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.

Published on January 23, 2021

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