Race Against Time

Option buyers, while they look comfortably placed they are not so always. They are running a tight race against time. So, while a few of the parameters are in their favor, which include Vega and Delta; it’s Theta which looms large on their trade. The number of positive parameters tends to undermine the impact of Theta.

Interestingly, delta and vega may or may not benefit as the price and volatility may or may not move in the expected direction but theta is bound to impact the price as the time to expiry will definitely reduce by atleast a day. So, gain is a variable while loss is given. That’s what brings about the race against time for option buyers.

I recently had a close encounter, which I lost with some cuts and bruises. It was the day after the GST committee met and they did not do anything much to tax cigarettes. Next day was ITC result day. The stock has been coming off since 300 levels. It’s been one of the laggards in the market. With the sort of weight which it commands in Nifty it is important that it performs well for Nifty to continue its upmove. The stock has consolidated well at 260 levels and now was inching at 270 and higher.

The stock had highest Call build at 270 strike. However, the day before the result witnessed Short Covering of 21.5 lakh shares which was third part of the total position at that strike. Now, the positions at 270 and 280 Call strike were almost the same. On the day of results I bought January 280 Calls at ~ Inr 2.5/-.

Well, the logic was simple, with Shorts at 270 strike moving out, a move till 280 was in sight. Even if the results would be in line the stock could easily cruise to 280. With a delta of 0.3 and higher, the Call price would reach Inr 6/-. Decent gain in a day or two! What was against the trade was slightly high implied volatility due to the results and an expiry which was closing by.

So, the odds in favor and against seem to be well balanced, not the best of the situation, but still seemed worth it. During the day the stock gained to near 275 levels and the Call price inched at Inr 4/-. However, the results were slightly below expectations. The stock came off slightly and traded at near 272 levels. The Call price, however, came off to Inr 2/- as the IVs came off.

The beauty of such OTM options with low investment (not cheap; cheap and low investment is two different concepts in options) is that you can hold on. That’s what I did. I held on to my position. For next two days the stock price hovered around 276 levels. The call price went to as low at Inr 1/-.

Finally, it broke above 280 levels a day before the end of January series. The Call price inched back to my purchase price. On the expiry day it was same, while it made a high of 283, which would be have fetched me 2.5x gains had it happened on the result day, I covered my position on the expiry day at cost. Please remember all In the Money options should be covered back on the last day by option buyers, else, the STT charged on settlement would be cash STT.

Net-net a decent gain trade ended up as a futile exercise due to not so good timing and picking a trade which did not offer the odds in favor situation. However, it’s only options which allow you to create trades where you can take such bets. So, hang on, we’ll all time it to perfection someday.

Happy Trading

Cheers!!