Stock indices continued to see volatile movement through the past week. At one level, it highlighted the under-performance of the market due to a fresh round of selling that has emerged on select counters. It may now take a while before the market makes another attempt to move upward.

The big picture on technical charts indicates that there is once again a high probability of Nifty seeing another sharp decline, which could lead to the formation of a new low. In bearish times, when volatility is high, the best strategy is to play the market either by selling call options or by buying put options. The first option is not very popular, as it attracts higher margins. The second option is cheaper, but it has the risk of the entire investment going waste due to a decay in time value.

Given the high probability of Nifty slipping southward, we would suggest two strategies. The first would be a simple strategy of buying put options at strike price 4,900, which are now quoting at Rs 137. In case of any further decline in the market, we are likely to see a sharp upward move in this put option compared with some of the other out-of-money puts.

But remember, this option should be bought only for trading purpose, and not to sell or close it at the time of expiry of the December series of futures and options contracts. It should ideally be closed when it gives a return of 20 to 25 per cent, which is highly probable. However, the strategy would not hold if there is a major financial accident in the global market and the Indian market slips below the 4,650 mark on a closing basis.

Given the macro structure of the market, volatility is going to remain and an overnight move in international markets could lead to a gap-up opening, which may take away all the profit from this option. A part of the cost of buying this put option can be financed by selling an out-of-money call option at strike price 5,400 for the January series.

The other strategy would be to buy a straddle at strike price 4,800, which is going to cost Rs 273, with call option costing Rs 177 and the put option Rs 96. This straddle should be bought with the objective of taking a contrarian trade. For instance, if Nifty slips southward, one should book profit on the put option and then wait for Nifty to rebound in a short-covering bounce to sell the call option. The other strategy would be to sell the straddle when it gains more 10 per cent over the next few sessions.

rajivnagpal@mydigitalfc.com