Nifty Bull Spread Strategy Analyzed

This analysis breaks down a specific options trading strategy called a “Bull Spread” used on the Nifty futures market. It’s designed to profit if the Nifty index moves upwards, but with limited risk. Let’s look at the details to understand how it works and what to watch for.

Key Points

• Buy Nifty 26,000 Call option, sell 26200 Call option.
• Initial cost: ₹87 per strategy (lot size of 75).
• Max profit: ₹8,475 if Nifty hits 26,200.
• Breakeven point: ₹26,087 – half the initial cost.
• Risk/Reward Ratio: 1:1.3 – potential for 1.3 times profit.
• Margin requirement: Approximately ₹39,000 – check with your broker.

Strategy Breakdown

The Bull Spread uses two Nifty options – a “buy” call option at 26,000 and a “sell” call option at 26,200. This is done for November 4th expiry. The goal is to profit if the Nifty index moves higher than 26,200, but your losses are limited.

You pay an initial cost of ₹87 per strategy, based on a lot size of 75. If the Nifty goes above 26,200 on November 4th, you keep the profit of ₹8,475. However, if it falls below 26,000, your losses are capped.

The breakeven point is ₹26,087, meaning if the Nifty is at this level, your profit and losses are equal. The risk-reward ratio is 1:1.3, meaning for every ₹1 you risk, you could potentially earn ₹1.30 in profit.

The strategy needs approximately ₹39,000 in margin. Margin is the amount of money you put up as security. It’s important to check with your broker to confirm this amount.

The analyst believes there’s a positive short-term trend in the Nifty, supported by rising open interest and the Nifty being above key moving averages (11 and 20-day). Additionally, put writing is prevalent at 25800-25900 levels, indicating potential downward pressure.

Foreign investors (FIIS) have a low ‘long to short’ ratio, suggesting they might increase their short positions, potentially leading to a covering of these positions and a rise in the Nifty. A key rule is to take profits when the return on investment (ROI) exceeds 20%.

“Understanding this Bull Spread strategy, coupled with careful monitoring of market trends, provides a robust approach to capitalize on potential Nifty gains.”