Take some profit off the table

Call option holders were the gainers last week, with the Nifty breaking its earlier highs and climbing higher in a short span of time, though the ITC stock spoiled the party for the bulls. For the last two weeks, we had been advising traders to avoid selling out-of-the-money options, both call and put, because the risk of selling options in either direction gets elevated when the market is close to its highs. After a period of range-bound movements, the index tends to witness a correction or a fresh breakout.

So, we would still continue with our stand of not selling out-of-the-money options to collect small premiums. It has been observed that in the week of expiry many traders tend to sell options, assuming that the derivatives expiry will not happen in a certain range. While this could turn out true most of the times, if the market sees a sharp move, the profits made from months of labour would be washed away in a matter of seconds. Despite all the bullish mood prevailing on Dalal Street, we would advise traders not to throw caution to the wind. When the market is in a bullish mode, it is tough to think of a corrective move. But historical trends show even strong bull markets experience sharp corrections. So, follow bullish strategies, but have either trailing stop loss or hedged positions.

As for strategy for this week, being an expiry week, it would be better not to take any fresh trade. Wait for the expiry of contract to get over and let the first session of the new series to come to a close. Essentially, take position towards the end of this week.

If the market opens the week with a gap-down, then take exposure to some at-the-money put options. But have a stop loss. The position should only be carried forward if the Nifty ends the day near the lows of the session, otherwise book profit. Traders have to keep an eye on developments in the international market. Our assumption is that if a market correction sets in from global factors, then it wouldn’t be getting settled in one day.

Some degree of profit booking was visible in the banking space last Thursday. Over the next two days, we might see more profit booking in the private banking space. So, if the broader market goes into any corrective mode, traders can buy at-the-money put options of the Bank Nifty from the August series for an extreme short-term trade.

Another sector which, after a long time, showed signs of a breakout was the FMCG. In the next two sessions, traders can think of buying call options of FMCG stocks, or even go for a covered call strategy in FMCG stocks. But this trade should be done with hedging, and only a small part of the trading capital should be used.