MUMBAI: A trading combination involving Nifty options is gaining prominence among savvy trading desks of institutional investors. The strategy, known as calendar spread, where traders simultaneously sell options contracts in the current month and purchase in the next month, is being recommended by brokers to institutional clients, who see sharp moves in Nifty options’ implied volatility — a key component of options pricing — in September.
“There is scope for money to be made by selling current month vols (implied volatility) and buying September vols,” said Girish Patil, manager-derivatives, Antique Stockbroking. In this spread strategy, traders use the premium they receive by selling the current series to part-finance the cost of buying options in the next month. “With only a few more days for the August series expiry, vols are unlikely to jump in this series,” Patil said.
Futures and options contracts for the August series will expire on 26th while the September series will expire on 30th next month.
Options sellers, who pocket the premium from the buyer, prefer fewer trading days in a trading month because of time value — another key aspect of options pricing. Time value of options decays closer to expiry of contracts, resulting in limited movements in options prices.
Selling Nifty 5500 calls options in the August series and buying the same contract in the September series is a good strategy in this kind of a market, said Shailesh Kadam, AVP-derivatives, PINC Research.
“This strategy bets that the Nifty will be range-bound and will not move above 5500 in the August series, while the undertone is positive next month,” Kadam said.
In the past one month, the Nifty has largely moved in a tight band between 5350 and 5450, resulting in the volatility index — a measure of traders’ expectations of near-term risks in the market — moving in the 15-20% band, the lowest range since January 2008. This indicates traders are comfortable about the market levels in the near-term.
Brokers said that options traders have struggled to make money, of late, in the absence of sharp index movements. “Vol buyers (buyers of options) have lost their money, while sellers don’t have the courage to sell vols at such low levels,” said the head of derivatives at an institutional broking house. “So, unless there is a sharp move, calendar spread appears to be the best strategy,” he said.