The Hindu Business Line : MTNL: Outlook positive, buy July 120 calls

Consider buying the July 120 calls, as they are cheaper in terms of implied volatility. The directional risk is moderate, as the calls are currently out-of-the-money. The position is not subject to high risk in the event of fall in volatility. Note that the theta-gamma trade off adversely affects the position. That is, the calls will lose more value due to theta than it can gain due to gamma should the stock sit still or move upwards.

If the stock moves to Rs 129 at the horizon, the July 120 calls will generate 110 per cent returns. Should the stock trade near the downside risk level, the calls will tend towards zero. The trading horizon is 13 days. The market lot is 1,600.

IPCL: The outlook on this stock is negative. The downside price target is Rs 95. The upside risk level is Rs 125. Note that the open interest position as a percentage of the market-wide limit is high; this has translated into high margin requirement.

Consider buying the July 110 puts. The options trade rich, perhaps because the contracts are not very liquid. The directional risk is low, as the puts are OTM. The position is not subject to high risk in the event of fall in volatility.

If the stock declines to Rs 95 at the horizon, the July 110 puts will generate 475 per cent returns.

If the stock rises to Rs 125, the puts will tend towards zero. The trading horizon is 12 days. The market lot is 2,200.

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