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Friday, Jan 11, 2002

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Negative outlook on Sterlite?

B. Venkatesh

THURSDAY'S trading in the derivatives segment at the NSE saw good demand for out-of-the-money index and equity calls. Here are some trading strategies based on the day's activity:

Equity options: There was good demand for OTM calls on Sterlite Opticals. The January 170 calls clocked the highest volumes with 96 contracts.

  • The outlook on the stock does not appear positive. Those who share similar view can consider buying the January 170 puts, which cost 13.85 points as on the day's close. The option's intrinsic value is 3 points on this price. The time decay of the option is relatively low.

  • Dealers can also consider buying the OTM 160 puts on Sterlite, which cost 8.55 points at the day's close. The entire premium consists of time value, and works against the buyer. The time decay of the option is not very high.

  • The demand for options on Digital was concentrated on the OTM calls. The January 520 calls clocked the highest volumes, with 258 contracts.

  • The immediate outlook on the stock appears somewhat uncertain. Buying a straddle (buying a call and a put on the same strike) could be useful, as the position will make money if the stock moves either way by a large amount. The problem is that a long straddle on Digital will entail large cash outflow, and the stock does not appear poised for a large move on either direction for the position to become profitable. Dealers can, hence, refrain from taking any positions on Digital for the present.

    Index options: The demand for OTMs was good, with the January 1100 calls clocking the highest volumes with 126 contracts.

  • The outlook on the market continues to remain negative. Dealers who hold similar view can consider buying the January 1080 puts. The puts cost 17 points based on Thursday's closing price. The puts are OTM, and the entire premium consists of time value. A factor that will work against the buyer is that the time decay is very high.

  • A more rewarding but costly position will be to buy the January 1100 Nifty puts, which cost 29.6 points at the day's close. The put's intrinsic value is 3 points, but the theta of the option is very high at 0.76.

    Follow-up: Dealers who are long Reliance 340 and 360 calls can hold the position with stop-loss limits. The stock may reverse direction, which may cause losses to the long call positions.

  • Those who are long the 160 puts on ACC can hold their position with stop-loss limits. The stock may break on the upside, which will cause losses to the long put position.

  • Dealers can continue to hold the January 1100 and 1080 puts. Both the positions are already in the positive territory, and could gain further if the market trends downwards.

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