Buy Dec straddles, sell Jan ones

Tags: Derivatives
Buy Dec straddles, sell Jan ones
The sharp upward movement in equities last week brought the bulls back to the game and the trend line, which had been the lifeline of the upward movement since June, still holds its weight. In any corrective move, it will again be a point of hope for the bulls.

While Nifty has been able cross two major resistance levels at the 5,750 and 5,840 levels, it might be a bit too early to say that the range-bound movement that Nifty was witnessing is over and a clear upward trend has emerged. There are still some roadblocks for that trend to appear.

We may see Nifty once again move back into range-bound movement, but the lower end of this range could shift from 5,550 to 5,700 this time. We still continue with our range-bound strategies and suggest selling of at-the-money straddles. But there is a small change. We would advise traders to buy some out-of-money call options to cover the risk that comes from the selling of call options. The time value of these options in the February series, which we had recommend last week, is still high while the value of the out-of-money call options in the December series can easily be financed by selling the straddles.

While we continue with the strategy of selling straddles for the December series, we would like to add another strategy this week. That would be to buy at-the-money straddles for the December series, or to buy both out-of-money put and call options for the December series. However, individual trader’s appetite for risk should decide which strategy one would implement, as there is a high probability that the money spent on the options might entirely go waste.We had suggested buying of straddle many a time in the recent past when there were events that had the potential of triggering a strong directional movement in Nifty. A similar event is on the cards this week and it has the potential of moving the index in either direction.

We would advise traders to buy a straddle on the day the FDI resolution is put to vote in both Houses of Parliament.

This could happen any time after Monday. So even though options of December series have higher time value than normal, one should hold them, as the outcome of the political event can have a significant impact on the market direction in the medium term.

The impact will not only be on Nifty, but also on several retail stocks, and aggressive traders can buy at-the-money straddles on these counters as well. zz

rajivnagpal@mydigitalfc.com

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