Take the first long step, with a hedge

It is rare for buyers of both call and put options to be caught on the wrong foot. But it happened last week. All who had bought call options on Wednesday were in losses on Thursday. And all those who had bought put options on Thursday, thinking that the global trend will push the Nifty down further, were in losses on Friday.

The moral of the story is that if option instruments are used for extreme speculative trade, be ready to take on sharp losses. Now the only thing traders need to do is to protect their profit by keeping a stop loss on all short-term or long-term positional trades, as going forward, volatility will heighten, more because of global reasons. Traders should also keep an eye on crude oil prices, because that will have even more market impact, especially if they show a strong upward trend. Price damage to stocks adversely impacted from oil price rise could be quite strong.

Coming to Nifty strategies, once again the index had taken support on some of its key averages. We would suggest buying some call options with stop loss. It would also be desirable to pre-decide a point to book profit, as profits could also evaporate overnight.

Many seemingly easy trades would float around in the market in the next two weeks, tempting one to sell call or put options in the hope that the index will not move up or down beyond a point. But desist from such trades, as these most often wipe out one’s trading profits as the heightened volatility in the market can take indices and stocks beyond the normal limits.

The Bank Nifty continued its range-bound moves with a slight bullish bias last week. Most likely, a similar trend would continue this week, and traders may take exposure through at-the-money call options and also out-of-the-money call option from the November series. Traders can also look at having covered call, but with a hedge at the lower end of the breakeven point of trade. It would indeed reduce the gains, but protect one from any unseen dip in the Bank Nifty.

Price charts of many individual bank stocks indicate that the worst is probably over for them, but the quarterly results have to been seen before jumping into conclusions. So, straddles may be bought in individual bank stocks around the results time. There would be enough movements in them to take care of the buying cost of straddles.

The IT sector had seen some profit booking in large-cap stocks in the last two weeks. While a sharp correction in them is unlikely, given that the recent weakness in rupee is still to reflect in their results, there could be some range-bound moment in them. So, this is another sector where a covered call strategy could be used. But these could be given a protective cover by buying out-of-the-money call options.

rajivnagpal@mydigitalfc.com