Brokers are suggesting a short straddle on InfyNSE 0.01 % and TCSNSE 0.18 % to their rich clients before the two software giants report their March quarter results on Friday. The strategy, which involves selling a call and put option of the same strike that’s close to the cash market price, should be initiated when the implied volatility (IV) peaks in the run up to the event – either on Tuesday or Wednesday. IV is one of the determinants of an option’s price. Higher the IV, higher the price.
Infy closed at Rs 769 apiece on Monday. The Rs 770 straddle, worth a provisional Rs 47 a share (1,200 shares make one lot), on Monday was discounting a 6 per cent move either-side on Infy post results. TCS cash share closed at Rs 2,073.6 on Monday. The Rs 2,080 straddle discounted a 5.5 per cent move after the numbers. Infy has seldom moved more than 6-7 per cent either way in the past 12 quarters and TCS also hasn’t moved more than 5.5 per cent, except on a couple of occasions, said Taparia.
Given this, and the fact that IVs collapse post the results, odds of short straddle traders making money are greater than their suffering a loss, said Rajesh Palviya of Axis Securities. This means they will pocket a great part of the premium paid by the option/ straddle buyers. A premium is the price of the option and it’s the maximum an option writer or seller can earn (from option buyers). However, her loss can be huge if the stock price breaks above or below the range.
Option sellers ..
The straddle seller receives a premium for selling the two options. That’s his maximum profit. If the value of the straddle rises above his inflow, he loses, and if it dips below the inflow, he gains.
Infy closed at Rs 769 apiece on Monday. The Rs 770 straddle, worth a provisional Rs 47 a share (1,200 shares make one lot), on Monday was discounting a 6 per cent move either-side on Infy post results. TCS cash share closed at Rs 2,073.6 on Monday. The Rs 2,080 straddle discounted a 5.5 per cent move after the numbers. Infy has seldom moved more than 6-7 per cent either way in the past 12 quarters and TCS also hasn’t moved more than 5.5 per cent, except on a couple of occasions, said Taparia.
Given this, and the fact that IVs collapse post the results, odds of short straddle traders making money are greater than their suffering a loss, said Rajesh Palviya of Axis Securities. This means they will pocket a great part of the premium paid by the option/ straddle buyers. A premium is the price of the option and it’s the maximum an option writer or seller can earn (from option buyers). However, her loss can be huge if the stock price breaks above or below the range.
Option sellers ..
The straddle seller receives a premium for selling the two options. That’s his maximum profit. If the value of the straddle rises above his inflow, he loses, and if it dips below the inflow, he gains.
1 Comments
Thanks for sharing valuable information.
ReplyDeleteBEML Ltd
IndusInd Bank Ltd
Kokuyo Camlin
Stocks