MUMBAI: A trading combination with Nifty options is gaining traction among savvy trading desks of institutional investors. The strategy known as calendar spread, in which traders simultaneously sell current month and buy next month option contracts, is recommended by brokers to institutional clients who see sharp movements in the implied volatility of Nifty options — a key component of options prices — in the September.
“There is money to be made by selling current month volatility (implied volatility) and buying September volatility,” said Girish Patil, Manager-Derivatives, Antique Stockbroking. With this spread strategy, traders use the premium they get from selling the current series to fund the cost of buying options next month. “With just a few days left until the end of the August series, volumes on this series are unlikely to jump,” Patil said.
Futures and options contracts for the August series expire on the 26th, while the September series expires on the 30th of next month.
Option sellers, who reap the premium from the buyer, prefer fewer trading days in a trading month due to time value—another important aspect of option pricing. The time value of options falls closer to contract expiration, resulting in limited fluctuations in option prices.
Selling Nifty 5500 call options in the August series and buying the same contract in the September series is a good strategy in this type of market, said Shailesh Kadam, AVP Derivatives, PINC Research.
“This strategy is betting that the Nifty will be rangebound and not move above 5500 in the August series while the undertone is positive next month,” Kadam said.
For the past month, the Nifty has largely traded in a tight band between 5350 and 5450, causing the volatility index – a measure of traders’ expectations of near-term risks in the market – to hover in the 15-20% range. the lowest range since January 2008. This suggests that traders are comfortable with market levels in the near term.
Brokers said options traders have been struggling to make money lately in the absence of strong index moves. “Vol buyers (option buyers) 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 brokerage firm. “So if there’s no sharp move, calendar spread seems like the best strategy,” he said.
https://economictimes.indiatimes.com/traders-bet-on-calendar-spread-as-nifty-moves-in-a-tight-range/articleshow/6302358.cms Traders bet on calendar spread as Nifty moves in a tight range