Weekly Investment Strategy | Stocks and Commodities

P R Sundar, Aditya Trading Solutions

Weekly Investment Strategy

Date:  September 22, 2013

Form now onwards, I will give one suggestion every week with one week to 3 months view and will follow it up every week until the expiry of the contracts.

Strategy: Sell December expiry Nifty 5000 Put Option and 7000 Call Option

Since january 2013, the Nifty has been trading in the range of 5100 and 6250.

CAD, GDP growth disappointment, IIP data, Rupee depreciation, Fed Tapering all contributed to the volatility of the markets and in just two months the Nifty fell from around 6000 to 5100 and then bounced back equally.

Now all the event risks are over. Fed event is over. RBI event is over. Volatility index fell from the peak of 35 to below 25.

Argument in favor of 7000 Call option:

1. For the next three months, there will be no positive surprises.
2. US debt ceiling talk is not going in the right direction.
3. Q2 results are not going to be great as the rupee depreciation and all other negative things that happened in the last three months, will be reflected in this quarter results.
4. Four state elections in November will also add to the uncertainty in political circles. That is not good for stock market. 
5. Though Fed did not go for tapering this time, one day they will have to do. So ahead of December FOMC meeting, this pressure will be felt in the markets.
6. US and European markets are trading at 5 year highs and moving significantly higher from here will be difficult.
7. So both globally and locally the things are not looking that great.
8. All these will make it very difficult for the Nifty to move beyond 6500.
9. So possibility of Nifty reaching 7000 in next three months is extremely difficult.
10. So Nifty 7000 Call option is a safe investment.

Argument in favor of 5000 Put option:  

1. So much of commotion in the last few months could not break the Nifty below 5100.
2. Things have improved in the last one month.
3. First new RBI governor brought lot of optimism to the market.
4. Rupee is stable now.
5. FIIs once again proved their faith in Indian stock markets and started buying in huge quantities.
6. Weaker hands all are out of the market in the last fall from 6000 to 5100. Only relatively stronger hands are left in the market now.
7. China and European economies are doing well and stabilising.
8. Massive stimulus in Japan also contributing to the positive sentiment there.
9. So the world economies are doing well, the problem came only for emerging economies with high CAD.
10. So the probability of Nifty falling below 5000 is also very low.

 Maths behind the strategy: 

Nifty Dec 2013 expiry Put option is trading at Rs 45 and 7000 Call option is trading at Rs 31. Total premium is Rs 76. Total premium per lot is Rs 3800. This works out to be a return of 19% for three months and one week, for an initial span margin of around Rs 20000.
That works out to be a monthly return of 6% and annualised return of 72%.
This is a very good return considering the level of risk.