The Hindu Business Line : Outlook on Reliance positive

Equity options: The immediate outlook on Reliance Industries appears positive. On the upside, the stock may find resistance at Rs 268. On the downside, the stock may find support at Rs 237.

Consider buying the September 260 calls, as they are cheaper than other calls on the stock. The option does not carry any theoretical edge, as the implied volatility (vols) is in line with the historical vols on the stock. The directional risk is moderate at 33, which implies that the calls will lose (gain) 0.33 point for every point decline (rise) in the stock price. The trade-off between theta and gamma is moderate. The historical vols on the stock has been stable in recent times. This and a low vega risk suggests that the calls will not lose much due to error in estimating future vols.

If the stock moves to its resistance level of Rs 268, the 260 calls will generate a 2-fold return. If the stock moves to its support level of Rs 237, the calls will tend towards zero. The calls will lose substantially if the stock trades in a range, as the theta-gamma trade-off is not in favour of the long call position. Initiate this position if you can afford the risk.

The outlook on Satyam does not appear positive. On the downside, the stock may touch Rs 190, but can move up to Rs 235 before it meets with some resistance.

Consider buying the September 210 puts, which are cheaper than other puts on the stock. Note, however, that the puts are trading rich in terms of implied vols, and hence, do not carry any theoretical edge. The directional risk is moderate at 30, which means that the puts will lose (gain) 0.30 point for every point rise (decline) in the stock price. The historical vols on stock has been stable for sometime now. This and a low option vega suggest that the error in estimating the future vols is not very high. The trade-off between theta and gamma is also very low.

If the stock moves to its resistance level of Rs 235, the puts will lose 80 per cent. If the stock moves to its support level of Rs 190, the puts will generate a 2-fold return. You will, however, lose heavily if the stock moves in a narrow range.

Index options: The outlook on the Nifty appears negative. On the downside, the spot index may move to 960. On the upside, the index may find resistance at 1009, and then at 1021.

Consider buying the September 990 puts. The puts do not carry any theoretical edge, but the implied vols is in line with the historical vols on the spot index. You run a high vega risk, which means that the puts will lose value rapidly if traders re-price the Nifty options at lower vols. The trade-off between theta and gamma is also very high. This means that the puts will lose heavily unless the spot index moves down fast.

If the spot index moves to 960 at an anticipated speed, the puts will generate a 100 per cent return. If the spot index, however, moves to 1021, the puts will lose 65 per cent.

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