Derivatives

Why buying Nifty put option is a good idea now

KS Badri Narayanan | Updated on January 23, 2021

Strategy strictly for traders who understand margin commitments and have deep pockets

The medium-term outlook for Nifty 50 remains positive as long as it stays above 12,677. A close below this level will alter the bullish view on Nifty and a close below 11,631 will change the outlook to negative for the index. On the other hand, a close above 14,513 will reignite the bull rally for Nifty 50 index. However, the index can remain volatile before taking a clear direction. We expect the Nifty to witness negative tilt with higher volatility.

F&O pointers: The Nifty 50 February futures closed at 14,419.95, at an almost 50-point premium over the spot close of 14,371.90, whereas January futures closed at 14,380.15.

The Nifty 50 February futures have witnessed a steady accumulation of open positions. However, the narrowing down of the futures premium indicates unwinding of long positions. Option trading indicates a range of 13,000-15,000 for the index.

Strategy: Traders could consider a plain vanilla put option by buying 14,000-strike (expiring February 25) ahead of the Budget. The option closed with a premium of ₹219.95. As the market lot is 75 units, this will cost investors ₹16,500, which will be the maximum loss one can incur. For that to happen, Nifty has to sustain above 14,000-mark.

On the other hand, the profit potential is huge, if Nifty slips sharply ahead of or post Budget. We advise investors to exit the position if the loss mounts to ₹7,500 or at a profit of ₹10,000 or above.

Traders with risk-taking ability can consider shorting Nifty 50 February futures with a stop-loss at 14,660. If the index opens weak, shift the stop-loss to 14,420 and hold for a target of 14,085 or 13,982. This strategy is strictly for traders who understand margin commitments and have deep pockets to withstand volatile conditions.

Follow-up: L&T Finance Holdings has moved on expected lines.

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

Published on January 23, 2021
This article is closed for comments.
Please Email the Editor