Stay covered and hedged

The Nifty zig-zag moves in the last eight weeks have made trade a bit easy; buy the Nifty when it moves towards the lower end of the range--which is anywhere close to 10,650-- and sell it, or even take short positions, when the index is close to 10,900 or 11,000 mark. Opportunities of contra trade, which gives sharp and quick returns, are available at short intervals for traders. But the easy trade mode doesn’t last long in the market.

So, while taking trade in a range-bound market, go long in either call or put, and not by selling these call or put options. The reason is that when a long position is created by selling a put option, the liability with that trade can be unlimited. Similarly, when a short trade is made by selling a call option, losses can be unlimited. Whenever this range-bound trade is broken, all those trades made by selling options will become a headache for traders.

Coming to strategy for this week, trader may continue with the covered call strategy on Nifty futures. Some of these trade may be shifted to the February series, as the time value in this series is good. But the trade should be done only with the perspective of closing it by the end of the January series. For, the February series, the interim budget is a big factor and every trading position needs to be reviewed before that event.

Chart patterns on the Bank Nifty are much similar to those of the Nifty and traders may continue with the covered call strategy on this index. Another strategy on this index could be to buy out-of-the-money call options, as any good result in any banking heavyweights could lead to sharp up-moves which would take even the Bank Nifty up sharply. Also, after a long time, there were indications that traders are not ready to go short on bank stocks, as no selling pressure was seen at the expiry of weekly contracts last Thursday, though Friday saw unwinding of some long positions. So, traders can look to go long in individual banking stocks. But these trades are speculative in nature so only a small exposure should be taken for this trade.

Traders also have to remember to keep trailing stop loss in either direction for the next couple of weeks. It is tough to keep trailing stop loss in options; if the market remains range-bound, the decay in time value itself causes enough losses.

Another option traders can look at over the next few sessions is buying straddles in some large, index heavyweights ahead of their results declaration, as possible directional moves in them would take care of the straddle cost.

Rajiv Nagpal