The Hindu Business Line : Using futures/options

We have some market indicators for Options Market i.e., put-call open interest ratio, put-call volume ratio, put call implied volatility and Index/Nifty.

In Futures Market also we have open interest and volume, but how is this open interest positions and volume data related to Index/Nifty movements? — Amit Rastogi

Generally, changes in open interest positions alone will not be useful in explaining possible index movements. The change in open interest position needs to be viewed in line with price movements over the week to understand the likely trend.

Rising open interest position along with the rising futures prices indicate bullish outlook. In contrast, rising open interest position along with falling futures prices may indicate bearish outlook.

In practice, however, the ability of the prices and other data in the futures market to explain spot price movements appears severely limited as of now.

Futures prices have for long traded at a discount to the spot price even in a strong bullish market.

Fortunately, we do not have to infer the outlook by looking at the Futures market alone. We have relatively superior indicators in the options market, which you have mentioned. These can be used to infer likely trends. Besides, the volume traded in the futures market along with the narrowing or broadening of the discount in futures price would be another useful indicator. So, the trends in the derivatives market are still capable of helping us form a view on likely price trends in the spot market.

Please clarify the term high vega risk for the spread position and also clarify what you mean by the term OTM calls attracting higher implied volatility than the ITM calls.— V. Narayanan

Vega risk refers to the possibility of the option price changing even without any change in price of the underlying stock. The change in option price is attributable to a change in volatility of the underlying stock.

Increase in volatility increases the value of a long position while a decline in volatility increases the value of a short position.

The downside risk due to Vega is high for an option that is at the money. The downside risk due to Vega is also relatively higher for a longer-term option compared to a shorter-term option.

In the case of a spread such as those involving options with different time to expiry, sensitivity of the options involved to changes in volatility will differ. You will need to the impact of changes in volatility to the different options involved before implementing your strategy.

In a spread strategy that involves out of the money calls and in the money calls, you will need to know how changes in volatility affect such calls. If you buy ITM calls and sell OTM calls, then a relatively higher increase in volatility for OTM calls will reduce the value of your position. The reason why OTM calls will attract higher volatility will, however, differ from case to case as it is a function of several factors.

The stock of Infosys Technologies is now trading at cum bonus. It will trade ex-bonus from July 2. But in futures and options in NSE, the stock of Infosys is trading at cum bonus and options is also trading at the strike prices of cum bonus. How will these options be settled after the stock becomes ex-bonus? Kindly clarify. — Ch. Mallikarjuna Reddy, Ongole

The basis for any adjustment for a corporate action such as a bonus is that the value of your position will remain unchanged due to the corporate action. This adjustment will be carried out on the last day on which Infosys trades at cum-bonus.

As such, there is no problem for the June contracts. Only the July contracts would need to be adjusted. So, on July 2, the contract specifications such as strike price, position and market lot will get changed automatically. In addition, since the bonus ratio is only 3:1, fractional holdings would be avoided and you are unlikely to have any problem.

Queries relating to futures/options may be sent to

fno@thehindu.co.in

or to Futures & Options, Kasturi & Sons, 859-860, Anna Salai, Chennai 600 002.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Investment Quiz

Ultratech Cemco: Accept

Overdraft on car

Adding mystique to the Qualis

Question `n' Auto

Why expenses can make or break fund returns

Understanding fund costs

Mutual fund IPOs: Contrasting styles on offer