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Thursday, Feb 28, 2002

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Beware Budget volatilities

B. Venkatesh

WEDNESDAY'S trading in the derivatives segment at the NSE saw equity calls on most strikes on Satyam and Reliance Industries ending in the positive territory. Volumes were relatively heavy in the February contracts, which are due to expire on Thursday. Here are some buy/sell strategies based on the day's trading:

Equity options: The February 280 calls on Satyam clocked the highest volumes on that stock, with 687 contracts.

  • With uncertainty dogging the immediate outlook on Satyam, dealers may do well not to take fresh position in this stock. Dealers who are, however, willing to trade on volatilities (vols) can consider writing the March 340 calls on Satyam. The calls fetched 9.2 points at the day's close. The time decay is slow, and does not quite favour the buyer. Writing the call may be rewarding because the implied vols on the option are far higher than the historical vols on the stock. Dealers beware that their short position in the calls may end in the negative territory in the event the stock reacts positively to the Budget.

  • The February 320 calls on Reliance clocked the highest volumes on that stock, with 459 contracts. Being a bellwether stock, Reliance carries large event risk (due to the Budget). Dealers may, hence, refrain from taking fresh positions in the options based on the immediate outlook on the stock.

  • Dealers who want to trade on vols can, however, consider writing the March 340 calls on Reliance. The calls fetched 13 points at the day's close. The strategy could be rewarding because the implied-vols on the calls is higher than the historical vols on the stock. The position may, however, lose money if the stock reacts positively to the Budget.

  • The February 170 calls on ACC clocked the highest volumes on that stock, with 180 contracts. The outlook on ACC may turn positive, notwithstanding the event risk. Dealers who share similar view can consider buying the March 170 calls on the stock. The calls cost 13.2 points at the day's close. Though half the premium consists of time value, the time decay is slow and benefits the buyer. Besides, the implied vols on the option is lower than the historical vols on the stock, which again benefits the buyer.

    Index options: While the February 1180 calls clocked the highest volumes in this segment with 226 contracts, the March 1200 calls were not far behind; the 1200 calls clocked volumes of 204 contracts.

  • The event risk, if anything, is the highest in the index options segment. Buying a straddle to bet on the volatile movements in the index may not be rewarding given the high premium points on the combined call and put positions. Dealers may, hence, refrain from taking fresh positions in index options for now.

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