Traders work out math for budget rally June 26, 2009
Posted by dhirendra1972 in Extreme Movements, Handful Success, Low Risk, More Wealthy Traders.Tags: Derivatives Analysts, Foreign Institutions, Market Direction, Premium Rise, Retail Investors, Stock price, Stock Traders, Trading Strategies, Wealthy Traders
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Good morning friends. Wealthy stock traders — those who missed out the post-election result rally as well as the handful who tasted success — are trying to ensure that they have a winning formula ready to cash in on the post-Budget swing in stock prices. These players are creating trading combinations in equity options that will help them capture extreme movements on either side.
Two of the most commonly used options trading strategies by these traders are strangles and straddles, which have been put to good use by foreign institutions. Tempted by the low risk associated with these strategies, more and more wealthy traders are taking to them.
The participation of retail investors in such strategies is minuscule, as they seek trading strategies to bet on the market direction rather than implied volatilities (IVs) — the expected volatility in an index or share price — a key aspect of pricing of options premium (when IVs rise, premiums rise, and the converse also holds true).Derivatives analysts have been divided over the use of these options trading strategies to bet on IVs.
Some, including brokerage Sharekhan, are recommending buying straddles, which means a trader would bet on a jump in IV ahead of the Budget. In a straddle, the trader buys a call and put option each of same strike and expiry. Abhinay Jain, a derivatives analyst at Sharekhan, recommends buying one Nifty 4300 call and put option each of July expiry, prior to the Budget. – The Economic Times
