Start preparing for budget & stay hedged
It was another week where fortune favoured traders with long positions in call options from the January series. The only thing traders need to do now is to protect their profit by keeping a stop-loss on all short-term trades or positional trades on the long side. Reason: in such a market condition, corrective moves come largely as consolidation, that too, of a broader range. Since option buyers carry the risk of decay in time value, it is important to have a stop-loss on the mark-to-mark profit.
As the Nifty has crossed some of its key resistance zones, we would continue with the neutral to bullish stance on the index. So, have covered call options, or long positions in at-the-money call options, with a stop loss from the January series.
Traders may now start preparing for the Union Budget. As the budget day comes closer, the value of some options from the February series will increase sharply, in open interest, in anticipation of the strong directional movement post-budget. But the idea of a budget trade is not to speculate but to hedge the portfolio from any unexpected loss arising from short-term volatility.
Every year, before the budget, a heavy build-up of positions happens in both out-of-the-money call and put options. This time, the build-up might be even more. Since the Nifty has moved up from its recent lows, the tendency to sell put options increases sharply. When the Nifty is close to 8,500 and the sentiment is largely positive, it is hard to think that the index would break 8,000. So selling put options on the face of it becomes an easy trade. Similarly, when the Nifty was below 8,000, none was thinking of its move towards 8,500. Selling out-of-the-money call options had become an easy trade then. Easy trade means loss of trading capital.
Over the next two weeks, there would again be many easy trade opportunities floating in the market. Traders should just not do any trade. For, such trades are the ones which wipe out the trading capital of a trader.
For a budget trade, just look at the total long positions in the portfolio and accordingly take a long exposure to put options from the February series. The trouble is that most investors think buying put options to hedge is an unnecessary cost. But it is extremely important to protect one’s portfolio from shocks. Another reason why such protection should be brought early this time is that the earnings season is going on and any money spent in buying options for hedging would help tackle any uncertainty that earnings might bring.
The Bank Nifty continued with its range-bound move, with a slightly bullish bias, last week. Most likely, a similar trend might continue. Traders may take exposure to the index through at-the-money call options and also out-of-the-money call options from the January series. It would be better to avoid a covered call strategy on the Bank Nifty at this point as the premiums are not good enough to take such risks which even covered call entails.
Rajiv Nagpal