With high volatility in the market, option premiums have risen sh­arply over the past couple of da­ys. But it will be better for traders to avoid the temptation of writing options to take advantage of higher time value as high overnight volatility and strong directional movement can lead to sharp losses. One should avoid writing out-of-money put options as we are at the beginning of a June series and any decline in the Nifty is going to lead to a sharp rise in the prices of these options. For compulsive option writers, we would suggest writing of out-of-money call options to collect the premium instead of writing put options.

This week we expect a decline in Nifty in the early part of the week after which we may see a short-covering rally. So, we would suggest investors to buy put options at strike price 4,800, which is now quoting at Rs 26. This option is likely to see a gap-up opening in the first trading session given the weak global cues. Despite a gap-up opening of the market, one may buy this option as a short covering is likely to lead to sharp rise in the index.

Some of the hedge funds are also likely to buy this put option to hedge their existing positions in cash market as 4,800 is a strong support for Nifty. While buying this option, traders should be mentally prepared to lose the entire amount spent in buying this put option as a short-covering bounce in Nifty may lead to a decline in its value.

So, if you are getting more than 20 per cent money on your investment, it would be advisable to book the profit unless Nifty sees a dramatic fall and moves below the 4,950 mark over the next couple of sessions.

For traders who are buying into stock futures, another strategy will be to write near-the-money call options or out-of-money calls. When the market slips southward, individual stocks tend to lose more weight. So writing of out-of-money call options will reduce the cost of holding of these stocks. Even investors who are holding stocks in their portfolio can write out-of-money call options in those stocks if they have liquid options and reduce their cost of holding.

We suggest this covered call strategy as in times of uncertainty the probability of stocks seeing a strong upward movement is very low and out-of-money options do not get exercised leading to good returns for stock option writers.