Go with straddle & covered calls

Tags: Stock Market
Nifty has been inching towards the upper end of the trading range in which it seems to be firmly placed at this point of time. Whether the index is able to break this range to hit a new sustainable high or not will be clear towards the later part of this week when large institutional investors will return to the market after the yearend holidays.

This upward move in Nifty could probably be because of lack of any major selling pressure in the largecap stocks, which would have possibly emerged but for the yearend holidays. We would still continue with our strategy of selling a straddle from the far-month series and covering both the break-even points of that straddle.

As for the strike price, we would suggest dividing this trade into three strike prices — at-the-money, near in-the-money and close out-of-money. The risk management of trading capital is extremely important at this point, because volatility may return to the market any time. These trades should be done with the objective of earning returns from the decline in time value, which will come even if the market remains broadly range-bound.

Over the past three weeks, Nifty has been showing a trend; on the day when bank Nifty corrects but the IT index is stable, it results in a range-bound movement in Nifty, but when both bank Nifty and the IT index move upward in the same session, Nifty shows strength and even the intraday correction is not very high. This correlation is generally visible in the first half-an-hour of a trading session.

It would be worthwhile for traders to keep a watch on these three indices for intraday trading calls in Nifty futures. Conservative traders can use the strategy of going long on close out-of-money call options for intraday trading with a four per cent stop loss. As stated above, the IT index has been performing well and it has been largely due to large-scale cash buying in IT stocks.

Another strategy traders can use on the IT counter is to go for covered calls in midcap IT stocks. These midcap stocks are likely to perform well, as the valuation difference in them and other largecap IT stocks will not sustain and the midcap IT stocks have already shown a tendency to do such a catchup in the past. The logic behind this strategy is that covered calls for these stocks will give short-term trading gains and reduce the holding cost for investors of these stocks.


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