Until a fortnight back, the market almost belonged to the buyers of call options. However, the scene has changed last week. Now traders with long positions in put options are having an edge in trading. That is the hallmark of the current market, which, on the one side, is being pushed higher by overwhelming liquidity, but, on the other, stretched valuations are making it unsustainable at higher levels.
By moving within a range, the Nifty also favoured sellers of straddles. Also, traders with covered call options would have made money in the market last week, though mark-to-market losses in Nifty futures would be making them a bit uncomfortable. But there is high probability that they would cover their M2M losses over the next couple of weeks.
Coming to strategy for this week for professional traders, not many short positions are there in the system at this point. The market is in overbought territory, so, the Nifty’s move would depend on the quantum of fresh long positions built. Also, even a bit of sluggishness in money flow to index instruments could create profit booking pressure. So, straddle sellers have to wait for the current correction to pan out. Once a Nifty range gets settled, they can sell multiple straddles of different strike prices that are not far from the money. Given that the Nifty is showing a tendency for sharp intraday recovery, traders can also look at implementing a highly speculative strategy of buying strangles for intraday moves and book profit when the combined value of those strangles gives 15 per cent return after trading costs. But have a stop loss in all such positions. The third strategy is of, as usual, covered call, but chances of making mark-to-market losses on existing positions are there. So, wait for a bounce that brings the Nifty closer to its recent high and then go for the covered call strategy.
In the banking space, after very long, the SBI counter moved up, rising from an initial dip after the result announcement. There was nothing extraordinary in the result. Still, other PSU banks also moved up along with the SBI stock. This shows that the correlation between SBI and the other PSU bank stocks has increased in the market’s mind space. So, the PSU bank stocks could move up further in the short-term if there are no major negative surprises in their quarterly results. A part of that up-move would be from short positions still existing in PSU banks. But unlike when investment buying was completely absent, this time we could even see some institutional buying taking place, leading to individual stocks moving up more sharply.
As for Bank Nifty strategy, the divergence of trend in private and PSU banks makes the index a good candidate for covered call. Here also, traders should be ready to book some mark-to-market losses for some sessions before finally recovering their capital and also making a return.
rajivnagpal@mydigitalfc.com