MUMBAI: A trading combination involving Nifty options is gaining ground among the intelligent trading desks of institutional investors. This strategy, known as Calendar Spread, where traders simultaneously sell alternative contracts this month and buy the next month, is being recommended by brokers to institutional clients who see sharp moves in the underlying volatility of Nifty options – a key component of options. Pricing – in September.
Girish Patil, manager-derivatives at Antique Stockbroking, said: In this spread strategy, traders sell the current series using the premium they receive to part-finance the cost of the next month’s purchase option. “With just a few days to go before the end of the August series, there is no chance of the Volls jumping in this series,” Patil said.
The August series futures and alternative contracts expire on the 26th and the September series expires on the 30th of next month.
Alternative sellers, who keep a premium pocket from the buyer, prefer fewer trading days per trading month because of the time value – another key aspect of alternative pricing. The price of the option is depreciated near the expiration date of the contract, resulting in limited movement in the price of the option.
Selling Nifty 5500 call options in the August series and buying the same deal in the September series is a good strategy in such a market, says Shailesh Kadam, AVP-Derivatives of PINC Research.
“This strategy bets that the Nifty will be range-bound and will not go above 5500 in the August series, while the undertone will be positive next month,” Kadam said.
Over the past month, the Nifty has moved to a tight band between 5350 and 5450, with the volatility index – a measure of traders’ expectations of near-term risk in the market – moving to 15-20%, the lowest level since January 2008. This indicates that traders are feeling comfortable about the market level in the near future.
Brokers say alternative traders have struggled to make money in the absence of late, sharp index movements. “Vol buyers (alternative buyers) have lost their money when sellers do not dare to sell volume at such a low level,” said the head of derivatives at an institutional brokerage house. “So, without a sharp move, calendar expansion seems to be the best strategy,” he said.