The Hindu Business Line : Construct calendar spread on Satyam

FRIDAY'S trading in the derivatives segment on the NSE reflected negative outlook on most stocks. Here are some buy/sell strategies based on the day's trading:

Equity options: The March 280 calls on Satyam clocked the highest volumes on the stock, with 746 contracts.

The immediate outlook on Satyam remains negative. Dealers can consider writing the April 300 calls, which fetched 8 points at the day's close. The time decay of the option is slow, as contracts are of the farther month.

Dealers who intend closing their exposures before the front-month (March) contract expires can consider the following strategy: Buy the March 280 calls and write the April 280 calls. This combination, a calendar spread, helps dealers hedge their farther-month short position with the front-month option. The combination will net cash inflow.

The March 300 calls on Reliance Industries clocked the highest volumes on the stock, with 199 contracts. The immediate outlook on Reliance appears positive. Dealers can consider buying the April 320 calls, which cost 6.15 points at the day's close. The time decay of the option is slow, as the contract is of the farther month. The calls are OTM, and hence, the gamma of the option is not very high. This means that the profit points for every 1 point move in the underlying will not be very high.

Index options: The March 1160 Nifty calls clocked the highest volumes in this segment, with 143 contracts.

After some secular downtrend, the market appears poised for a reversal. Dealers can hence consider buying the March 1160 calls, which cost 3.60 points at the day's close. The time decay is, however, very high, and works against the buyer.

Follow-up: Dealers who hold short positions in March 600 calls on Digital would have made considerable profits. The calls have fallen from 7.1 points to 1.30 points. As profit points from the current levels are not high, the short position can be closed.

The short position in Reliance March 320 calls has also generated profit points; the calls have fallen from 2.2 to 0.90 points. Dealers can take profits and close their position.

The short position in Satyam March 300 calls has yielded sizable profit points, as calls have fallen from 9.6 points to 1 point at the day's close. Dealers can take profits at this level.

Dealers who are long on the March 1180 Nifty calls would have lost 2.5 points per option. Since the market is poised for a reversal, dealers can hold their long position and recoup their losses.

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