Thursday, May 7, 2009

LOOK OUT FOR SELLING BIG TIME - BUY PUT OPTIONS

Are you amongst those who have been surprised by the sharp up move of the stock markets around the globe? If yes, then be rest assured that you have company. Such surprises in Bear market are part of the game. A smart momentum trader would have benefited from this surge in stock markets. He may still take positions and ride the wave. But in case you are an investor then make sure to take money home from your profitable positions. The reason is simple. We are riding at the top end of the wave where taking fresh buy positions is fraught with dangers.

Looking at Dow Jones charts it is evident that the rally can stretch up to 9400. So the selling spree should be witnessed anytime. Dow closed at 8512 on 06 May 09. The zone of selling for Dow is between 9000 and 9400.

Nifty on the other hand is in its sell zone. Its present ceiling is 3770 which means that it should witness selling around present level of 3700. The moment it shoots up through its ceiling then it will be ready for a move up to 4150. However in Nifty charts one can sense that there is formation of an Evening Star in Candlestick pattern which foretells big time selling.

Since you cannot think of buying at this level and selling Futures can be disastrous if Nifty marches to 4150, therefore one should shift focus to buying Put option. One can start building positions in Nifty Put option from here on till Nifty reaches 4150. Let me be more elaborate in my present strategy. Since Nifty has a ceiling at 3770 it is prudent to buy Nifty Put option now. In case Nifty penetrates its ceiling then take similar position when Nifty reaches 4150. If Nifty doesn't violate its ceiling of 3770 then the Put option that you have taken now will give you good return. Why good return? Because any confirmed move downwards will surely have Nifty trading at 3150 in next to no time.

In a scenario where Nifty refuses to be contained within 3770 then the next step would be to buy Nifty Put option of the same strike price at around 4150. This would make a WINNING average to your Put position. Since there is possibility of 4150 in Nifty therefore time factor will assume greater significance in deciding the month of contract. Hence I would be more comfortable to go for a Nifty Put of June contract which will take care of time decay factor of May. This is just a precautionary step in case Nifty doesn't fall in May. As for the strike price, 3400 will be quite conservative out of money Put. The premium is not steep and you can make quite a packet if Nifty falls from present level. In case it doesn't, then buying same Put when Nifty is at 4150 will give you a good average to profit from.

In short, my recommendation is to buy 3400 Nifty Put of Jun 2009 at current market price. On 07 May 09 this Put traded at 146.2 before close.