Focus on bank stocks and Nifty Bank index
We probably had the least volatile budget speech event in recent memory on Wednesday, in the first half trading. As the finance minister read out the budget, the Nifty moved in an extreme short range of 45 points. But soon after he wrapped up, the Nifty moved up sharply. By then it became clear to the market that even the budget fine print did not contain anything about long-term capital gains tax on stocks. The index’s sudden rise and the unwinding of long positions in put options clearly showed that rather than short covering, fresh long positions were pushing up the Nifty.
The underlying reason for an up-move should be understood to know its longevity. Short covering-led up-moves are sharp, but short-lived. In contrast, up-moves led by a build-up of long positions tend to be slower in pace, but long-term in nature.
We would continue with our bullish to neutral strategy on the Nifty. Since the index has gained reasonable weight in a short time, it might see some consolidation now. Keeping this probability in mind, traders should give more weightage to the covered call strategy than buying out-of-the-money call options. But do have some out-of-the-money call options in the trading portfolio as well.
More aggressive traders can take a long position in Nifty futures and buy out-of-the-money put options and place a trailing stop loss. This will protect profit and prevent extreme loss. Yes, profit margin would be lower in this case, as put options have to be bought.
The Nifty Bank index is clearly bullish now. In fact, banking stocks are leading the market rally. Stay with the bullish to neutral strategy on this index as well. Traders should focus more on the Bank Nifty than the Nifty 50, since the latter could be bogged down by the performance of IT and metal sectors in the short-term. Also, traders can have higher exposure to the Bank Nifty with at-the-money and out-of-the-money call options rather than a covered call.
Also, in the last couple of sessions, PSU bank stocks have come into the limelight, with some of them gaining sharply. So, traders may go for the covered call strategy in PSU bank stocks, but stay only with performing bank stocks. Don’t just buy a bank stock because it is priced below a certain price range and so look cheap. Such small-cap bank stocks may see a small rally that would fizzle out in no time. Buy a stock that has been outperforming the Bank Nifty and is either a large- or mid-cap, because such stocks would yield better results in covered call and out-of-the-money options.
In individual bank stocks, traders may take long positions in their stock futures and hedge at-the-money or out-of-money put options, and take the full advantage of the upward movement in this section.
rajivnagpal@mydigitalfc.com
Columnist: 
Rajiv Nagpal