Nifty Option Traders Turn Greedy, Hope to Hit ‘Jackpot’
Man’s greed knows no bounds. This may be said of rich domestic punters, many of whom have not booked profits despite having made a near three-fold return in just four trading sessions by buying Nifty options on the bet that the index would pierce the psychological 7000-barrier, which happened on Monday. The rise in the markets has coincided with an increase in the Nifty 7000 call option’s implied volatility (IV) — estimated magnitude and rate of price change — which, in turn, has increased its price by almost three times to .` 294 on Monday from .` 108 on Wednesday last week. IV of the Nifty 7000 call rose from around 32% last week to 44.5% on Monday. However, not content with the trebling of the option’s price, the punters are holding on to their positions on hopes of hitting a “jackpot”. This, analysts said, may be on the premise they (punters) hold that volatility, or vols, of the 7000 call could rise further ahead of the election results on May 16. Alternatively, even if volatility does not increase much more, a rise in the Nifty, as witnessed over the past two trading sessions, could further boost the price of the option, they feel. However, they risk losing their gains if markets correct. Markets have priced in a BJP-led coalition, helmed by Narendra Modi, coming to power after the general election. If exit polls hint that it may not be smooth sailing for the BJP, a fall in markets could be as sharp as the recent rise. But that doesn’t seem to concern the punters much. “I’ve come across a case where a trader contemplates buying a 7400 Nifty call as he’s set a target of 7600 for Nifty,” said Bhavin Desai, derivatives analyst, Motilal Oswal Financial Services. “Some of the traders taking directional calls have forecast 7600-7900 levels for the Nifty by the end of the current series. They seem to be playing for market action, if not for volatility to rise any further”. But other analysts point to IVs shooting up to nearly 60% in the last general elections and said that the current IVs of around 42% could also rise further. “There’s a difference between good return and jackpot return and if a trader is holding on despite a trebling of return, it’s because he’s aiming for the latter,” said Ashish Chaturmohta, head, derivatives research, Fortune group. Chaturmohta recalled how the premium of the 3800 Nifty call rose to .` 700 from just .` 80 within three days during the previous elections. “I think IVs have the scope of rising further from current levels. Even if markets were to decline, premiums won’t fall much because of the high IVs,” he said. Another interesting data point is that the IVs of call options are more or less keeping pace with those of put options, suggesting a great deal of call buying happening on expectations of a favourable election outcome, said Chetan Jain of Anand Rathi. He pointed to a “phenomenal” rise in outstanding positions of the 7000 Nifty put to stress his point. The 7000 put has seen a jump in open interest by 12.55lakh shares to 22.2-lakh shares over a single trading session. This indicates high-risk traders are selling the put option in the hope market won’t fall from its current record high, Jain said. A call option theoretically gives a buyer the right to purchase the Nifty at a lower price if the index rises. His gain is the difference of the sale and purchase prices of the index. A put option, on the other hand, allows its buyer to sell the index at a higher price if it falls. The 7000 call option has the highest open interest — 58.6-lakh Nifty shares — compared to any option in the current series as on Monday.
The IVs of call options are more or less keeping pace with those of put options