F&O Query: Should you buy Nifty December call options?

You’ve written that Nifty 50 will touch 28,000 in long term. Taking this has cue shall I buy December expiry Nifty 28,000-CE? Kindly advice – T C Rajashegaran.

Nifty 50 (23,963): By the end of last week, the index confirmed an inverted head-and-shoulder pattern, signalling a bullish trend reversal. However, the breakout has not yet seen any meaningful follow-through buying. In fact, renewed geopolitical tensions have dragged the index lower this week.

That said, Nifty 50 continues to hold above a key support at 23,800, which coincides with the 50-day moving average. Even if this level is breached, the index has additional support at 23,500 and 23,000.

The broader long-term outlook remains bullish as long as Nifty 50 stays above 22,000. However, a decline towards 23,500 or 23,000 could delay the anticipated rally towards 28,000. While a move to 28,000 appears achievable over the medium term, the timeline for such an advance remains uncertain, particularly given the current geopolitical backdrop.

Given the above factors, instead of buying the December 28,000-CE option (₹51.95), you may consider the December 26,000-CE option (₹293.50), as the probability of Nifty reaching 26,000 is considerably higher than it advancing to 28,000 by expiry.

Rather than deploying capital in a single tranche, the position can be built in two legs. Buy the first tranche at the current premium since there is a support nearby at 23,800 and add the second tranche once Nifty 50 decisively breaks above 24,600.

As for exits, consider booking profits on half the position when Nifty reaches 25,600 and hold the balance for a target of 26,200. On the downside, exit the positions if Nifty falls below the support at 23,000. This will serve as the stop-loss level.

All entry, exit and stop-loss decisions are based on the underlying Nifty 50 index rather than the option premium. This is because, over the coming months, the option’s time value will significantly influence its premium, making the underlying index a more reliable reference point for trade management.

Send your queries to derivatives@thehindu.co.in