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B. Venkatesh

THE following strategies are based on Wednesday's trading at the derivatives segment on the NSE:

Equity option: The outlook on BPCL is negative. Interestingly, the put-call open interest ratio has been gradually moving up, while the put implied volatility has been declining. This sends contrasting signals on the prevailing sentiment in the stock.

The downside price target is Rs 230. The worst-case upside risk limit is Rs 270. Consider buying the June 250 puts, as they are cheaper in terms of implied volatility.

The option greeks cannot be used to gauge the position risk because the horizon coincides with the expiry of the June contracts; option greeks tend to be very volatile near the expiration date.

If the stock declines to Rs 230 at the horizon, the June 250 puts will generate five-fold returns. If the stock rises to Rs 275, the puts will tend towards zero. Note that the payoffs are based on extreme price movements in the stock on either side. Since the horizon date is the option's expiration date, realised volatility is not a primary factor in determining the payoffs. The market lot is 1100.

Index option: The outlook on the Nifty spot index is positive. The upside price target is 1075. Profit-taking in the constituent stocks could drag the index down to 1025.

Note that the put-call open interest ratio, which was above one, has been inching down. This could be a sign that there is a gradual build-up in call positions than in put positions. But the fact that put positions are still high does lend to the possibility that the market may decline to 1025 levels.

Consider buying the June 1050 calls. As with BPCL, the option greeks cannot be used to gauge the position risk. This is because the horizon coincides with the expiration of the June Nifty contracts. Should the spot index touch 1075 at the horizon, the June 1050 calls will generate 165 per cent returns. If the spot index declines to 1025, the calls will lose value. The market lot is 200.

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