Derivatives

Derivatives

Keep all options open as results roll in

Last week, call option holders made gains, with the Nifty almost breaking its earlier highs and gaining further in a short span of time.
We would continue with our stand of not selling out-of- the-money options to collect small premiums. At the same time, option traders should look to sell straddles at close to at-the- money strike price to take advantage of the range-bound moves.

Keep Focusing on Bank Nifty

Will what looked like a profit-booking move end up as a corrective move? That’s the fear derivative traders are nursing now. Intraday charts and market breadth details show selling pressure at higher levels in both Nifty and mid-cap stocks. When the Nifty turns southward with bad market breadth, it rules out the probability of any sharp recovery in the market. At best, the market could stay range-bound for some more time.

Wait for earnings reports

If last month belonged to call option buyers, this month belongs to neither call option buyers nor those with long positions in put options. Straddle sellers are the lucky ones in the April series, as the Nifty has remained in a narrow range-bound mode this month. To some extent, traders who had covered call options would have made some money, though mark-to-market losses in Nifty futures would be making them at bit uncomfortable now.

Consolidation with a bullish bias

Once again, the market remained in a no-news-is-good-news mode and gains at the index level were nothing to write home about. But the real strength of market was visible in the mid-cap and small-cap segments. Mid-caps formed a new high last week and this has made people to feel more bullish about the market compared to phases where select large-caps lifted the indices up.

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.

Stay bullish, but stay hedged

The market is going into the budget week with a fair degree of optimism. This was more than evident from the way bears covered their short positions on Wednesday and the surge seen in open interests. On Wednesday, the expiry day of the January series, call options of the February series saw a huge build up of open interest, especially, out-of-the-money call options were being bought in a frenzy towards the last hour of trade.

Start preparing for budget & stay hedged

It was another week where fortune favoured traders with long positions in call options from the January series. The only thing traders need to do now is to protect their profit by keeping a stop-loss on all short-term trades or positional trades on the long side. Reason: in such a market condition, corrective moves come largely as consolidation, that too, of a broader range. Since option buyers carry the risk of decay in time value, it is important to have a stop-loss on the mark-to-mark profit.

Have long exposure to call options

After almost eight straight weeks, luck finally favoured traders with long positions in call options. The Nifty’s rise on Thursday created some discomfort, as traders could be seen rushing to cover short positions in out-of-the-money call options.
We had been cautioning in this space that selling out-of-the-money options should be avoided at all cost, as it is risky in volatile market conditions.
In the last couple of weeks, selling call options seemed to have become an easy trade, but whenever a trade becomes easy, the yield on it becomes low usually.

Never sell options without hedging them

Options, both call and put, are probably the only instruments that price in the emotions of fear, greed and hope that rule the equity market at any given point. The rise in open in interests, or implied volatility, is the sum of the emotions prevailing on the Street. As always, last 12 months saw all these emotions visiting the market time and again.