A strategy using Nifty options usually before a major event or when one is uncertain of market direction. Comprises purchase of a Nifty call and put option of the same strike price.
Usually strikes are purchased closer to the level of the underlying index.
2. What is better buying or selling a straddle?
It depends.Implied volatili ty of options, or near-term expectations of price swings in an un derlier like Nifty , usually peaks before an event and falls when the outcome plays out like Infy re sults in past years.
However, once the event plays out, a sharp rise or fall in Nifty could result in price of the straddle rising benefiting buy ers. But, normally , those who sell or write options charge hefty premiums from buyers in the hope that fall in volatility would ensure the options end out-of-the-money, hurting buyers.
3. So, do straddle sellers end up winning most of the time?
Yes. That's invariably the case when market volatility is trending on the lower side. For instance, on Thursday, when the market closed at 7861, a 7900 strike call and put expiring in December cost a combined `87. But when the market rose by 44 points, breaching the 7900 mark intraday Monday, the value of the straddle shrank to `71. The buyer was left staring at a mark-to-market (MTM) loss of `16 a share (or `1,200 for a lot of 75 shares) while the seller was sitting on an MTM gain of `16.
4. When do buyers gain?
In the above instance, the value of the straddle purchased on Thursday , excluding brokerage of `100 a lot (75 shares), was 1.1%. So for her to gain, Nifty must either rise or fall by more than 1.1%. Intraday Thursday , the index was up only half a percent, leaving buyers with an unrealised loss.Only if Nifty decisively breaks above 7987 or below 7813 plus brokerage, will the buyer gain. Unfortunately , for buyers, since the December series ends on Thursday , time decay or increased theta begins to erode option value. In such a scenario it is likely that the straddle sellers will emerge winners.
5. Currently who are selling straddles?
Mainly brokers who run proprie tary trades and some rich clients.
FPIs are net buyers of puts and sellers of index calls on an outstanding basis. Buyers of calls are DIIs who can purchase but can't write options.
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