04
Jun
11

Benefit from Sun TV drastic fall

As option writer, I love the kind of events that happened in Sun TV last week. As the news broke out, Mr. Maran might have misused his power to benefit the family business, Sun TV saw drastic fall – closer to 30 percentage. Due to this drastic fall in Sun TV, Implied Volatility in its options increased substantially to 150%. Are these IV’s sustainable ? Answer is no in short term since  stock will remain volatile over next few days and will take time to stabilize. But after next few days IV’s will surely come down from unrealistic 150 odd level.

Options in Sun TV were quite illiquid(low or no trading volume) before this fall. But now situation is just opposite and options from 180 put to 400 call are quite liquid. Given the negative news flow emanating not just related to 2G scam but also on business front from Chennai, it looks extremely difficult for Sun TV to go back and test 380-400 levels. One can write OTM 380 or 400 calls for June series resulting in 6.8% and 3.5% returns respectively in 27 days (assuming 10% margin requirement of contract value).   Writing puts in this case can be quite risky since no one knows the extent of damage which can occur in the stock. As of now, I have written one OTM 400 call and looking to write some more 380 calls in case stock rebounds.

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