Still stay with covered calls

The Nifty's zig-zag move for the large part of last week was a double-edged support for the derivative traders, as that presented an opportunity for contra trade, with quick, high returns. At the same time, for the traders who stuck to their positions, the decay in time value of options was bad enough to eat into their returns. So, it was week where every nimble-footed trader made money.

After having four trading sessions in an extremely narrow range-bound mode, the Nifty made an attempt to break that range last Friday.

This breakout needs further confirmation, as such breakouts failed to see follow-up action in the past. Moreover, as the Nifty is placed below its important average and Friday's broader market breadth was weak, we can't take the breakout for granted.

Coming to strategy for this week, traders may continue with the covered call strategy on Nifty futures. Some of these trade may be shifted to the December series, as the time value in that part of the series is good. Another trade can be buying put options when IT and bank stock show weakness, as there is a possibility of volatility and corrective moves due to some heavyweights coming under pressure. Also, Intraday trade in options is not a bad idea when the series coming closer to the end next week. Since shifting of positions starts much earlier these days, volatility can be expected before a series closure.

As the chart patterns on Bank Nifty are much similar to those of the Nifty, traders may continue with the covered call strategy. But traders can also look at buying out-of-the-money call options of the Bank Nifty, as there is still the probability of a short covering-led bounce back in bank stocks. Needless to say, short covering-led up-moves are short and sharp.

Also, after a long time, there were indications that traders are not ready to short on bank stocks, as no selling pressure was seen on the day of expiry of weekly contracts. So, traders can look at going long on individual bank stocks. But these trades are speculative, and only a very small exposure should be taken on these.

One thing traders need to keep in mind over the next couple of months is that they need to keep trailing stop loss on options. While it is tough to keep trailing stop loss on options as the overnight volatility in the underlying index can be strong, an attempt is to be made during trading hours. The reason is that in a market where trends don’t last for long and options are the only way of taking exposure, it becomes important for one to book profit at regular levels.

rajivnagpal@mydigitalfc.com