As the market continued to slip southward, indicating further weakness, it would be better for investors and traders to continue with bearish strategies. The simplest of them would be to buy put options, both for trading on an intra-day basis as well as position basis.

We have been suggesting in this column that traders may part-finance the buying of put options by selling out-of-money call options for the far-month series above the strike price 5,400, as it would be a tough task for Nifty to cross this mark, and even if it does, it would give enough time for traders to cover their positions in case of the any trend reversal.

But as Nifty has slipped even further, the value of the call option above 5,400 even in the far-month series has dropped sharply. So in view of the present state of the market, the bar for selling call options of the far-month series can be lowered to the 5,200 level. However, there is a word of caution in this case. In case of a short squeeze, Nifty can go up to the 5,050 mark, in which case one will have to book loss on the call option for the far-month series. At this point of time, the far-month series will be the February series.

For this week, as the momentum is still in the southward direction, we would suggest traders to continue with short positions till the time Nifty does not close above the 4,840 level. Traders can also buy the put option at strike price 4,600 for the December series, which is quoting at Rs 78. We suggest this put option as any decline below 4,600 is likely to embolden the bears, who have just returned to the market with more confidence, and take the index much lower.

So the return on the investment is going to be high on this option. However, one should understand that these options should be closed when they give a return of 15 to 20 per cent, as any short covering bounce can wipe out profits from put options within a short span of time.

Besides this, traders can also sell call options at strike price 5,000 for the January series and collect the premium of Rs 48, which will take the breakeven to 5,048 and give enough time to cover the position even if there is a short squeeze. As the process of bottom formation has begun in the market, traders who are ready to take higher risks can buy at-the-money straddles and book profit when Nifty moves in the opposite direction.

rajivnagpal@mydigitalfc.com