It pays to go contrarian

Being a contrarian would pay even  this year. That's the impression one gets after seeing the first trading week of the New Year. The very first trading session of the year saw volatile moves, which would have given gains to any trader who had taken a contrarian position when the Nifty turned overtly bullish or negative.

 Another notable feature of the week was that the Indian market was back to following the Dow Jones futures. For almost the whole of last week, Dow Jones futures were trading in the negative zone when the Indian market opened. The domestic market kind of followed the Dow moves. Last  Friday, the moment Dow Jones futures turned positive, the Indian market saw a sharp recovery and it was clear that the bears were not comfortable keeping short positions opened on the weekend. Their discomfort indicates that the market is not overbought and there is not much of long positions left, otherwise rather the bulls would have been rushing to unwind their positions.

Macro-formations on the Nifty charts indicate that the index may stay in a range-bound mode for sometime. In this scenario, traders can either sell straddles or go for covered call. Since global volatility can be very high it is better not to sell straddles. So, Nifty traders can opt for covered call and cover the lower end of the trade with put options, may be, from slightly far off the present Nifty level to reduce hedging cost. This may entail a possible loss, but it is a necessary risk to be taken. This trade can be done on a day the index comes under pressure. A contrarian trade is suggested even in covered call for its probability to give superior returns if the trade is done closer to the index's lower end of the trading range.

The Bank Nifty continues to outperform the Nifty but here also volatility is high. So any trade that involve selling options has to be avoided. Covered call strategy is sugested on the Bank Nifty, but by hedging it with far off-the-money put options. This trade can be made in the initial part of the week as the trend was strong on Friday.

Traders can also look at call options in bank stocks. After long, some PSU banks have started showing signs of life. But most of them are placed below their 200-day moving average (DMA), which means they have still to cross a big hurdle. So, instead of taking exposure to futures, look to buy call options if the uptrend in them gains more momentum. Keep the calls so that the risk is limited.

Rajiv Nagpal