MUMBAI: With markets surrounded by uncertainty ahead of the Union Budget on July 5, wealthy traders could initiate a diagonal calendar spread strategy on the Nifty. This involves the sale of an 11400 put option expiring on June 27 and simultaneous purchase of an 11200 put expiring on July 25 as a hedge against greater-than-anticipated downside.
The strategy is a play on volatility with the price of the sold option expected to decline by June end, while that of the purchased option antic ..
If the market remains above 11400, the loss to the trader will be limited to his outflow for the strategy. With the Union Budget slated for July 5, the volatility of the July option could increase just around the event, profiting the buyer, said derivatives experts.
By June end if the Nifty trades at or above 11400, the sold put expires worthless while the purchased put’s premium rises due to the increase in implied volatility, one of the key determinants of an option’s price.
If the Nifty corrects to 11200 by June 27, the 11400 option will expire Rs 200 in the money. However, the purchase of the 11200 put will come to the trader’s rescue as its premium will be higher than
The strategy involves sale of an 11400 put option expiring on June 27 and simultaneous purchase of an 11200 put expiring on July 25 that of the sold 11400 put due to its higher time value and implied volatility -- two important determinants of an option’s price.
If by expiry the Nifty trades higher than 11400 and the trader wants to exit, his loss will be negligible and not more than Rs 19.
“It’s a play on volatility,” said Rajesh Baheti, director, Crosseas Capital. “I short th ..
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