Start building space for calls as well

For the third week in a row, traders with long positions on put options have enjoyed an upper hand in the derivative market as they could log both intraday and intraweek gains. At this point, a question before derivative market traders is whether the trend has changed and accordingly should they change their basic strategy from bullish to bearish, on both indices and stocks?

Going by the Nifty trends in the last four years, it is clear that such corrections had happened and the index had bounced back as well. So, technically we are not in a bearish market yet. But the trouble is that by the time one defines a bearish market by the text book rules, half the gains on stocks would be eroded. So, in stocks, a trader should look at taking bearish strategy, but only through options and not through unhedged stock futures. But on the index, it is better for a trader to stay hedged and not go overboard on taking a bearish position.

If consolidation emerges going forward, as it is a possible course the Nifty might take, traders can come back to covered call strategies and selling of straddles, but even in straddles, there has to be stop loss and hedge on both sides. Especially on the higher side, as we are not short from a distance where selling call would appear to be an easy trade.

For the extreme short-term, it would be worthwhile to have some out-of-the-money put options on the Nifty just to have a minor hedge on the portfolio value. Despite the steep fall of the last week, there is still a high chance of a bout of selling emerging in the start of the week.

Another aggressive strategy professional traders can adopt is to look for an opportunity to buy at-the-money call options for an extreme short-term trade. Such opportunities are going to be there amidst all this gloom. In fact, it would be better for traders to take long exposure through call options than Nifty futures even for intraday trade. Yes, the gains would be limited because the price of call options would rise less than the Nifty futures do, but when the market is in a state of confusion, the first priority of any trader has to be protecting his trading capital.

The Bank Nifty outperformed the Nifty last week. Had bank stocks participated in the decline in the last part of the week, the Nifty would have suffered much more than what it had done.  There is a chance of some financial stocks coming back to life by moving in sideways directions. So, have some call options in individual stocks.

rajivnagpal@mydigitalfc.com