The market seems to be grappling with lack of buying, because of which even a little bit of selling is having to a strong impact on the downside. The selling that has emerged, especially that on the banking counter, is delivery-based, and not due to fresh short positions. This is clear from the fact that rallies on the index are becoming shorter and shorter, as every time selling has emerged at higher levels. Even during the expiry of December series F&O contracts, there was hardly any short covering.

In fact, perennial bulls are getting caught on the wrong foot time and again and that is why traders were seen liquidating positions in the last sessions of the past few F&O series. Normally, the January F&O series is the one when we would see a lot of buying on the mid-cap counters in December in anticipation of new funds getting pumped into the market by FIIs. But there has been no such build-up of fresh positions this time around. As such, no selling is likely to emerge from local market makers when the market kicks off 2012. If one were to look at the way investors sold stocks on the banking counter till the last session, it is very likely that we would once again see Nifty come under pressure. It can only get worse if other heavyweight stocks also see a similar bloodbath. And going by what happened in the market over the past two sessions, there is a high probability that this kind of a situation will emerge shortly.

In such a condition, we would strongly recommend traders and investors to once again seek refugee in put options. For those who feel buying of puts can be wastage of money can look at selling in-the-money call options with decent time value. For this week, we would suggest traders to buy put options at strike price 4,500, which are now quoting at Rs 75. This is a strong support for Nifty and any breakout below this level may lead to another pounding by the bears. The bears have been trying to take off this level for a long time and they might just achieve it this time around. The other strategy would be to sell call options at strike price 4,400, which are quoting at Rs 279. There is enough time value in this and it would give traders ample time to cover any position in case the tide turns in the market. While the indices are getting it tough to move up, there are a number of stocks that are very close to their bottoms. For investors looking to invest in some of the good firms with a long-term perspective, a time would come soon when selling of out-of-money puts would become a rewarding strategy. So, it is time to be patient as far as investors are concerned.zz

rajivnagpal@mydigitalfc.com