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Tuesday, Mar 19, 2002

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Short calls on Digital may yield

B. Venkatesh

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

Equity options: Digital GlobalSoft was one of the few stocks that cantered up during the day. The March 600 calls clocked the highest volumes on the stock, with 189 contracts.

  • The immediate outlook on Digital Global appears positive, but the upside is likely to be capped. Instead of riding the short rally, dealers' can bet on the downside by writing the March 600 calls. The calls fetched 14.50 points at the day's close. The calls are OTM, and the entire premium consists of time value. The time decay is also high, as the calls are due for expiry by the month end. The implied volatility (vols) on the option is higher than the historical vols on the stock, a factor that favours the short position.

  • The outlook on Reliance appears somewhat negative. Dealers can consider writing the March 320 calls, which fetched 3.65 points at the day's close. The calls are OTM, and the entire premium consists of time value. The time decay is not very high, but the option's implied vols is higher than the stock's historical vols, a factor that favours the short position.

    Index options: The spot index was volatile during the day; the intra-day trading-range was 20 points. The March 1180 calls on the Nifty clocked the highest volumes in this segment with 159 contracts.

    The market carries an upward bias, thought the speed of the rally may be slow. Dealers can consider buying the March 1180 calls, which cost 10.80 calls at the day's close. The calls are OTM, and the entire premium consists of time value. The time decay is, however, high, as is the implied vols on the option. Both the factors work against the long position.

    Follow-up: The immediate outlook on Reliance Industries does not appear positive. Nevertheless, dealers who hold a long strangle constructed from March 320 calls and 300 puts can carry their positions.

  • Dealers who hold a long strangle on Satyam, constructed from March 300 calls and 280 puts, can keep their positions open for now.

  • The immediate outlook on Sterlite Opticals appears somewhat negative, but the stock may see a small upside before the March option contracts expire. Dealers who have constructed the long straddle from March 140 calls and puts can carry their positions for now.

  • Those who are long on Reliance 300 calls can place a limit order at the current price levels, and exit their position.

  • Dealers who are short on Satyam March 300 calls can hold their position.

  • Dealers who are long on the March 1200 calls on Nifty can hold their position for now, with stop-loss limits.

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