Stock Market

As VIX rises, analysts advise ‘Short Strangle’

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Traders with a stomach for risk could sell a strangle on Nifty options expiring on January 16 to play for a rangebound move even as volatility has spurted 36% in the past three sessions through January 7 ever since tensions flared up between the US and Iran over the killing of Iranian general Qusem Soleimani by the former. The rise in fear gauge VIX from a low of 10.73 on January 2 to a close of 14.61on January 7 has increased the price of options and derivatives.

Heads of top brokerages like ICICI Direct and Axis Securities believe that those wanting to play for limited rewards could sell these options as they expect the Nifty to trade within a roughly 400-point range till expiry on January 16. So long as the Nifty moves in a 11885-12315 range (based on Tuesday closing prices) the seller can make money.

If, however, it moves sharply either side the seller can be subjected to huge risks unless she places a stop loss. The strategy comprises selling a 12200 call and a 12000 put expiring on January 16.

Total inflows that the trader receives is ?115 a share (75 shares make one lot) based on Tuesday closing prices.

This means for the buyer to profit the Nifty must trade above 12315 (12200+115) or below 11885 (12000-115) before or by January 16.

The closing on Tuesday was at 12053. “If the situation in West Asia doesn’t worsen in the next few days, the risk premium will reduce and stability will return causing IVs (implied volatility of options) to fall and enable option sellers to keep much or all of the premium received from the (strangle) buyers,” said Amit Gupta, derivatives head of ICICI Direct who recommends this strategy. He adds that the imminent first-phase trade deal between the US and China was not allowing the market to slip sharply. Rajesh Palviya, derivatives head, Axis Securities, said the short strangle was “sound” in the current situation of high VIX levels as most in the market had expected the Iran-US tensions to not spiral out of control. “Nifty is likely to trade in a range rather than post a sharp move for now,” said Palviya.




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Category: Stock Market


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