With sharp declines in the indices last week, call writers were lau­ghing all the way to the bank. But at the same time, put writers were not on the wrong foot either. For, put writers were already running for cover after the fall in Nifty in the week before and, as it appears, they had turned cautious in writing at-the-money put options after that shock and avoided the temptation of collecting small premiums.

If we look at intra-day movements of various option prices, it is very clear that in spite of Nifty moving below some of its important support levels, the bears are in no mood to take very aggressive positions. Even if market cues are very bearish, they are keen to book profit at short intervals. That’s the reason why we have been seeing bouts of short covering at the first whiff of a strong opening in the European market.

While the medium-term trend is still under pressure, a strong bout of short covering may be on the cards as traders who had gone short are likely to book profit and the last-minute shorts that were created when Nifty moved below its 200 DMA are likely to come in for covering this week.

So we have two strategies for the week. First, buying at-the-money call options and selling them when Nifty sees a bounceback. At present, the call option of strike price 4,800 is quoting at Rs 147. While this option also has a time value, in case of a sharp recovery, this time value will turn into intrinsic value and the returns are going to be high.

Traders who are not keen on spending that amount of money on a call option, but at the same time ready to take a higher risk for a slightly lower amount of money, may buy a call option at strike price 5,000. This option is now quoting at Rs 34 and there are a large number of short positions in this option. Any upward movement in the Nifty is likely to lead to an upward movement in the option price.

But for traders who buy this option the return will come only in the form of a rise in the value of the option due to short covering and they should not wait for the expiry of the May series, which is going to end on Thursday.

Over the next three to four sessions, volatility is likely to increase in the market, and as far as writing of options is concerned, we would suggest traders to avoid the temptation of collecting premium till the time the new series begins.