The market is pricing in a large stimulus package in the US, which could result in incremental fund flows to EMs like India. “If this happens, Nifty could potentially test new highs, if not a breakdown to 11,500 or lower is in the offing,” said Rajesh Palviya, derivatives head at Axis Securities.
Given this backdrop, Palviya suggests the long straddle to his clients.
The Nifty traded up almost a per cent at 12,000 intraday Wednesday.
The intraday cost of the 12,000 straddle was Rs 250 a share (75 shares make one lot). This implies analysts are anticipating an over 2% move either side.
The buyer will gain if the Nifty expires or trades below 11,750 or above 12,250. The record high of Nifty is 12,430.5 on January 20. Month-end options indicate an initial range of 11,500-12,000 for the market.
A trader buys a call or put option when he expects an underlier to rise above the strike bought plus the premium paid to the seller in case of a call. In case of the put, the buyer gains only if the underlier drops below the strike bought minus premium paid to the seller.