F&O Tracker: Buy liquid options to keep your money safe
Out-of-themoney contracts are not advisable to create positions because once the implied volatility drops, option's value declines immediately.
Updated:
Alex Mathews
Nifty VIX has shot up almost 45% in the past two days and has caused serious damage to plain-vanilla option writers. During the period of uncertainty, it is prudent to buy liquid options contracts.
If an investor buys an illiquid stock option contract, he will not be able to book profit even if the trader is at a profit. Out-of-themoney contracts are not advisable to create positions because once the implied volatility drops, option's value declines immediately.
One should also avoid in-the-money options for investments because it can become illiquid once it becomes deep-in-themoney options, so there won't be much takers even if we are ready to sell below intrinsic value.
As the global market outlook is still negative, a long butterfly with calls suits the situation. It can be created by buying 5000 and 5200 August call options one lot each at Rs 214 and Rs 94, respectively and selling two lots of 5100 call August series at Rs 148.
The trading position will give a profit of Rs 4,400 if Nifty expires at 5100. Maximum loss is limited toRs 600 if Nifty moves up or down sharply. Another safe strategy that the investor can adopt in the current scenario is hedge wrappers.
Those who hold stocks in their portfolios can sell out-of-the money call option of the stock and buying put options with the sale proceeds from call writing.
Nifty VIX has shot up almost 45% in the past two days and has caused serious damage to plain-vanilla option writers. During the period of uncertainty, it is prudent to buy liquid options contracts.
If an investor buys an illiquid stock option contract, he will not be able to book profit even if the trader is at a profit. Out-of-themoney contracts are not advisable to create positions because once the implied volatility drops, option's value declines immediately.
One should also avoid in-the-money options for investments because it can become illiquid once it becomes deep-in-themoney options, so there won't be much takers even if we are ready to sell below intrinsic value.
As the global market outlook is still negative, a long butterfly with calls suits the situation. It can be created by buying 5000 and 5200 August call options one lot each at Rs 214 and Rs 94, respectively and selling two lots of 5100 call August series at Rs 148.
The trading position will give a profit of Rs 4,400 if Nifty expires at 5100. Maximum loss is limited toRs 600 if Nifty moves up or down sharply. Another safe strategy that the investor can adopt in the current scenario is hedge wrappers.
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Those who hold stocks in their portfolios can sell out-of-the money call option of the stock and buying put options with the sale proceeds from call writing.
(The author is head-research, Geojit BNP Financial Services)
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