Thursday, May 29, 2008
Amazing opportunity in Nifty Long Term Options Contract
0 comments Posted by Saurabh Mangal at 10:14 AMI have been tracking the Nifty Long Term options contract since they were launched in March this year. There have been a great opportunity existing in the market in the very liquid counters. I have observed that when the market is at a certain level the long term nifty at-the-money options become highly liquid. For eg. when Nifty was trading at 4500, around March, the Put and Call options of nifty with the strike price of 4500 and expiry of Dec 2008 were highly traded. Now, I'll come to the point - the opportunity: At the time when nifty was near 4500, the nifty 4500 Put of DEC 2008 expiry was trading at around 600 i.e. if you write (sell) the option when the market was, lets say, 4530 you would require a total margin of around Rs. 30,000 to open the position and your cash inflow would be Rs. 600*50 = Rs. 30,000 (Nifty Lot size is 50) i.e. VIRTUALLY YOU HAVE A PUT WRITTEN WITHOUT ANY MARGIN. Now, you can again get into the same trade with a margin that you have got from the above trade i.e. Rs 30,000 and thus you can leverage any number of times. Also, the other advantage can be that if you write, lets say, 20 lots of nifty i.e. 20*600*50 = Rs. 600,000 cash inflow (with just Rs. 30,000 as margin) and if you have a portfolio worth Rs. 600,000 after hair cut, you can deposit those securities as margin and have Rs. 600,000 cash earning around @ 2-3% Rate of interest as it would be considered to be in savings account while you can enjoy the growth in your portfolio also. Now, you can make killing on the street if market remains above 4500 till expiry i.e. you will have Rs. 600,000 with just 30,000 investment. Even if you get out before december if the market is substantially high for eg. at current level of 5000, the liquidity in the 4500 strike PUT option, with Dec 2008 expiry, is less but then also the sellers are available at 300 to square off your position i.e. you make a smooth profit of Rs. 300,000 on Rs. 30,000 in just three months. But the major CATCH here is if your directional call fails i.e. if the market goes below, lets say 4460 (assuming 40 point cushion) you will get screwed with margin calls as you have to deposit more money with the broker (for each of the 20 positions) to keep your positions open.
Even in yesterday's trade when market was near 4900 similar kind of opportunity was existing with June 2009 put with the strike of 4900. You can write that at 600 with the expectation that market won't move below 4860 (assuming 40 point cushion). However, my personal opinion is that 4500 is a good level to enter into such trade instead of 4900 as chances of market getting lower than 4500 are less. So, I would suggest people to wait for 4500 to come and then target the Dec 2008 or June 2009 expiry 4500 PUT option.
In Crux,
Opportunity: Unlimited returns on just Rs. 30,000 investment. Write 'n' (n depends on your risk apetite) number of long term at-the-money PUT which are highly liquid.
Catch: If market slips below the strike, you can get screwed bigtime.
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