Dalal Street traders look to cash in on market volatility

The uncertainty over the Greek referendum has kept global market participants on the edge. But a set of Dalal Street traders are likely to laugh their way to the banks on Monday.

Unlike a larger section of the market — unsure about whether the market would rise or fall, these savvy traders have bet on higher volatility around the Greek referendum on Sunday. They have used combinations of options contracts to form complex strategies structured to benefit from a rise in volatility.

Traders have been buying call as well as put options of Nifty that are trading well below the current levels of Nifty. In derivative traders' parlance, this strategy is known as long ' Vega' option strategy.


Among the five measures which determine the theoretical option premium value, Vega tell us how option value changes if the implied volatility changes. Implied volatility is a key aspect of pricing of options' premium — the price at which the contract is bought or sold. If implied volatility rises, premiums too advance, or vice versa.

So, traders can be long or short on ‘Vega' depending upon their expectation of the volatility.

"We have seen significant buying in call option of 8600, 8700 and 8800 strike price of the Nifty; and similarly in strike price of 7700, 7800 and 7900 put options with increase in implied volatility. This is happening because traders are adopting long ‘Vega' trade to gain from volatility in either side since the outcome of Greece is unclear," said Neeraj Agarwal, derivative analyst at Antique broking.

Though NSE's volatility index fell for most of the week, the index surged 4.8% to 16.30 on Friday.

Open interest — total outstanding position in any derivative contracts — in the out of money Nifty strike prices (call 8600, 8700 and 8800 & 7700, 7800 and 7900 put) has increased by 24% to 2.34 crore from 1.88 crore since the beginning of new July series on June 26, according to data compiled by ETIG. At the same time, implied volatility of these strike prices have increased to 19-21 for put options and 13-15 for call options.

Analysts believe that the outcome of the Greek ballot will increase the volatility in the market in the short-term; but as leveraged positions have thinned considerably, it should limit the downside for the Nifty. "Though fears of Greece referendum is overhang on the Indian market, I believe there is limited downside for the market as leveraged position in the market reduced noticeably. Market may confront higher event risk if it were loaded with the leveraged position before an event risk; but presently this is not the case," said Bhavin Desai, derivative analyst at Motilal Oswal.

The outstanding open interest in the Nifty currently is quite similar is the situation in the beginning of January 2015.