Have some put options and stay hedged

The time values in both call and put options, seen right before the budget, clearly indicated heightened hedging activity is going on in the market. But the hedging was done not for taking caring of the positions in stock futures, but only on Nifty trades, which meant traders were playing on chances of high volatility.

Since it was the first day of a new series, no unwinding pressure was witnessed on the Nifty, and that probably had ensured that the market did not end in red territory.

The concept of hedging requires both the legs of a trade to be closed together. It appeared that this time around, a large number of trade was closed together, which essentially means that there was more discipline in the market.

As for the Nifty strategy for this week, the covered call strategy that we had been suggesting in this column would have now come to breakeven levels after a period of mark-to-market losses. Now that the Nifty is placed close to the upper end of the zone, instead of taking a covered call strategy, it would be better for traders to wait for sometime and see if a correction happens before taking the covered call trade.

If the Nifty trades with weakness in the first part of the week, then traders should look at buying put options, but with a stop loss. Also, book profit at regular intervals as put options now have a good amount of time value, which means if kept for long, it would mean loss of that time value and consequently the prices decline. So trade in options. But traders should watch what kind of gap get formed and whether there is an attempt to fill that gap in the first one hour of trade. Execute this trade only if there is weakness across the sectors, especially in Bank Nifty and Nifty Mid-cap.

After a phase of outperforming, the Bank Nifty is once again mirroring the moves of the Nifty. So, in Bank Nifty also traders can look to take short positions through put options or in Nifty futures, but take care to cover it by buying call options.

But in individual bank stocks, traders should follow a different, and probably bullish, strategy with covered call. But in this case too the covered call should be executed after the correction, which appears to have set in some of the banks, gets over.

After a minor profit booking-led corrective move, IT stocks are again making an attempt in sideways range. Traders need to look at the IT sector stocks with a perspective of covered call. But this part of the trade should be kept small and the focus should be on the Bank Nifty and individual banking stocks.


Rajiv Nagpal