Posts Tagged ‘Derivatives


Volatility smile

As option trader, the most crucial thing one has to observe is Implied Volatility (IV). When IV of an option and its strike price is plotted, its curve is known as volatility smile. Volatility smile for FX options is U shaped curve which resembles smile. FX volatility smile curve implies that IV’s for At-the-money (ATM) options are lowest, and higher for In-the-money (ITM) and Out-of-the-money (OTM) options.

For equity options, volatility smile tends to be downward sloping. IV decreases as strike price increases. After 1987 US market crash, people are worried about rapidly falling share prices and buy OTM puts as insurance. OTM puts IV’s are higher than ATM and ITM puts.

In one of my previous post, I had written that Reliance Communications (RCom) options have higher IV’s. I thought I should plot volatility smile for RCom calls and puts.

RCom put exhibit typical bookish pattern of reverse skew with ATM puts having lowest IV’s. OTM puts have highest IV’s followed by ITM puts.

RCom Call exhibit forward skew with OTM calls having highest IV’s followed by ATM calls and ITM calls. Normally commodities exhibit forward skew when prices are expected to rise in future.

Reliance Industries (RIL) is struggling on various fronts and this reflects in its share price performance over the past several months. So I thought about plotting volatility smile curve for RIL also.

RIL puts exhibit downward sloping volatility smile curve with OTM puts having highest IV’s, followed by ATM and ITM puts.

RIL calls volatility smile curve exhibit a shape similar to that of currencies. Its shape is different from RCom call volatility smile curve.


Maruti follow up

In my previous post, I had mentioned about selling Maruti 1350 Call. I wanted to wait for RBI rate hike decision on 16th June before writing 1300 Call, but yesterday there was sudden spike in 1300 call premium. Returns from Maruti 1300 call at 4.75% in remaining 17 days of June series, became too compelling for me to go ahead and write this call. Its high risk trade, but returns are also high. There might be some spike in share price if strike at Maruti is called off, but I don’t expect share price to rise too much.


Short strangle in Sun TV

I entered into short strangle in Sun TV with selling 180 Put and 400 Call for June series. It simply means that I don’t expect Sun TV to move beyond 400 and below 180 during June. Strangle is a simple option strategy where one hold position in both a Call and Put of same series but with different strike price. Normally this strategy is useful when you expect large movement in underlying but not sure of its direction. Short strangle is when you sell Call & Put whereas Long strangle is when you buy Call & Put. Apart from price movement in case of short Strangle one is also bearish on Implied Volatility(IV’s).

Payoff diagram for short strangle in Sun TV (sold 180 put, sold 400 call):

My returns from this trade are 5.61% in 28 days. Upside looks far more capped in Sun TV, hence I have also sold three 380 Call for June series.

June 2019
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