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Out-of-the-money calls meet with good demand

B. Venkatesh

THURSDAY'S trading in the derivative segment saw good demand for in-the-money equity and index calls. Here are some pointers from the day's trading:

Equity options: The February 300 calls on Reliance Industries clocked the highest volumes in the far-month contract on that stock.

Those who expect a downside in the stock from the current levels can consider buying the February 300 puts, which are nearly at-the-money (ATM). The puts will cost 13 points based on Thursday's close.

Dealers who are willing to assume higher risk can consider writing the 300 ATM calls, which will fetch a premium of 13.5 points. They can also hedge their naked position by buying the February 320 calls, which are OTM by 18 points. The net income from th e position will be 7.75 points, without accounting for commissions and margins.

The February 140 calls on Sterlite Opticals closed at Rs 11.95, with volumes amounting to 70 contracts.

The outlook on Sterlite appears negative; dealers can consider writing the February 140 calls, which will fetch a premium of 11.95 points based on Thursday's close. The premium consists of time value and works in favour of the writer.

Dealers who want to reduce their risk can consider writing the February 170 calls, which will fetch a premium of 4.75 points. The probability of these calls ending ITM is 0.25.

Dealers can also consider buying the February 130 puts, which will cost 7.90 points. The puts are currently OTM, and the probability of the put ending ITM is 0.38. The risk-seeking dealer can simultaneously write the 160 calls, which will fetch 6.25 poin ts. This will bring down the net cost of the position to 1.65 points based on Thursday's close.

The February 220 calls on Satyam clocked the highest volumes in the far-month contract.

Dealers who continue to have a negative outlook on the stock can consider writing 210, 220 or the 240 calls; these calls are currently OTM, and the time decay will work in favour of the writer. The 220 and 240 puts, which are ITM, also look attractive bu t requires a large cash outlay.

Unlike the spot market, the options on Infosys are not very liquid. Dealers who have a negative outlook on the stock have to weigh the difficulty of closing their naked position before writing call options on the stock.

Index options: The January 1100 calls attracted good volumes.

The good demand for OTM calls suggests that dealers in the derivatives segment have a positive outlook on the market.

Those who hold a positive outlook can consider buying the January 1120 calls, which are deeply OTM. Dealers who hold a bearish view can consider buying the January 1020 puts, which will cost 29 puts; simultaneously writing the 1100 calls will reduce the cost to 12.95 points based on Thursday's closing price.