Amid growing uncertainty over West Asia peace talks, retail investors, high-networth individuals (HNIs), and proprietary traders are betting on significant short-term market swings to profit from rising volatility.
Known in market parlance as a ‘long straddle’, the strategy involves the simultaneous purchase of both a call and a put option at a predefined level, known as the strike price. Under this strategy, the trader wins so long as the market moves sharply enough in either direction to cover the cost of both premiums.
On Tuesday, these traders purchased 52,000 contracts at the 23,900 strike price, betting on a major market move over the next week. Each contract (consisting of 65 shares) was bought for ₹380 per share before the Nifty closed 0.5% lower at 23,913.7.
They will accrue profits so long as the Nifty moves more than 380 points (about 1.6%) in either direction from the 23,900 level before the 2 June expiry. Sellers will retain the premium paid by buyers if the market does not break out of this range.
The seller stands to earn a maximum profit of ₹380 per share if the Nifty closes exactly at 23,900. Any movement away from this level erodes that profit, with the trade hitting breakeven at 24,280 on the upside and 23,520 on the downside. Beyond these points, the seller starts to incur losses.
Will the bet pay off?
Rajesh Palviya, senior vice president (technicals and derivatives) at Axis Securities, said, "The uncertainty over direction has caused traders to opt for the long straddle amid a fragile peace deal being worked out between the warring sides.”
Sudhir Joshi, director at Khambatta Securities and former director finance at BPCL, said, "Given the uncertainty over the peace talks, a long straddle — though expedient, as it's direction agnostic — won't work for buyers if the movement (volatility) isn’t large enough.”
"Generally the writers (sellers) are smarter than buyers of options, but if a peace deal is reached, a sharp 2-3% market rally led by short covering can't be ruled out," Joshi added.
As of Tuesday, foreign portfolio investors (FPIs) were cumulatively net short index calls by 200,355 contracts and net long puts by 434,742 contracts. Retail and HNI investors were cumulatively net long calls by 158,033 and net short puts by 634,849 contracts. Prop traders were cumulatively net long calls by 41,146 contracts and net long puts by 167,907 contracts.
Crude supply risks persist
Brent oil, which fell 6.8% on Monday amid hopes of a peace deal, rose 3.48% to $96.67 a barrel Tuesday on reports of a US ‘defensive’ strike on Iranian naval vessels. At 1.25 pm India time on Wednesday, crude was down 2.28% at $94.47 a barrel as traders assessed the odds of a peace deal. The market will run through 11:55 pm India time.
Control over the Strait of Hormuz and Iran relinquishing its nuclear stockpile remain the key sticking points.
Despite Wednesday's dip, crude prices have climbed 31% since the start of the conflict on 28 February as global supplies have been cut by roughly 10 million barrels per day. The daily global supply is estimated at 110-112 million barrels, Palviya said.
India, which imports 88% of its crude or 5.6 million barrels per day, has been hit especially hard, with the government hiking petrol and diesel prices four times in the past 12 days due to huge under-recoveries by oil marketing firms and a falling rupee. The domestic currency is down over 5% since the war began and was trading at 95.77 to the dollar intraday on Wednesday, according to Bloomberg data.