Last week, call option holders made gains, with the Nifty almost breaking its earlier highs and gaining further in a short span of time.
We would continue with our stand of not selling out-of- the-money options to collect small premiums. At the same time, option traders should look to sell straddles at close to at-the- money strike price to take advantage of the range-bound moves.
Last Friday, unwinding pressure was seen both in call and put options, indicating that some speculative positions were getting closed. This meant that a section of the market is willing to take risk, assuming that the Nifty will not move up or down sharply in the July series.
Despite the prevailing bullish mood, we would advise traders not to throw caution to the wind. When markets are in a bullish mode, it is tough to think of an imminent corrective move. But historical trends show sharp corrections do take place even in strong bull markets.
So, follow bullish strategies but stay hedged by buying some put options, especially given that the earning seasons is about to start, which might increase pressure on the Nifty in intraday trades some days.
So have very few out-of- the-money put options this week. As far as bullish strategies are concerned, stay with the covered call strategy, even though the premium on call options has come down a bit compared to earlier months. Still it would be better to go for this given that extremely bullish or bearish strategies are not going to yield any result. Also, traders can look to buy at-the- money options on days when there is a gap-down opening that does not sustain beyond an hour. In a bullish market, short intraday dips give good trading opportunities.
In the banking sector, some profit booking was visible in individual banks and the Bank Nifty stayed in a broad, range-bound mode.
Macro-formations on Bank Nifty charts show a trend of continued broad range movement. So continue with the covered call strategy on bank stocks.
In the last couple of weeks there has been some confusion over how bad loan provisioning will take shape in the earnings season. If there is indication that the worst is over and there is an operational improvement, then bank stocks could see a sharp spike, especially PSU banks, as they are not over-owned by institutional investors at this point. But exposure should be taken only through call options, to limit risk.
There could arise some trading opportunities in the IT sector around result announcement. This time, expectations from IT companies are low and if the firms show any positive surprise, both short covering and fresh buying could give trading opportunities.
rajivnagpal@mydigitalfc.com