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Wednesday, Jul 17, 2002

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Buying August Nifty calls may be profitable

B. Venkatesh

THE following are some buy/sell strategies based on Tuesday's trading in the derivatives segment at the NSE:

Equity options: Calls on M&M ended lower in line with the decline in the stock's spot price. The stock may witness a short rally in the immediate future. The problem is that the rise in price may not be enough for you to profit by buying calls.

On the upside, the stock may find resistance at around Rs 110. It may, however, move to Rs 125 if it is able to get past Rs 110 levels.

On the downside, the stock's support level is far away from the current price. So you may be taking a huge risk by buying the calls now.

If you want to nevertheless bet on the upside, consider buying the August 110 calls. These calls are reasonably priced in terms of implied volatilities (vols).

Moreover, the advantage of buying the farther month contract is that you will have more time for the position to generate profits. The long calls may not lose heavily due to passage of time because the option's theta is very low.

You will, however, not witness a sharp rise in the call value, as the option's delta is moderate. This means that calls may not rise sharply for every point rise in the stock price.

  • Calls on MTNL ended marginally higher, with the July 150 calls clocking the highest volumes on the stock.

    The immediate outlook on the stock appears positive. The stock may find resistance at Rs 156, at which level your calls may be worth 6.85 points.

    On the downside, the stock may find some support at Rs 143. If the stock touches this level by July 19, your calls will tend towards zero value, because the option expires on July 25.

    Buy the calls only if you can take the risk. The calls are moderately priced in terms of implied vols. The option's delta is also moderate, which means the calls will not rise sharply for every point increase in the stock price.

    Index options: Calls on Nifty fell sharply, as the overall sentiment in the market continued to remain bearish.

    The immediate outlook on the spot index is positive. Consider buying the August 1040 calls. The spot index may find resistance at 1060. If the market moves to this level before the expiry of the July contracts, the August 1040 calls will be worth around 28 points.

    Of course, you should consider the downside in the Nifty spot index as well. The spot index may find some support at 1030, which is very near its current levels. If the index moves below this level, however, the support levels may be quite far away. You can hold the calls unless the spot index displays a secular downtrend.

    Note: There is no follow-up table because all open positions have been closed. The positions initiated on Tuesday will appear in the table on Wednesday.

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