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Charts & Analysis

Options: Is there a #Brexit play? Uncle Theta explores.


Uncle Theta - Options - Is there a #Brexit Play - Capitalmind | Active InvestingThe event is upon us and India VIX – a measure of uncertainty in NIFTY’s options market – reached adulthood today, closing above 18. If you haven’t noticed already, implied volatility is a mean reverting beast. And since we’re talking about Brits, perhaps the opening lines from The Beatles song Helter Skelter explains VIX best:

When I get to the bottom I go back to the top of the slide
Where I stop and I turn and I go for a ride
Till I get to the bottom and I see you again

That’s all fine and dandy, but is there a tradable play here? Let’s find out.

We have one week to the June Series expiry and 5m+ Open Interest have been built at 8300 and 8400 Calls, and 8100 and 8000 Puts. With VIX at 18.19, the implied range for 30th June is 8000 to 8400. By selling a June 8100-8300 Strangle and buying a July 7900-8500 Strangle with the credit, you’ll have a defined risk strategy where you’ll stand to make 6.7-7.2K/Lot if Nifty expires between 8100 and 8300 on June 30; with breakevens close to 8000 and 8400 (matching the implied range). Max you could lose, if there’s a big move till June 30 is 15.5K/lot (i.e. below 7300 or above 9200). For a more realistic measure of risk, you’d lose about 7K/lot at 7800 and 8600.

Is there a #Brexit play? - India

But here’s the fun part. Suppose NIFTY does expiry between 8100-8300. You now would have a free strangle for the month of July. If there’s a trending move then, there’s a lot to be made. Considering NIFTY has been in a 231 point range since May 27, it might not be the most foolish idea to assume a trending move follows this compression.

Of course, the other way to play #Brexit is to watch Financial News channels and listen to experts analyse with coin-toss odds what will or will not happen to Indian markets. But, where’s the fun in that?

More on options is available at #strategic-options on our Slack, which is available to all Capitalmind Premium members. If you’re not already subscribed, use discount code GETCM for a 20% discount, valid through June 2016. Our plans start at ₹1,333/mo (post discount). Click here to GET PREMIUM.


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