How To Approach The Weak Market Next Week

Saturday, May 24, 2008 | | |

We expect the Nifty future to witness significant volatility in the forthcoming week. As we have always maintained, the Nifty future faces a strong resistance at 5350, a level it failed to breach last week also. It is now loitering precariously close to its support at 4950. Failure to sustain at this level will take Nifty future to its next crucial support at 4400. However, any reversal from the current level holds the potential to take Nifty future first to 5150 and then to 5350 levels. However, for the overall negative bias to lift, Nifty future has to make a decisive move above 5850, failing which the probability to revisit its January lows looms large.
Since we are now approaching the settlement week for the current month derivatives contracts, volatility is sure to make its presence felt. The risk-return payoff during such volatile times, more often than not, favours the use of straddles. Traders can consider setting a straddle for Nifty. You can do this by buying Nifty 5000-June strikes for both call and put options. Note that this is a good strategy when you feel that there will be a large price movement in Nifty in the near future but are unsure of which way that price movement will be. The premium paid for setting this option spread is the maximum loss you can suffer while the gains can be unlimited should the price move sharply in one direction. Nifty 5000 call on Friday closed at Rs 150.70 and the put ended at Rs 214.65. Traders can consider holding this strategy beyond this week