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VIX auguring pain?

, July 23, 2012, 0 Comments

Option Analysis
As on Friday close call of strike 5300 has more than 10.0 million open interest closely followed by 5400 call with 9.6 million and large number of open interests are also seen on put of 5000 strike (7.7mn) followed by 6.0mn of 5100 put and 5.5mn of 5200 put. Heavy concentration of calls at strikes 5300 and 5400 at the start of a expiry week hints that Nifty might gain from 5200 but atslightest negative triggers the market can drop sharply aided by strong buildup of calls.

The chart which looks at the open interest of put and call of strikes 5200 and 5300 shows that the open interest of call 5300 has been building up strongly while that of put of strike 5300 has been getting wound up taking the OI put call ratio to 0.28x, a level which can work either way.

In an expiry week the theta decay will accelerate and hence trading in option is more risky.With this caution we suggest buying a put option. As mentioned in our earlier article the Nifty spend last week filling the gap though the work is still in progress. Currently with low volatility the option premiums are cheap and hence shorting option is not a viable option and coupled with the fact that shorting gamma in an expiry week can wipe out any make shorting a strict no.
As mentioned above fundamentally there is no need for Nifty to rally and secondly strong accumulation of call options can work in favor of bears, and technically Nifty looks weak and hence we suggest buying put option. The put option is priced at an implied volatility of 12.6 which shows that option is trading cheap.