'Option sellers can now bet on falling volatility to profit'

MUMBAI: Traders with deep pockets and an appetite for risk could take a cue from their more sophisticated peers -FIIs -and sell Nifty options for tidy profits amid falling market volatility and range-bound markets, derivatives analysts said.

FIIs, who usually net purchase index options, have net sold index options, mainly Nifty, worth Rs 2,537 crore over three trading sessions through Wednesday, NSDL and NSE data shows. This, said Amit Gupta, head, derivatives research, ICICI Securities, is because of a steady fall in volatility index Vix, a gauge based on Nifty option traders' expectations of price swings, or implied volatility (IV), over the near term.

The Vix has fallen steadily this month to 17.72 on Wednesday from over 25 levels last month. This has resulted in a drop in option prices. The options that are seeing maximum activity are the 8000 put and the 8200 call. The 8000 put has fallen by 17% in he week through Wednesday while he 8200 call has lost almost a third of ts value, provisional NSE data indicates. Based on these two options the market range for the October series is currently around 7940-8260.

“Clearly, with the Fed decision not o hike rates and the RBI's surprise 50 bps rate cut behind us, there's no major event to push volatility up rom current levels. Rather, we could expect a further fall to 15-15.5 levels in Vix from here, giving writers leeway to gain from falling option prices,“ said Yogesh Radke, head of quantitative research, Edelweiss.

Radke and other derivatives experts like Bhavin Desai of Motilal Oswal Financial Services don't expect quarterly corporate results or China's GDP figures next Monday to throw a “spoke in the wheel“ of option sellers.

“Infosys's Q2 results were a mixed bag and that of TCS was below market expectations. But even then volatility did not rise. They are unlikely to rise above 20 this series, which opens up an opportunity, albeit a risky one, for traders who'd like to make money by shorting IVs,“ said Desai.

The danger to trades such as these is an unforeseen event which could spike volatility higher. If that happens the loss to the traders will be huge. In such a case not only will volatility rise, markets could also break out of the consolidating range between 7950 and 8260, based on provisional option prices on Wednesday.