Take advantage of long volatility trades this week

The Nifty lost 58 points last week with smart gains on Friday reducing the weekly losses. The Nifty basis (premium of futures over spot) traded in a discount for most of the week as market participants hedged their long stock positions by shorting the Nifty.

The India VIX, or volatility index, closed at the 19.45 mark on Friday losing 1.18 points for the week. The India VIX has broken down of the trading range between 20 and 22 and this could mean that the Nifty remains locked in a narrow range in the immediate future.

The highest build-up in Nifty call options is at the 5600 strike and in put options at the 5400 strike. Friday’s upmove saw substantial put writing at the 5400 and 5500 strikes with corresponding call unwinding. The Nifty options equilibrium settled at the 5500 strike after oscillating between 5400 and 5500 throughout last week.

Long volatility trades - long straddles or long strangles are recommended for this week as the Nifty is near the important support zone of 5400. Calls can be bought one strike above the current market, along with simultaneous buying of puts one strike below the market.

Long volatility trades work when a big directional move happens in either direction, which is greater than the combined premium paid by the trader.

The result season resulted in volatility in two pivotal stocks. State Bank of India saw heavy short build-up after disappointing numbers, while L&T gained on back of short covering after impressive results. ONGC witnessed short build-up of open interest due to lack of clarity on subsidy sharing to support the downstream oil companies.

The writer is associate vice-president -technical equities with Motilal Oswal Securities Ltd