Option writers make the most of market volatility

The implied volatility in the Indian equity derivatives market has remained high for the September series. At an average of 29.4 for September series so far, India VIX?an indicator of the underlying market volatility ? stands at a highest monthly average for any series since September 2009. Higher volatility coupled with rangebound movement (250 points) of Nifty over the last two weeks implies option sellers and volatility traders have benefited, said market participants.

According to Vishal Jain of ICICI securities, heavy writing (selling) was observed in the put options when the market tanked towards 4,800 levels while the implied volatility started surging. ?Volatility traders, who actively trade, took benefit of rising volatility by selling options aggressively. This led to a huge build-up in September put options for the strike price of 4,500 to 4,700?.

Increasingly, these options were bought by buyers who had turned bearish on the market. Higher VIX also means that trades pay a higher premium to buy an option.

The Nifty managed to move up after closing below 4,800 for a single trading session in August. However, the index’s movement in the last two weeks has remained quite fickle with instances in which it lost or gained more than 150 points each in a period of three trading sessions. ? The build-up in the put options of 4,500-4,700 strike continued even till last week as traders were cautious and option buyers continued to buy these strikes expecting an eventual decline in the market. Options sellers on the other hand were a happy lot taking advantage of the significant swings in the market along with higher implied volatility,? said Siddarth Bhamre, head ? equity derivatives at Angel Broking.

For the September series, the 4,700 puts maintained the highest open interest as late as Monday and on Tuesday it added 3.2 lakh shares. However, 5,000 puts, which held 9.29 lakh shares as of Tuesday, had the highest open interest for any strike prike on the put side.

Experts believe that after spending trading sessions in the range of 5,170-4,910, the Nifty may finally be looking to extend its gains towards 5,200 or 5,350 range, filling the gap created when the market crashed in the first week of August.

?In September, 5200-5300 calls have seen a rise in the open interest as the Nifty has managed to gain 200 points in last five sessions on short-covering in stocks,? added Jain.