Stay put on options

Tags: Derivatives
After Nifty’s sharp corrective last week, some of the put writers would think twice before writing out money puts options to collect small premium, as the January series expiry took everyone by surprise. While normally option writers have a higher chance of making money, option writing should be avoided during some market conditions, especially in the current month series. As we enter the February series, we still believe that options writing should be avoided, though straddles can be sold by writing options from the far-month series.

Our opinion is based on the assumption that while we might see corrections in the extreme short term, there would be a bounce over the next couple of weeks, which would bring us close to where Nifty is trading right now. So, straddle writing would bring money in the form decline in time value of options. This trade is only for more aggressive traders and not for investors looking to use derivative instruments for hedging. As Nifty is placed close to its strong support levels with chances of slipping lower, we would advise traders to buy put option for the strike price of 6,050 from the February series, which is currently quoting at about Rs 76. Reason: 6,040 is a strong support level and we would see some more pressure on Nifty if it slips below that mark.

The option should be bought with the objective of trading gains and not retaining it till the expiry. Traders may sell Nifty straddle of 6,000-strike price from the April series in order to finance the purchase of this option as well as for trading purposes. This straddle has combined value of Rs 409 as call option for strike price of 6,000 from April is quoting at Rs 289 and put option for same is quoting at Rs 120. This range of almost 400 points is good enough to take care of the volatility on both sides of the index over next few weeks.

Another strategy would be to let Nifty decline and when it reaches close to 5,950, the trader can buy out of money option at a strike price of 6,100 and 6,200 for trading purposes as a bounce back in Nifty would make those options react sharply. It is important to watch the currency because the first cue of any possible selling in the cash market from large institutional investors would come in the currency market, forcing Nifty to shed some more weight.

rajivnagpal@mydigitalfc.com

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