Stay bullish, but with put options
As the April series derivatives contracts expired last week, the winners were, once again, traders with bullish to neutral positions. Largely banking stocks were pushing up the Nifty. Even the first trading session of May contracts, on Friday, was also taken care of by bank stocks.
This makes developments in the banking sector critical to the Nifty’s movements. Once again reports have emerged that policy measures to tackle NPAs would be announced soon. Given the high liquidity and inflows in the market, bank stocks may keep moving up in anticipation of those measures, though profit-booking could emerge on the day of announcement.
If the measures are extremely good, even the PSU banks that have been underperforming for the last two years, may see a strong turnaround, at least for the next couple of months.
The bank stocks’ behaviour after the policy announcement will give us an idea whether the rise is part of a strong turnaround or another periodic uptrend in the banking space. Broad, range-bound moves for two sessions after the policy announcement would indicate a strong change in trend. On the contrary, a spike followed by selling pressure at higher levels would indicate a period of bounce.
So, it would be better for traders to keep some capital aside for this trade. If there is a structural change in the banking sector, then trading gains would be abnormally high. However, in the extreme short-term, traders should continue with the covered call strategy on Bank Nifty. Also, before doing this trade, it would be desirable to wait for the Bank Nifty to come close to its short-term moving average.

On the Nifty, traders can follow two strategies in the short-term. Buy out-of-themoney put options on the day all three sectors—bank, metal and IT—show weakness. Because when these three sectors come under selling pressure, there would be sharp correction and buying put options would give good enough returns on trades in the short-term. Also, traders with long positions in Nifty futures should have some put options to hedge long positions. Yes, the cost of buying out-of-the-money put options may go waste as only a range-bound correction might take place, but when an index is forming a new high, it is always better to be prepared for any corrective movement, as corrections won’t come after prior notice. Traders can also look for the covered call strategy, but it should be executed only after the Nifty corrects and comes close to its short-term moving average—placed about 2 per cent away from the current level. Also, volumes of covered call strategy trades should be kept low at this point.
rajivnagpal@mydigitalfc.com