The market continued to be volatile this past week, and to the relief of the diehard bulls, this time the volatility came in the form of a short-covering rally. In fact, the market recovered a part of the damage that it had suffered over the previous week. However, an important characteristic of such rallies is that once the short covering gets over, the decline resumes and the bottoms formed earlier are taken off. This ends up emboldening the bears. But before that happens, there is some hope for the bulls. After moving from the low of 4,531 level, Nifty has the potential of forming a short-term higher bottom. If that were to happen, then our deduction that the process of bottom formation has begun will gain more weight. But the fact is, despite the indices having moved upward from their recent lo­ws, the chances of Nifty slipping downward are still high. In such a situation, we suggest the strategy of having some put options in the portfolio. These options can be bought by selling extreme out-of-money call options for the far-month series, so that in case of a range-bound movement, the money spent on buying of put options does not go waste. For aggressive traders, it would be worthwhile to once again consider writing straddles. The market may remain range-bound near its bottom and that will give an opportunity to traders to write straddles and make gains from the decline in time value of these options. But the risk of writing a straddle is high. So in order to have a protection against any sudden decline in the market, a part of the money collected from selling of straddles can be utilised to buy out-of-money put options. The number of puts can be lesser than straddles, and it can be increased on a later date in case there is any decline in the market. For this week, we suggest traders to buy a put option at strike price 4,700 for the December series, which is now quoting at Rs 50. But one must sell the option if Nifty closes above the 4,790 level. As far as straddles are concerned, the one at strike price 4,700 for the January series now has a combined value of Rs 250. This premium will take care of the move till the 4,470 level in the southward direction and till the 4,970 level in the upward direction. Nifty has strong support and resistance levels, respectively. So there is a high probability that the decline in time value will give a decent return on Nifty over a period of time. To be extremely cautious, a trader can buy put options at strike price 4,400, which are now quoting at Rs 43. So the uncovered risk on the downside is only 70 points. This can also be covered depending on the strength.

rajivnagpal@mydigitalfc.com