In normal market conditions, it is very rare to see any index move more than 7 per cent at a stretch. But the past three months has seen Nifty move more than 7 per cent every month, first it was in the southward direction in November and December, and then in the upward direction during the just-ended January series of F&O contracts.

Now it remains to be seen whether Nifty can repeat the same performance this time and make a move of another 7 per cent in February. While nothing is impossible in the stock market, yet there is a high probability that after such a volatile movement, Nifty would stay in range-bound mode for some time before witnessing any strong directional move once again.

In such a situation buying of options may not yield good returns, as the decline in time value of options will erode the capital that goes into buying of options. So, we would not be advising traders to buy options this time, though investors with long positions can still think of buying some out-of-money put options for specific stocks in order to create a hedge and protect themselves from any major selloff on particular counters.

As Nifty is placed close to its strong resistance levels, the probability of some consolidation has increased. This consolidation can be best exploited by selling straddles with a strict stop loss on the downward direction. As the time value is maximum in the March series, our first strategy would be to sell straddles for March series at strike prices 5,100 and 5,200. For the first straddle at 5,100, the combined value now stands at Rs 381, with the call option quoting at Rs 257 and the put option going for Rs 124. The combined value of this straddle takes care of a 7 per cent movement in Nifty in either direction over the next few weeks.

In case of the straddle at strike price 5,200, the combined value stands at Rs 378, which will take care of a 7 per cent move in Nifty as the breakeven would come at 5,578 in the upward direction and 4,822 in the southward direction. But this strategy needs to be adopted for gains that can come from any decline in time value without waiting for the expiry of the March or February series. The target should be a decline of 15 per cent in the combined value of the straddle, and the trade should be done at that level.

As the bias of the market is upward, traders can also use the strategy of covered calls on individual stocks and look for good returns in a sideways market over the next few months.

rajivnagpal@mydigitalfc.com