As the index continued to inch upward, call writers got caught on the wrong foot as the out-of-money calls they wrote for the February series saw short covering. The short-covering being seen in the ongoing series has been more due to the fact that a lot of short positions were built in the February series in December when the index was slipping southward as not many had expected the index to move above 5,000 level thanks to the gloom and doom prevailing at that point of time. The broad picture of Nifty still indicates strength, but buying of out-of-money calls from this level could not be a very remunerative strategy. Even though the index might still move up, buying of call options may give profit only if the sharp upward movement comes within this month. As the market has already moved up sharply, the probability of another sharp upward movement without any consolidation is very low.

So this time around, we would suggest traders to go long on Nifty so that even if there is a bounce of one to two per cent, they can get maximum return. So, go long on Nifty futures at 5,345 for the February series. But correction is always a possibility after a sharp run-up and it could be a strong one after the fall in banking stocks.

So we would suggest traders to buy put options at strike price 5,300 for Rs 89. If Nifty sees a sharp upmove, which is possible in the early part of the week, traders can book profit on the Nifty futures, but still continue to hold the put options. They should sell the put options when Nifty sees a corrective move.

The second strategy would be to sell a straddle for the March series at strike price 5,300. The combined value of this straddle comes to Rs 382, with the call option going for Rs 229 and put option quoting at Rs 153. This straddle will witness at least 10 per cent fall in combined value if there is more than 2 per cent move in Nifty from its present level.

The volatile market can lead to a sharp rise in option prices when the extreme short-term trend reverses. So if Nifty closes below the 5,290 mark this week on a day after a strong bounce in the first half of the session, this would indicate that profit booking has begun and could lead to further decline. That day, traders can buy the put option at strike price 5,200, as it has a large number of short positions and it will trigger a sharp rise in Nifty when these positions are squared off.

rajivnagpal@mydigitalfc.com