Is This Trade Betting On Nifty Rising 5% By Month-End?
An options block trade suggests that someone has bet that the NSE Nifty 50 Index may pull back 5 percent by the end of this month after seven straight days of losses.
While it’s not possible to identify the trader, Bloomberg’s Block Trade Monitor shows a notional amount of more than $32 million was wagered by selling in-the-money put options on the Nifty at 11,200, or 5 percent above the current price of Rs 10,676.55.
A put contract gives the holder the option, but not the obligation, to sell a security at a pre-determined level or price. These are in-the-money put contracts where the strike price is above the market price of the underlying asset.
While it is not impossible for the Nifty to pull back 5 percent in the next seven sessions, the trade warrants attention given the sustained weakness in the market.
Trades like these form part of structured deal or options arbitrage. Option price consists of two components —time value and intrinsic value —and usually trade above their intrinsic value.
BloombergQuint’s calculation, however, shows the February 11,200 put option was quoting 6 percent below the intrinsic value as the block trade was wagered at Rs 491.10 per unit while the intrinsic value was Rs 523.45 at the time of the trade.
Hence, buying Nifty put options at Rs 11,200 while simultaneously purchasing Nifty futures could effectively help lock in gain of 0.30 percent for the next nine days or an annualised gain of 12 percent.