With a sharp rise in Nifty, some traders who used to write out-of-money call options whenever Nifty came closer to its immediate resistance level, were caught on the wrong foot. This was seen wh­en there was a strong bout of sh­ort covering in the call option at 5,400 as soon as Nifty crossed the 5,450 mark after a strong correction in the previous few sessions. But it appears some institutional traders had taken large positions in these options and they booked profit as call writers came to cover their positions. This option did not have any time value though we had more than seven sessions left in the August series.

This shows some smart traders had an idea that when Nifty crosses 5,400 level, there would be a bout of short covering. If we look at Nifty movement from 4,800 level, it has been following a pattern. After evey sharp rise, the index consolidated for a few sessions and then again moved upward sharply. We expect this trend to continue over the next few sessions.

For this week, we would recommend two strategies. First is a pure bullish strategy. In this, we would suggest traders to buy a call option at strike price 5,500 for the August series. This call option is going for Rs 43 and the Nifty August futures is quoting at 5,422. The time value a trader will be paying is just Rs 23. As the average discount between a Nifty futures and spot is around 10 points, Rs 13 is the real cost the trader buying this option will be paying. There is a high probability that Nifty will see a sharp upward movement from present level before witnessing range-bound movement once again. In such a case, traders can get high returns by risking just Rs 43.

The second strategy, which would be suitable for aggressive traders but has to be followed with a strict stop loss, would be to write a straddle at strike price 5,500 for the September series for a combined premium of Rs 216. But this straddle should be closed the moment Nifty moves below 5,368 level, as this can lead to a sharp correction in the market due to aggressive short selling.