F&O Radar: Deploy Iron Butterfly in Nifty to Benefit from Index Consolidation

The Nifty Index has recently seen some profit booking after reaching a high of 24,365 on Friday. This marked the peak before the index faced a pullback, dropping to a low of 23,847 during the session. However, the index managed to recover some of those losses and closed at 24,039, maintaining support above the crucial psychological level of 24,000.

The Nifty Index’s movement in the past few days shows signs of consolidation, a scenario where the index is trading in a relatively narrow range rather than making significant upward or downward movements. Investors and traders looking to capitalize on this sideways market phase may find the Iron Butterfly strategy in the F&O (Futures and Options) segment to be an effective approach.

Understanding the Nifty’s Current Technical Setup

The daily chart of the Nifty reveals that the index is currently finding support at 23,804, followed by another important Fibonacci retracement level at 23,363. Fibonacci levels are widely used by technical traders to identify potential price retracements and support/resistance levels. These levels are significant as they often act as turning points for price movements.

The RSI (Relative Strength Index) of the Nifty stands at 61.39, which suggests that while the market remains in neutral territory, the index is showing signs of a downward trend. This indicates a loss of bullish momentum, which means that the recent upward push may have run out of steam. The RSI measures the speed and change of price movements, and levels above 70 indicate an overbought condition, while readings below 30 point to an oversold condition. With the RSI in the neutral zone, there’s potential for consolidation rather than a strong trend in either direction.

Iron Butterfly Strategy: A Perfect Fit for Nifty’s Consolidation

Given that the Nifty is likely to consolidate within a specific range, the Iron Butterfly strategy could be ideal for traders looking to benefit from low volatility. The Iron Butterfly is a neutral options strategy that involves selling an at-the-money call and put, while simultaneously buying a higher strike call and a lower strike put to limit potential losses.

This strategy profits from a narrow trading range where the index remains close to the strike price of the sold options. In the current market environment, where the Nifty is expected to hover around the 24,000 level, an Iron Butterfly strategy can provide traders with a defined risk/reward setup, as long as the market does not experience a strong breakout in either direction.

Key Support and Resistance Levels to Watch

As the Nifty trades near the 24,000 level, traders should keep an eye on key support and resistance zones. The immediate support lies at 23,804, and if the index breaks below this level, the next support is at 23,363, which coincides with the Fibonacci retracement level. On the upside, 24,365 is the recent high that traders will watch closely. If the Nifty manages to break above this level, it may signal a resumption of the upward trend.

However, given the current loss of bullish momentum reflected by the RSI, the risk of a further decline cannot be ignored. Traders may want to consider stop-loss orders or other risk management strategies if the index starts to approach key support levels.