After a long time, call buyers had the smile back on their faces as they were finally able to make some money over the past two weeks after having been beaten down month after month over the past one year. There is a possibility that they will be able to make some more gains over the next few sessions as there are a number of short positions that need to be covered, specially those on metals and capital goods counters. But as the earnings season is going to create volatility on an intra-day basis, we may not see any strong move on the indices even if there is a short-covering squeeze.

If banking stocks had not seen a bout of short covering on the day technology major Infosys announced its results, Nifty would have lost a fair bit of weight. Thankfully, the fall in the IT stocks was countered by a rise in the banking basket and Nifty was able to stay above some of its medium-term support levels. However, this might not happen every time results of some index heavyweight are announced. This will give an opportunity to option traders to aim for higher intra-day gains with limited risk as there could be a strong directional move due to fresh selling or short covering on Nifty majors.

As such, it will be worthwhile for traders to play this sort of volatility by buying options on an intra-day basis instead of selling them. For a few weeks, one should avoid selling of options just to collect premium. While the Indian market closed on a strong note on Friday, post-market news flow from global markets has not been very good. It is very likely that we will see some weakness in the early part of the week due to fresh selling as well as profit booking by traders, who have long positions.

So, the first strategy for this week will be to buy put options at strike price 4,700 for the January series, which are quoting at Rs 24. We are suggesting this level as a lot of short positions were created at this strike price when Nifty crossed the resistance of 4,750. These positions are likely to come up for covering at the first instance of any fall in the index. The second strategy will be to buy call options at strike price 4,800 for the Jan-uary series when Nifty sees a decline. This trade should be done in case the market sees a drop in the first two sessions of the week.

Even for stocks that have highly liquid options, it would be better to play them through options instead of going for stock futures, as the earnings numbers are likely to lead to a sharp move in specific stocks and options can give much higher returns with limited risk.

rajivnagpal@mydigitalfc.com