Firefighting a Short Iron Fly Strategy on Nifty50 on Expiry Day

This is also a range-bound strategy but has a higher reward-to-risk ratio which gives the trader the feeling of earning more per money spent. i.e. a feeling of higher ROI.

Here you need to sell the PUT and CALL options for the ATM strike and then buy OTM PUTS and CALLS to limit the max loss.

In the example above we have taken the following trades.

· Buy 19450 PE for 26.95

· Sell 19650 PE for 91

· Sell 19650 CE for 95

· Buy 19850 CE for 27.5

The max profit would be Rs6578 and the max loss would be Rs3423. And the lower breakeven is 19518 and the upper breakeven would be 19782. Here the max loss is seen as much lower to handle compared with the iron condor example above. But note that the breakeven levels have contracted and we have a tighter range to defend.

When to Firefight?

Firefighting would be required if Nifty50 chooses to stay below 19518 or above 19782 on 03 Aug 2023 expiry day — because we know pretty well that if it’s within this range, we are not going to lose any money.

High-Risk Firefighting

The firefighting strategies require naked option buying or selling so it’s best recommended that you do it after studying the risks associated. Most importantly these tactics have to be done within the day and should not be taken overnight which may otherwise wipe out your capital.

How to Firefight?

There are only 2 loss making possibilities here

1. Nifty50 is above our upper breakeven of 19782

2. Nifty50 is below our lower breakeven of 19518

Let us assume that Nifty is trading at 19800 now which means it is above our upper breakeven as per (1).

From here Nifty50 has only 3 possibilities on 03 Aug Expiry Day

a) Stays above 19782

b) Falls below 19782 but stays above 19518

c) Sharply falls below 19518

Conditions (a & c) are unfavorable for us, whereas condition (b) is an ideal case for us. If condition (a) i.e. Nifty Stays above 19782 happens we have the freedom to sell PUT options below 19300 all the way till 17150 intraday.

The imagebelow shows the option chain of Nifty50 and the strikes highlighted in red are PUT options below 19300

If we select to short-sell any of these strikes — there are only 2 possibilities that could happen

1. Nifty falls below the upper breakeven of 19782– then these PUT options will appreciate in value and we will incur a loss if we hang on. The idea is that we got Nifty50 back below our upper breakeven so that it profits us — so it makes sense to exit the firefighting position.

2. Nifty closes above 19782 which means the PUT options we sold becomes worthless (ie goes to 0) and we pocket all the premiums paid.

Reiterating again that the firefighting has to be done only on expiry day when you have 100% visibility that the OTM PUT options are going to zero. On any other day, Nifty50 could make even a 0.5% fall and drive up the options premium so high that you end up losing more.

Similarly, if Nifty50 is below 19518 we need to short sell CALLS above 19900 and grab those premiums to offset the max loss of Rs3423.

How much premiums you should grab?

The idea here is not to use the option selling strategy for income rather to cover your max loss. The max profits you can target should match the max losses you will hit in the original strategy. Also do not be adamant that you need to recover 100% of the losses, even if you are able to reclaim only 50% — it’s still a WIN.

When to Exit the Short Selling Position?

As soon as Nifty is back in the favorable range, we should prioritize exiting the short-selling position as the fire is doused. If you hang on to the short-selling position anymore — you may get barbequed/incinerated.

Why is Iron Fly preferred over Iron Condor?

Technically Iron Condor is a better strategy than Iron Fly because it has a wider profit range. Iron Fly on the other hand is more popular among the options trader because most of them may not hold it till expiry. Even on T+1 or T+2 if Nifty stays at the same level — the profits are very high.

Traders can exit this position at good profits even before the expiry day, for this sole reason Iron Fly scores above Iron Condor. Since this book covers the scenario of trades only on a Thursday, you could select any of the two strategies based on your risk profile. We are not discussing a condition of premature exit or profit booking other than on Expiry Day.

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