Straddle your moves this week
A comparison of the macro-formation on the charts and the Nifty’s intraday reaction to news flows would indicate the market is waiting for a positive trigger to go into a breakout. Take Thursday’s trading, for instance. The market opened with a downward gap, but two factors stood out. One, the gap was not as wide as suggested by Singapore’s SGX Nifty before the Indian market opened. Two, soon after the RBI announced a status quo in the repo rate, the market, along with bank stocks, recovered.
How come a status quo is positive news for the market and a reason for bank stocks to move up? The only logical deduction from this can be that the market’s undercurrent is extremely positive and is looking for a reason to break out. If the earnings season provides a trigger, we might see a breakout.
In such a setup, we would still continue with the bullish to neutral strategies for the market, though at this point the weightage of neutral strategies should be slightly higher in the option portfolio. So, keep having the covered call strategy on the Nifty but with stop loss, as suggested in this space last week. More aggressive traders can look to sell straddles of different strike prices, and get returns as the index’s range-bound movements lead to decline in time value.

In the normal course, breakeven points are covered at the start of the trade, but as the possibility of a strong directional move taking the Nifty beyond the point of straddle is low, traders may keep breakeven points open, and if there is a directional move, buy the required number of options. Also, traders should be mentally ready to buy out-of-the-money options if the Nifty moves below or above the range. But given the huge open interest in call options, traders should look for a small profit in call option trades.
Also, as the earning season is about to start, traders who have long positions in individual stock futures should hedge their positions with put options. In fact, instead of stock futures, it would be advisable to shift positions to call options so that the risk is limited in the earnings season.
After touching an all-time high, the Bank Nifty has got into a typical corrective mode, with a sharp decline followed by sideways moves. Sideways moves tend to start when all the short-term moving averages come closer. However, at this point, though the required short and sharp correction has taken place, all the averages are yet to come close. So, traders should wait for the Bank Nifty to slip more. Around the end of the week, when the index comes close to its moving averages, which are now placed at the 21,000-mark, go for the covered call strategy.
Professional traders may look at selling straddles of different strike prices which are close to at-the-money options. In this strategy, the lower end of the trade should be covered by buying put options.
Rajiv Nagpal