Sudden short covering rally in Nifty causing dent in profitability

This month has been quite a tumultuous journey for our strategy. We began the series with a long bias covered call position by purchasing Nifty futures at 24303 and selling an equal quantity of August 24400 put options at Rs 245.50. We maintained this bias for a significant period and only reversed our position when the downside break-even point of 24054 was reached on August 19. This occurred close to the monthly expiry, with very little premium left on the options, making the decision difficult. Nonetheless, we reversed our position, incurring a loss of Rs 48204.00, sold Nifty futures at 24110, and sold double the quantity of August 23900 puts at a premium of Rs 43.00.

We opted to close all positions with a moderate profit if Nifty reached 23900 before expiry, or to reverse our strategy if the trend shifted, moving Nifty towards 23255. Unfortunately for our strategy, Nifty completely reversed direction the next day. On August 21st, Nifty continued its upward movement but at a slower pace, surpassing the targeted reversal point of 23255. As a result, we entered the third and final stage of our plan, incurring a loss of Rs 50300.00 in Nifty futures, buying futures again at 24303, and selling double the quantity of August 23300 puts at a premium of only Rs 82.80.

As illustrated above, this action has not only resulted in an overall losing position (though the game is still ongoing) from what was a decent profitable situation at the beginning of the series, but it has also reduced our maximum profit potential to just Rs 30,047.00. In the remaining 2 and a half days, if Nifty reaches 24184 or 24300, we will close the entire position and record either a small loss or profit. However, if that does not occur and Nifty expires anywhere between 24200 and 24300, our net profit after covering the entire booked loss of Rs 98,354 could range from Rs 4,000.00 to Rs 30,000.00.

Cheers and happy trading