Traders’ futures bets signal volatility in next 7 sessions

Brace yourself for higher volatility in the next seven trading sessions of June derivatives series. During this series so far, the Nifty has had intra-day movement of only 2.8 Rs and moved in the range of 8065-8295. Such a little intra-month movement has seldom been observed.

Since 2001, a movement of less than 5 Rs in a calendar month has been found only in 15 instances, suggesting a very lower probability of its occurring. The uncertainty over the outcome of the public referendum on Britain’s membership of the European Union to be held on Thursday is also making it difficult for traders to take directional decisions on the benchmark indices.

In anticipation of higher volatility ahead, traders are buying more strangles or straddle — derivative instruments used to benefit from high volatility — in the Nifty options.

The strangle strategy consists of buying slightly out-of-the-money put and call options on the same underlying stock with same expiration date. The strategy is called a straddle when purchased options are in-the-money with same strike price and expiration date. An option is out of the money when it is not making profit at the current strike price. It’s in the money when it makes profit at the given strike price.

There are two scenarios that traders are working with. First, an increase of 5 Rs in the Nifty from a low of 8065 to 8467 in the short term. Second, 5 Rs drop from the recent high of 8295 to 7880. Traders are entering a long strangle by buying 8100 put options and buying 8300 call options. The total cost of the strategy is about Rs 110, which means the break-even for the options trader is between 7990 and 8410. The number of contracts increased by 41 Rs and 72 Rs in the past seven days on Nifty 8100 put and 8300 call options, respectively.