Stay hedged against higher volatility

After two consecutive weeks that gave good gains to traders with long positions, last week saw traders with put options gaining and looking forward to more gains.Their optimism comes from the fact that after staying range-bound for days, the Nifty slipped sharply last Thursday, but it still has not moved below some its key support areas, and hence it would be too early to call it as the end of the uptrend that started in mid-October.

So, the strategy for this week will also be based on this. Even as the Nifty has ended close to the lows of the day on Thursday, the SGX Nifty had been trading in the green. So there could be a gap-up opening on Monday. We might see some short covering. But the moment the short covering is over, the Nifty could start on another range-bound movement. Because this is the derivatives expiry week for November contracts, traders should avoid taking any fresh positions on the Nifty. Let the volatility associated with rollover gets over and a directional movement emerges before take fresh positions are taken. Once the new series start, it would be better for traders to go the covered call strategy and buy out-of-the-money call and put options to cover the possibility of extreme losses around the state election results. Professional traders could get opportunities to take contrarian trades through options in the coming days.

The Bank Nifty could see more unwinding pressure as selling was seen during last week's weekly contracts expiry. This means there is enough long positions in the system and if there is volatility, we might see more unwinding pressure. There is a difference between unwinding pressure and strong selling pressure. Unwinding pressure tends to get over in a much shorter time-frame compared to selling pressure that comes from delivery-based selling. This not say a sharp recovery would happen or a fresh uptrend get started, but surely it would make some of the banking stocks and the Bank Nifty candidates for buying out-of-the-money call options for short-term trade once the November series is over. There would be opportunities to go for covered call in some of the PSU bank stocks.

The chart formations on most IT stocks indicate  the sector is likely to trade with a bearish bias. With a stable rupee and declining oil prices, we might see correction in IT stocks. But the correction could be shallow in lagre-caps because of their inherent strength. So traders may look to buy put options in these stocks with a perspective of short-term gains. Normally traders don’t tend to put stop loss in options, but it would be better to have stop loss on the put options of these stocks and the overall quantity of trade should be low as this is a speculative strategy.

Rajiv Nagpal