The Hindu Business Line : Negative outlook on ACC

ACC: The outlook on the stock appears negative. The price projection on the downside is Rs 119, while that on the upside is Rs 154. Consider buying the October 135 puts, which are cheaper than other puts on the stock. These puts are nevertheless trading rich in terms of implied volatility (vols).

The directional risk is moderate, as the option delta is 40. The vega risk is low, which suggests that the puts will not rapidly lose value due to fall in vols. The loss in put value due to time decay, which is the cost for buying the gamma, is not very high. This means that the puts will not rapidly lose value even if the stock moves down slowly.

If the stock moves to its downside price projection, the puts will generate 3.5-fold returns. If the stock, however, moves up to Rs 154, the puts will carry no value. The stock may take a long while to reach the downside price projection. Beware of the option theta, as its speed will increase when the option nears expiration. Do not hold this position for more than 27 days. The market lot is 1,500 options.

Infosys: The immediate outlook on this stock appears positive. The price projection on the upside is Rs 3663, and that on the downside is Rs 3218. Consider buying the October 3400 calls, as they are cheaper than other calls on the stock. The calls are, however, trading rich in terms of implied vols. The directional risk is high, as the 3400 calls are at-the-money. The vega risk is high, as is the trade-off between theta and gamma. This suggests that the calls will rapidly lose value unless the stock moves up quickly.

If the stock moves to its upside price projection, the 3400 calls will generate 130 per cent returns. If the stock, however, moves down to Rs 3218, the calls will lose 80 per cent. Note that the calls will also lose value if the stock moves up slowly. Initiate this position if you can afford the risk. Do not the position for more than 5 days. The market lot is 100 options.

Digital GlobalSoft: The outlook on this stock remains negative, though the downside from the current level may be limited. The price projection on the downside is Rs 512, and that on the upside is Rs 585. Consider a bear put spread. This spread can be constructed by buying the October 570 puts and writing (selling) the October 540 puts.

Note that the put spread is gamma-neutral, which means that you will not derive the benefit of long gamma. The net theta-gamma trade-off is low, which means that the spread will not rapidly lose value even if the stock goes down slowly.

If the stock moves to its downside price projection, the put spread will generate just 1.20 points per unit. If the stock, however, moves up, the put spread will lose 13 points per unit. The payoff matrix is left-skewed because of the high value of the 570 puts and high upside price projection. Do not initiate this position unless the 570 puts are available for less than 25 points. Further, do not hold this position for more than 4 days. The market lot is 400 options.

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