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Tuesday, Feb 26, 2002

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Positive outlook on Ranbaxy

B. Venkatesh

MONDAY'S trading in the derivatives segment at the NSE saw most equity calls on the top-traded options end in the positive territory. Here are some buy/sell strategies based on the day's trading:

Equity options: The February 810 calls on Ranbaxy clocked the highest volumes on the stock, with 124 contracts.

The immediate outlook on Ranbaxy appears positive. Dealers can, hence, consider buying the March 840 calls, which cost 49 points at the day's close. Only 13 per cent of the premium consists of time value. Slow time-decay and low implied volatility (vols) favour the buyer. Dealers beware that writing the February calls will be not very rewarding because of the high time decay.

The price pattern in Satyam suggests that the stock may be boxed between a certain trading range. Dealers can therefore consider buying the front-month calls and writing the forward month calls. The strategy, which is self-financing, can be constructed by buying the February 280 calls and writing the March 320 calls. The strategy will fetch a net inflow of 1.65 points based on the premium points at the day's close. Dealers should, however, close this combination before the near-month contract expires; otherwise, they will be exposed to the naked short calls on the March contract moving against them.

Index options: The February 1160 calls on the Nifty clocked the highest volumes in this segment, with 164 contracts.

The market appears somewhat wobbly at this point in time. Dealers can, hence, consider buying the February 1160 calls and writing the March 1200 calls. This is a self-financing strategy, as the call-write will fetch premium points necessary to pay for the call-buy.

The February 1160 calls cost 10 points at the day's close, while the March 1200 calls fetched 11.95 points. Dealers should, however, note that the time-decay on the front-month long call is very high compared with that on the short March calls. The position should be closed before February 28 to prevent exposure to naked short calls.

Follow-up: The immediate outlook on ACC appears somewhat uncertain. Dealers who are short on the February 170 and 180 calls can continue to hold their positions, with stop-loss limits.

The positive outlook on Tata Steel may weaken. Dealers may, however, hold their long positions on February and March 110 calls, with stop-loss limits.

Those who are short on the February 300 and 320 calls on Satyam can continue to hold their positions.

The outlook on L&T continues to remain negative. Those who are short on the March 210 and 220 calls can hold their positions.

Dealers who are short on the February and March 340 calls on Reliance can continue to hold their positions with stop-loss limits.

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