With the June series of derivative contracts ending on a strong note, the confidence of put writers is running high.

As we are very close to the previous high of the market, there is a high probability that the indices will face some resistance before making any meaningful attempt to break its earlier high of 5,400.

Given this basic premise, there are a couple of strategies that both investors and traders can follow over the next few sessions. The first strategy will be to sell a straddle at strike price 5,200.

The combined premium that one is going to get is Rs 260 as the call option of strike price 5,200 is quoting at Rs 170 and the put option is going for Rs 90. This makes 4,940 the break-even point on the lower side.

Given the fact that 5,000 is a strong support, there is a lower probability that this straddle will lead to losses in the lower direction. In the upward direction, the break-even for this trade is at 5,460.

One who is writing this straddle should keep a stop-loss at 5,400 in the upward direction. In case Nifty moves below this level, this straddle should be closed immediately.

If this crossover above the 5,400 mark takes place over the next three to five sessions, then it is very likely that one will incur a loss while closing this straddle.

However, if we suppose that the cro­ssover takes place after 15 to 18 trading sessions, then the decay in time value will ensure that there is no loss in squaring off this straddle.

Given the kind of high weightage that rate-sensitive stocks have in Nifty and expectations of a rise in interest rates, it is very unlikely that Nifty is going to see a sharp upward movement.

Instead, there is a high probability that we are going to see range-bound movement in the market over the next few sessions. This makes writing a straddle the best choice.

Another strategy that an aggressive trader can follow is writing out-of-money put and call options to collect the premium. Traders can write a put option at 4,900, which is now quoting at Rs 29, and a call option at strike price 5,500, which is quoting at Rs 29.

These options can be written with a stop loss at 4,950 in the lower direction and 5,500 in the upward direction. zz

rajivnagpal

@mydigitalfc.com