|
|
Markets
-
Commentary
Columns
-
On the hedge
Immediate outlook positive for Sterlite
B.Venkatesh
TUESDAY's trading in the derivatives segment at the NSE saw good demand for out-of-the-money index and equity calls. The outlook on the stocks and the market does not, however, seem as optimistic as the demand for the OTM calls suggest. Here are some buy/sell strategies based on the day's trading:
Equity options: There was good demand for OTM calls on Sterlite Opticals. The January 160 calls clocked highest volumes of 196 contracts.
The immediate outlook on Sterlite appears somewhat positive. This provides some opportunity for dealers to buy calls on the stock. The historical volatility on the stock has also risen in the last few days, which make the options more valuable to the buyer.
Dealers who have a positive outlook on the Sterlite can consider buying the January 160 calls. This will cost 13.65 points based on Tuesday's closing price. The options are currently OTM and hence consist entirely of time value, which works against the buyer; the loss due to time decay is, however, not very high.
A more aggressive strategy will be to buy the deep OTM 180 calls, which will cost 7.40 points based on Tuesday's closing price. The probability of the calls ending ITM is 0.34. Even though the stock has to rise close to 19 per cent from the current levels for the position to become profitable, short-term dealers can expect to close their position at a profit should the stock move up considerably in the spot market. The risk-seeking dealers can consider writing the January 150 puts on Sterlite, which will fetch 9 points based on Tuesday's closing price.
The immediate outlook on Digital Global Soft appears negative; this despite good demand for OTM calls on the stock. The January 500 calls, which are OTM by 14 points, clocked the highest volumes with 181 contracts.
Dealers who hold negative outlook on Digital can consider writing the January 480 puts on the stock. This will fetch a premium of 30 points based on Tuesday's closing price. Since the puts are slightly OTM, the entire premium consists of time value, and works in favour of the writer. The probability of the puts ending ITM is 0.42.
A less risky strategy will be to write the January 460 puts, which are deep OTM. This will fetch a premium of 22 points based on Tuesday's closing price. While the time decay is lower than for the 480 puts, the probability of the puts ending ITM is only 0.33, which makes the puts more attractive to the writer.
Those who want to take a contrary (positive) view on the stock can consider buying the January 460 calls on the stock. The calls cost 42.75 points based on Tuesday's closing price. The premium increases the breakeven of the position to 502, which means that the stock has to rise by 4 per cent from the present levels for the position to become profitable.
Index options: There was good demand for OTM calls on the Nifty index. The January 1120 calls clocked the highest volumes with 192 contracts.
The immediate outlook on the market appears somewhat positive. Dealers need to beware that the market could fall should the current trend continue.
Those who hold a positive outlook can consider buying the January 1060 calls, which cost 29.90 points based on Tuesday's price. A more aggressive strategy of buying the 1080 calls will cost 20 points. The probability of these calls ending ITM is 0.41. The risk-seeking dealers can consider writing the January 1040 puts or the 1060 puts.
Send this article to Friends by
E-Mail
|
Stories in this Section
US-64 redemption at Rs 12 cr on day one
`Dud investments' dog US-64 revamp
Bears make a comeback
NSE's new VaR system
Immediate outlook positive for Sterlite
2002 opens on bright note, ends weak
Wockhardt eyes US biotech market
All quiet on the IPO front
|
