Financial Daily from THE HINDU group of publications
Friday, Mar 15, 2002

News
Features
Stocks
Port Info
Archives

Group Sites

Markets - Derivatives Markets
Columns - On the hedge


Long straddle on Sterlite may be beneficial

B. Venkatesh

THURSDAY'S trading in the derivatives segment at the NSE saw all the top-traded contracts (calls and puts), except Ranbaxy, shed value. Here are some buy/sell strategies based on the day's trading:

Equity options: Calls on Sterlite Opticals ended the day marginally lower. The March 140 calls clocked the highest volumes on that stock, with 123 contracts.

  • The immediate outlook on the stock appears negative, but the stock may rebound in sometime. Dealers can construct a straddle to take advantage of the stock's likely volatility. The straddle can be constructed by buying the March 140 calls and puts. The calls cost 7.9 points at the day's close while the puts cost 4.35 points. The time decay of the combination is low, and favours the buyer. The combination will be profitable if the stock makes a large move in either direction. The reason is that the 140 puts and calls are short-term options and near-ATM, which means the gamma of the options is high.
  • The March 870 calls on Ranbaxy clocked the highest volumes on that stock, with 125 contracts.

  • The immediate outlook on Ranbaxy seems positive. Dealers can consider buying the March 870 calls, which cost 36.80 points at the day's close. About a half of the option premium consist of time value. The implied volatility (vols) of the option is somewhat higher than the historical vols on the stock, a factor that works against the long position.

    Index options: The spot index moved within a 10-point range, and ended marginally up for the day. The March 1200 calls clocked the highest volumes in this segment, with 173 contracts.

  • The immediate outlook on the market appears somewhat positive. Dealers, who do not have existing positions, can consider buying the March 1200 calls on the Nifty. The calls are deep OTM, and hence may not be very rewarding, as the option gamma is low. The time decay of the option is very high, which works against the buyer.

    Follow-up: The outlook on Reliance remains positive. Dealers can hold their long position in the March 300 calls.

  • The outlook on Satyam appears negative. Those who are short on the March 300 calls can hold their position. Short positions in the March 320 calls can be reversed, as profit points from the current levels appears limited.

  • Even though the immediate outlook on L&T appears positive, dealers who are short on the March 190 calls can keep their positions open, with stop-buy limits.

  • The immediate outlook on Nifty appears positive, but dealers who are short on the March 1180 and 1200 calls can keep their positions open, with stop-buy limits.

    Send this article to Friends by E-Mail

  • Stories in this Section
    Padmalaya open offer at Rs 148.50


    CDSL cuts transaction fees
    HDFC MF's plan to reduce tax burden
    Free entry, exit for First MF schemes
    Narrow movement
    Pfizer, Parke up as merger moves ahead
    SCI scrip surges; market cautious
    Long straddle on Sterlite may be beneficial
    SEBI, exchange officials discuss various issues
    Joy ride for 2-wheelers in narrow Dalal Street


    The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription
    Group Sites: The Hindu | Business Line | The Sportstar | Frontline | Home |

    Copyright 2002, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line