After a sharp short-covering bounce, the market moved in a trading range in the last three sessions of the week. But given the macro structure of the broader market, it is very unlikely that the market can stay in range-bound mode for a very long time.

Given the fact that we are in an earnings season, the market cannot stay in range-bound mode, as results from the index heavyweights may lead to sharp movement in the index. There are some sectors that still have huge short positions. In case the results from any of these companies are better than expected, we are going to see a bout of short covering, which will increase volatility in the market.

In such a situation, the best thing to do will be to buy a straddle and try and make money when the combined value of the trade increases.

But given the fact that the time value of these straddles is extremely high at this point of time, there is a high risk that the amount of money spent on these options can actually go waste.

So instead of buying a straddle, one can buy few out-of-money call options and more out-of-money put options, and get them financed by selling extreme out-of-money call and put options for the far-month series.

For this week, we would suggest traders to buy put options at strike price 4,600, which are quoting at Rs 48, and buy call options at strike price 4,900, which are quoting at Rs 50. Both these options should be for the January series. The total amount spent on buying these options comes to Rs 98.

In order to part-finance the buying of these options, traders can sell call options at strike price 5,300 for the March series at Rs 46 and put options at strike price 4,000 for the March series at Rs 36. The total inflow from the selling these options would be Rs 82, which means the net cost of this strategy would come to just Rs 16.

The logic behind buying these options at strike price 4,600 and 4,900 is that the first is a strong support level while the second is a strong resistance for Nifty.

So any breakdown or breakout is going to lead to a sharp movement on either side and it should give good returns in the January series. As this strategy also involves selling of options, it would mean higher outgo in the form of margin money given to the exchange.

rajivnagpal@mydigitalfc.com