Option prices indicate high uncertainty

Option prices indicate high uncertainty
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First Published: Wed, Feb 24 2010. 10 23 PM IST

Updated: Wed, Feb 24 2010. 10 23 PM IST
The usual pre-budget rally is missing this time around, with the markets correcting by around 8% since mid-January instead. Expectations are indeed running very low.
But as is their practice, option sellers are protecting themselves from a large move in the markets after the Budget announcement.
Graphic: Yogesh Kumar / Mint
Option premiums have started inching up in the past one month. At current prices, the implied volatility on Nifty options is around 28.5%, pretty much in line with the historic average of 30% around budget announcements.
Markets typically either rally sharply or fall steeply on the day the budget is announced. To bet on a similar outcome using options would involve buying a call and a put option, or what is called a long straddle. At current prices, a long Nifty straddle expiring in March with a 4,900 strike price—which is closest to the current index level—would cost 305 points.
In other words, the Nifty would need to rise or fall by over 300 points for a long straddle position to break even. That translates into a move of around 6-7% from current levels. The main trigger for such a large move this time around would be the targeted fiscal deficit and borrowing programme.
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First Published: Wed, Feb 24 2010. 10 23 PM IST