Have long exposure to call options
After almost eight straight weeks, luck finally favoured traders with long positions in call options. The Nifty’s rise on Thursday created some discomfort, as traders could be seen rushing to cover short positions in out-of-the-money call options.
We had been cautioning in this space that selling out-of-the-money options should be avoided at all cost, as it is risky in volatile market conditions.
In the last couple of weeks, selling call options seemed to have become an easy trade, but whenever a trade becomes easy, the yield on it becomes low usually.
Coming to strategy for the short-term, have long exposure to call options. The Nifty is now placed close to its major resistance zone and if it crosses the zone, we might see another phase of short squeeze in Nifty futures, leading to a rise in call option prices.
Another strategy can be followed after the Nifty rises further. Once the index comes close to its long-term resistance, traders may look to sell at-the-money straddles. Most likely, after this phase of up-move, Nifty might stay range-bound, though this time the range will be broader. So this strategy should be adopted only after covering the breakeven points.
Despite all the bad news, the Nifty Bank Index had seen only range-bound moves, and in some intraday trades, it even outperformed the Nifty. The Bank Nifty is now negotiating its important long-term moving average. This makes the index a candidate for covered call strategy this month. Near-term, traders may look at taking exposure to individual bank stocks post-results. Unlike in the past, when a secular trend was witnessed in banking sector stocks, this time the earnings season is going to be of individual bank performance. Given that some large-cap banks have seen solid correction, if there is any positive surprise in their loan book and net interest margins, then these stocks might see a sharp rise. It would be better to take exposure to these as options, rather than stock futures, for higher returns in a short period. But the quantum of such trade should be kept low.
IT stocks have been moving in a range-bound mode. After a long time, these stocks have started reacting to the rupee’s weakness and have also witnessed a of long positions when the overall market was weak. But they tend to come under selling pressure whenever there is negative news. So, traders should take exposure to IT stocks through either covered call options or call options. Over the next fortnight, there would be news flows that would impact the IT sector. So keep some part of the trading capital free for taking trade in IT stocks.

Rajiv Nagpal