The Hindu Business Line : SBI: Outlook positive, buy Feb 640 calls

Consider buying the February 640 calls. The option traded for 17 points on Monday. The position allows for approximately 15 per cent error in forecasting volatility. This lowers the vega risk, but the position is subject to high time decay. The reason is that the strike price is not far away from the upside price target.

The implication is that the option will rapidly lose value unless the stock's upside price acceleration is high. The position will generate marginal profits if the stock reaches the upside price target on option expiration. The minimum order size is 1,000. Note that the open interest position as a percentage of the market-wide limit is just above 15 per cent.

GAIL: The stock closed at Rs 222 in the spot market. The near-term outlook appears positive. The upside price target is Rs 255.

Consider buying the February 240 calls. The option traded for 6.75 points on Monday. The position allows for approximately 20 per cent error in forecasting volatility. This lowers the vega risk, but the option theta is very high. The reason is that the strike price is not far away from the upside price target. The payoff, hence, depends on the speed with which the stock reaches the upside price target. The sooner the stock moves to Rs 255, the better the payoff.

Note that the volatility of the underlying has increased considerably in recent times. This makes long options valuable. Traders should note that initiating a long futures position instead of long calls might be sub-optimal. The reason is that tight sell stops may be triggered.

Trading with far away sell stops may expose the position to high downside risk because the contract multiplier is 1,500.

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