MUMBAI: A trading combination with convenient options is gaining prominence among smart trading desks of institutional investors. The strategy, known as calendar spread, in which traders simultaneously sell options contracts in the current month and buy in the next month, is recommended by brokers to institutional clients, who are seeing sharp moves in the implied volatility of handy options — a key component of options pricing. in Sept.
“There is room to make money by selling current month’s volumes (implied volatility) and buying September’s volumes,” said Girish Patil, derivatives manager at Antique Stockbroking. In this spread strategy, traders use the premium they receive by selling the current series to co-finance the cost of buying options in the following month. “With only a few days left to the end of the August series, vols are unlikely to jump into this series,” Patil said.
Futures and options contracts for the August series expire on 26th, while the September series expires on 30th next month.
Options sellers, who collect the buyer’s premium, prefer fewer trading days in a trading month because of the time value – another important aspect of options pricing. The time value of options decreases as the contract expires, resulting in limited movements in option prices.
Selling Nifty 5500 call options in the August series and buying the same contract in the September series is a good strategy in these types of markets, said Shailesh Kadam, AVP derivatives, PINC Research.
“This strategy is betting that the Nifty will be range-bound and not go above 5,500 in the August range, while the undertones are positive next month,” Kadam said.
Over the past month, the Nifty has largely moved in a tight band between 5350 and 5450, leading the volatility index – a measure of traders’ expectations of short-term risk in the market – to move into the 15-20% range. band moved, the lowest range since January 2008. This indicates that traders are comfortable about the market levels in the near term.
Brokers said options traders have struggled to make money lately because there have been no sharp index movements. “Full buyers (option buyers) have lost their money, while sellers don’t have the courage to sell vols at such low levels,” said the head of derivatives at an institutional brokerage. “So, unless there’s a sharp move, calendar diversification seems like the best strategy,” he said.
This post Traders bet on calendar spread as Nifty moves within a tight range
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