Posts Tagged ‘Options


Time for another quick ratio spread..

On Friday, I sold few Nifty 4200 puts. A fall in the market, along with the fear of it falling even more, sharply increases the put premium. Nifty 4200 September series put premium was ruling at attractive level for me to go ahead and sell it. Although I covered some puts intraday also. As the premiums were quite high, I didn’t buy 4500 put for setting up ratio spread. Once there is some rebound in Nifty from current 4800 levels and put premium fall, I will buy 4500 put. It’s a lesson I have learnt from my previous ratio spread; Sell lower level put when there is absolute panic and buy protection for your sold put when there is some market rebound. Markets are oversold in short-term and Nifty is near its major support zone of 4750-4800, so there will be some rebound early next week. I will cover all my written puts in case of rebound. Overall market is weak and there will be more opportunities down the line.


Covered my ratio spread..

In my previous post, I had written about entering into ratio spread on Tuesday. Markets were extremely oversold in short-term and I sold several OTM puts. As a trader it was extremely satisfying trade. In trading also, just like investing it pays to buy panic and sell greed. But these are volatile times and one should be extra cautious before writing puts and going long.


Waiting for new opportunities..

July series has been one of my best till date return wise. ONGC and Sun TV panned out as expected. Premiums have come down to near zero levels and I have started covering my positions.

I have started looking forward to August series. It should be much more challenging than July series.  I am waiting for some event or trigger point to happen so that I can start initiating trades for next series. Given the problems around Euro-zone, it makes sense to wait for favorable risk reward ratio rather than chase events. In case Mr. Maran is named in CBI charge sheet for 2G scam, Sun TV might have one more down move. It should be an opportunity. If one of the biggies announce poor results, that should also be an opportunity to write some options.

I wish HDFC had announced poor Q1 results. But results were good along the expected lines. I don’t know how do they manage it, but they have consistently delivering 20-25% growth for past 30 quarters. HDFC has become the benchmark of consistency in Indian markets. Almost every FII or DII has exposure in HDFC. In case of poor results, HDFC would have provided good opportunity in terms of writing options. Reliance Industries is trending downwards and is currently trading around 870 something. Lot of issues like gas output, CAG adverse report and more importantly lack of clarity has hampered RIL stock. In case cabinet approves RIL-BP deal, RIL stock should see 5-6 percent positive reaction. As of now, its difficult to write both calls and puts in RIL. ONGC will come out with FPO in september, with or without clarity on subsidy sharing formula. I am not sure if without clarity on subsidy sharing, ONGC would get a price of more than 240-250. But deferred FPO should throw up some opportunity in August series. Infosys came out again in Q1 with sub-par results. I think more than Q1 results, not scaling up of Annual guidance spooked the markets. In contrast TCS Q1 results were above market expectations. Both Infosys and TCS present opportunity in OTM calls. I need to track result season carefully for next trading idea.

(Yesterday while booking tickets for Zindagi na milegi dobara, I felt very happy while seeing seats full tag. As a shareholder of Eros International, I have every reason to be happy. I will watch the movie today. If you have not seen the movie till now, please go and watch it.)


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.


Opportunity: Maruti dealers have inventory for 28 days

As soon as I opened today’s BS newspaper and saw the headlines, I sensed my new opportunity.

New Index of Industrial Production (IIP) series figure released last week, Q4 FY11 GDP figure, May Auto sales figure, HSBC Purchasing Managers Index (PMI) – all point in one direction of slowing economy. All auto-makers were struggling with margin pressure on account of rising commodity prices, but with rising interest rates, signs of demand destruction are also quite visible.

Passenger car segment in India is highly competitive. Today country’s largest car maker, Maruti Suzuki’s chairman Mr. RC Bhargava said, “company dealers have inventory for 28 days”. It clearly shows that the company is struggling with sales growth and consumers are deferring the decision to buy a car. As if, all of this was not enough car-maker is also struggling with strike at its Gurgaon plant for past one week, leading to several crores of loss every day. Given all the concerns around automakers in general and Maruti in particular, I don’t expect stock price to cross 1300 level in a hurry. In case RBI does not increase repo rates in its 16th June review, there might be some rally in rate sensitives including Maruti. I have sold 1350 call and looking to sell 1300 call for June series, just waiting for the RBI meet…


Straddle : difficult to make money

Just read an article on buying straddles into earning season Somehow I am not completely sure if, one can make money by buying straddles.

Straddle is a simple option strategy where, one buy call and put at same strike price expecting a big  movement in either direction but not sure which way. Problem here is that, both call and put are At the Money (ATM) options, hence have high premium. It takes a lot of movement in either direction to recover premium cost and make money. For e.g. , if one knew of coming SBI Q4 2011 disaster, straddle would have made money. Otherwise, in most of the cases one loses money on time decay. Straddle can be useful in case, stock has run up too much and slight disappointment in terms of result will lead to big down-move. In case, the stock has been under performing till results, slight improvement can lead to a big up-move. In both the cases, up-move and down-move has to be more than 5-6% to be profitable. In my previous post I had mentioned about buying strangle to benefit from increased volatility in Cairn India. Earlier, I had given a thought to buying a straddle in Cairn India, but decided against it after looking at 340 Call and 340 put premium (Rs 11 each). Large movement  of Rs. 22 was required on either side to become profitable, which is approximately 6% of the 340 strike price.

Pay-off diagram for Cairn 340 Straddle:

July 2018
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