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On the hedge
Positive outlook on Satyam
B. Venkatesh
MONDAY's trading in the derivatives segment saw good demand for out-of-the-money equity and index calls. Here are some buy/sell strategies based on the day's trading:
Equity options: Satyam appears to be reversing direction and may turn positive if the momentum continues. The rise in volumes in the single-stock futures segment indicates buying interest in the stock, as do rise in volumes in the 260 and 280 calls.
Dealers who are bullish on the stock can consider buying the January 260 calls, which is currently OTM by 20 points. The 260 calls will cost 12.6 points based on Monday's closing price. The entire premium consists of time value, and works against the buyer. The probability of the calls ending ITM is 0.39.
Those who do not want to buy deep OTM calls can consider buying the January 240 calls, which is OTM by just 3 points. The cost of the option is 19.75 points, which takes the breakeven to 259.75. This means the stock has to rise 10 per cent from the current level for the position to become profitable.
Dealers who are risk seeking can consider writing the January 220 puts, which will fetch a premium of 11.85 points based on Monday's closing price.
The outlook on Reliance Petro continues to remain negative. Dealers who hold similar view can consider writing the January 35 calls on the stock. This will fetch 0.75 points, which consists entirely of time value, and works in favour of the writer. The probability of the calls ending ITM is 0.23.
A less aggressive strategy is to write the January 40 calls, which will fetch 0.35 points based on Monday's closing price. The calls are currently OTM by 11 points. The probability of the calls ending ITM is 0.12.
Another strategy could be to buy the January 35 puts, which costs of 6.5 points. The puts have an intrinsic value of 5.75 points, and the probability of the contracts ending ITM is 0.75.
The outlook on ACC could turn positive if the momentum continues. Dealers who hold a positive outlook on the stock can consider buying the January 160 calls, which will cost 5.4 points. The probability of the calls ending ITM is 0.39.
A more aggressive strategy could be to buy the January 180 calls, which costs 1.7 points, based on Monday's closing price. The entire premium consists of time value, and the probability of the calls ending ITM is 0.15.
Index options: There was good demand for deep OTM calls; the January 1100 calls clocked the highest volumes with 134 contracts. Notwithstanding the good demand for OTM contracts, the outlook on the market could weaken if the current trend persists.
Those who hold a negative outlook on the market can consider writing deep OTM calls, such as the January 1100 and 1120 calls. The January 1100 calls, for instance, will fetch 19.55 points premium and carries 0.35 probability of ending ITM.
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