Traders place open bets on poll verdict

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Book big contracts in May options

Traders place open bets on poll verdict
Equity investors and traders are bracing themselves for extreme situations in the stock market this May, by building up unusually high open interest positions in derivative contracts expiring that month in preparation for the election verdict.

While option prices have risen sharply, traders have lapped up even far out-of-money options, reflecting their nervousness over the possible outcome of the general elections. The vote count of the April-May general elections is scheduled for May 16.

In 2009, the market was closed for trading on the day the election results were announced. Next day Nifty made history by rising 20 per cent within a few seconds, leading to a trading halt on both the exchanges. Traders who had short positions in Nifty futures or call options were left high and dry, and were forced to wait for the next session to cut their losses, which only mounted with the unprecedented rise in Nifty.

Singed by that experience, equity investors and traders are leaving nothing to chances this time around. As the political battle unfolds on streets and television channels, they are taking guard against different situations by building up positions heavily in the May series option contracts.

On February 28 as the May series contracts opened for trading, Nifty futures quoted at 6,289 and May series call option of strike price 7,000 saw buildup of 143,350 open interest. The call option price ended the session at Rs 97. Such high open interest position and price are not normal in an out-of-money call option that was 10 per cent above the prevailing Nifty level.

Open interest refers to the total number of derivative contracts that are open or have not been settled. A large open interest indicates more activity and liquidity in that contract.

The open interest in the call option at strike price 7,000 rose to 546,200 on Monday, while the price shot up to Rs 156. Normally, call option prices inch up when the underlying index (Nifty in this case) moves up. But the quantum of price rise seen in an out-of-money call option is something one doesn’t get to see in a normal market.

An out-of-money call option is one where the contract is at a strike price higher than the market price of the underlying asset, Nifty in this case.

Traders are getting ready not just for a sharp bounce in Nifty, but also for a possible crash in case the election throws up a ragtag coalition to power. May series put options of strike price 5,500, which was again more than 10 per cent lower than the prevailing Nifty level, saw buildup of 47,950 open interest with the price rising to Rs 70 on February 28.

Call options of strike prices above 7,000 too saw buildup of large open interests (See chart).

Put options are seeing similar interest. The open interest in put options above strike price 5,500 has hardly seen any decline despite the Nifty futures touching a new high on Monday. The price of a put option is inversely related to the movement in the underlying index (Nifty in this case).

Open interest in May series put option of strike price 6,200 rose by 79,100 in Monday’s session to reach 253,250.

Traders seem to have finally realised the cardinal rule of trading that there is no bull side or bear side of the market, but the right side. The rush to build up derivative positions on both directions shows that they are attempting to be on the right side of the market weeks ahead of the election results.

(The writer is director of Elan Equity Services

and consulting editor of

Financial Chronicle)

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