Posts Tagged ‘Implied volatility


IGL zooms 29 percent..

Today, the Delhi high court decided in favor of IGL (Indraprastha Gas Ltd) and said that regulator PNGRB cannot fix tariffs. It was a huge relief for the company and its shares surged ahead 29 percent to close at Rs 249.15. On April 9, Government regulator had asked the gas utility company to reduce gas prices retrospectively from 2008. This order, if implemented would have eroded complete net worth of IGL.

Given the current market scenario, I am not selling any puts. But in case of IGL, I would be making an exception and sell some puts. Quashing of PNGRB order has removed the existence fears about IGL. Even if there is meltdown in markets, I would assign very low probability to IGL stock going below 200 again. This sharp up-move in IGL stock has significantly increased Implied Volatility (IV). One thing that has to be kept in mind is that PNGRB might appeal against this order in Supreme Court. Hence, I would also be selling OTM calls also. Effectively, it would result in short strangle strategy.


Bought some panic today..

One more DMK wicket is down from cabinet after Mr. Dayanidhi Maran resigned as Textile minister today ( It was seen coming after CBI implicated Mr. Maran in chargesheet yesterday. Sun TV shares fell sharply as soon as the news broke out. Puts from 200-240 were actively trading. Implied Volatility (IV’s) as well as option premium increased sharply. I thought panic reaction was an opportunity to write some OTM puts, since premiums were quite compelling. I think lot of negatives and uncertainty is factored in Sun TV share price. Lot of people might compare Sun TV with GTL or RCom, but they are ignoring one big fact that Sun TV is doing extremely good on business front. It’s high risk, high return trade.


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.


Sun TV follow up

Yesterday, I sold some more puts in Sun TV – two 180 put, one 200 put. My returns from these puts are 2.46% in 23 days. Implied Volatility (IV’s) are still high at 100 plus level in puts, although they have come down from 150 level. I expect them to come down further. After short covering, Sun TV seems to be stabilizing around 295-300 odd levels.


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.


First post

I have been writing options for quite some time. Writing or selling options is quite risky since your gains are limited to premium collected while your loss is unlimited, as shown by the black swan event like 2008 market crash across the world. As option writer, one stands to benefit from Implied Volatility(IV) and Time decay. IV as implied by the option premium, is the rate and magnitude of change in underlying prices. Time decay says that if underlying does not move much then, option will expire worthless (represented by greek theta). Anyways, options are wasting assets and their value declines over time.

Trading in options has increased significantly in Indian markets over last year and this is reflected in falling margins of major brokerage houses. Within option segment, Index options attract majority of volumes.

If you think market or stocks will remain range bound over extended period of time then, option writing is the way to go. Normally, I write Out of Money(OTM) Calls on individual stocks and rarely OTM Puts. First of all, I identify stocks which have announced either poor results or affected by any new development or major event which will impact their business significantly. Usually, these stocks take some time to recover and you stand to benefit from time decay. For e.g. – Infosys announced its Q4, 2011 results in April this year and market didn’t like its performance which was evident in stock reaction that fell 7 odd percentage. One could have easily sold its OTM Calls at 3300 or 3200 strike price and made quite a bit of money. Given the kind of selling which Infosys witnessed on huge volumes, it was extremely difficult for Infosys to go back and test 3200-3300 levels. I sold one 3300 Call for May series which was trading at Rs 19 that time. Writing options usually involve some kind of margin commitment and hence you calculate returns on margin provided. My returns on writing Infosys call were 4.59% in 18 days, which is quite decent by any standard.

Over next several posts, I will keep giving examples of trades which I have executed or about to execute. I believe, writing options if done sensibly can yield 25% annualized returns.

June 2019
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