With the market once again entering a phase of range-bound movement, it’s time to

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return to the time-tested strategy of writing straddles with stop loss in order to take advantage of the decay in time value of options due to the range-bound movement of the Nifty.

The only difference this time is that the market has a bullish bias and it is likely to find buyers at lower levels. The premiums on put options have fallen sharply after the budget announcement as the event uncertainty got over. And now, as the Nifty stabilises, it’s time to start writing extreme out-of-money puts of those stocks that an investor is confident of buying at lower levels.

Investors who have missed the chance of buying stocks when the Nifty had come closer to its 200-day moving average in Feb-ruary may write out-of-money puts.

But when you go for this strategy, make sure you have enough funds to take delivery of those stocks for which you have written the put options in the event of a surprise fall in the world equity markets. However, the probability of such a fall is very low given the positive news flow emerging in global markets. As for option traders, they may write a straddle at strike price 5,000. The call option of strike price 5,000 is quoting at Rs 139 while the put option is going for Rs 55. This takes the combined premium to 194, ensuring that over the next 18 days if the Nifty does not break the 5,194 level on the upside and 4,806 on downside, then traders writing this option earn good returns.

In this case, the trader should use a stop loss at 5,150 in the upward direction and 4,850 in the southward direction. The moment the combined value of this straddle falls to Rs 110, straddle writers should book profit partially. However, more aggressive traders should wait till the expiry of the March series of F&O contracts.

In fact, an aggressive trader may even think of writing a straddle at strike price 4,900. But in this case, the risk is very high in the event of strong upward movement.

As the overall bias of market has turned bullish, it will be advisable for traders not be very aggressive in writing out-of-money call options as a sharp upward move in the stock could lead to huge losses. Given the range-bound movement, an investor may write covered calls instead of writing naked call options, as the market’s bullish undertone is likely to help a covered call writer get better returns over the next few sessions.