- Buy on Speculation and sell on News
- Learning: Implied Volatility(IV) in INFY derivatives increases just before its quarterly results are announced & peaks a day before its quarterly results and drastically comes down after the results are announced.
- Beware of all events that affect an underlying before taking a position
- Learning: While choosing the underlying, be sure of all the events that can influence the stock price. When an event is scheduled for the expiry day, there is little scope for maneuvering. So, better not to take a position.
Buy on Speculation and sell on News
Expectation/motivation for the trade:Premise: Implied Volatility(IV) in INFY derivatives increases just before its quarterly results are announced & peaks a day before its quarterly results and drastically comes down after the results are announced.
INFY stock is expected to make wild moves after the results are announced, however, history shows that it does not move beyond +/- 20% i.e., it is not expected to go down by more than 20% or go up by more than 20%
Entry strategy: So, to capitalize on the momentary increase in IV and the post-result drop in IV, I consider selling a deep-out-of-the-money PUT option and selling a deep-out-of-the-money CALL option, effectively implying that INFY stock will not go below the strike of the PUT option or above the strike of the CALL option.
Exit strategy: Square off the positions after the results are announced.
To make use of this expectation, I execute the following trades.
Trade details:
Date: 11-July-2013
CMP of Infosys (NSE code: INFY) stock: 2505
Lot size of INFY derivative: 125
Price of Rs.1900 put option: 14
Price of Rs.3100 call option: 14
Margin required to execute these trades: Rs.80000/-
Trade: Sell a 1900 put and 3100 call just before results are announced.
=> Effectively a short strangle option strategy
Reality: Infosys results were announced on 12-July-2013
Infosys stock reacted positively to the results and jumped ~10% to 2800 levels.
The premium of the above two options declined drastically and the prices for these were as follows:
CMP of Infosys (NSE code: INFY) stock: 2804
Price of Rs.1900 put option: 1
Price of Rs.3100 call option: 2
On squaring off, the profit on these trades will approximately be as follows:
1900 PUT: 125 * (14-1) - brokerage = 1625 - brokerage
3100 CALL: 125 * (14-2) - brokerage = 1500 - brokerage
Learning:
Strategy works.
However keep in mind, the strikes of the options should be carefully chosen so as to not get caught on the wrong side of the stick ;)
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Beware of all events that affect an underlying before taking a position
Expectation/motivation for the trade: If a stock is going too high, riding on the moves made by another stock in the same sector, It is only a matter of time before it comes back to equilibrium.
Premise: Hindustan Unilever voluntary open offer was announced by its promoter shareholder to take its shareholding to maximum permissible limit for a listed entity (75%). This open offer schedule was as follows:
Date of commencement of tendering period: Friday, 21 June 2013
Date of expiry of tendering period:
Thursday, 4 July 2013Last date for communication of rejection / acceptance and payment of consideration for
applications accepted / return of unaccepted Share certificates: Thursday, 18 July 2013
July 2013 series expiry date for derivatives: Thursday, 25 July 2013
Entry strategy: ITC is going higher than usual and beyond its fundamentals; Sell an OTM call of ITC July 2013 because, it is not running high on its inherent strength, but based on the scarcity premium created in Hindustan Unilever stock on account of its open offer in progress.
Exit strategy: Once the open offer news is absorbed by the market, both the stocks are expected to return to normalcy. i.e., come back to their standard PE multiple band. currently, they are beyond the band, on the higher side.
Trade details:
Date: 16-July-2013
CMP of stock: 355
Lot size of derivative: 1000
Price of Rs.365 call option: Rs. 2.50
Trade: Sell a Rs.365 call & square off after the open offer formalities are completed.
Margin required to sell the above option: Rs.40000/-
=> Effectively, writing a naked OTM call.
Reality:
ITC results were due on July 25, 2013. So, the options did not decay as expected and the premium continued to rule high until the results were announced on expiry day (quarterly results of ITC were announced at 12:15 PM noon).
On the other hand, the quarterly results of Hindustan Unilever were scheduled to be announced on 26 July 2013; Hindustan Unilever stock continued to trade higher than the open offer price after the completion of the offer.
ITC underlying was trading at 370 on July 24, 2013.
In order to cover for some losses incurred on the position, I considered selling a Rs.365 PUT (with one day to spare for expiry and a premium of Rs. 2 per lot, this looked mouth-watering)
on Expiry day, positions in ITC were as follows:
Sell a 365 PUT and sell a 365 CALL option of ITC
=> premium income of Rs.4.50
Safe range: (360.50, 369.50)
Margin commitment: Rs.80000/-
After the results of ITC were announced at 12:15 PM noon on July 25, 2013, the stock corrected and ended the series at 358.5
Learning:
While choosing the underlying, be sure of all the events that can influence the stock price. When an event is scheduled for the expiry day, there is little scope for maneuvering. So, better not to take a position.
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Heading
Expectation/motivation for the trade:
Premise:
Entry strategy:
Exit strategy:
To make use of this expectation, I execute the following trades.
Trade details:
Date: 29-July-2013
CMP of stock: 2505
Lot size of derivative: 125
Price of Rs.1900 put option: 14
Price of Rs.3100 call option: 14
Margin required to execute these trades: Rs.80000/-
Trade: Sell a 1900 put and 3100 call just before results are announced.
=> Effectively a short strangle option strategy
Reality:
Learning:
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