Gold Silver Reports — Selling Long Dated Index Puts Brings the Extra Buck as Market Moves North — Wealth managers who design structured products on Nifty derivatives for rich clients have bettered the returns on their portfolios by selling long dated index put options to pocket the premia or the prices of the options. The fundamental view of the market in this case is bullish.
The multi-legged strategy is to create a portfolio of Nifty stocks typically running into `5-10 crore per client. To strengthen the yield on these underlying portfolios, the manager sells Nifty puts to pocket the premia. This premium, in turn, is put in fixed deposits by HNIs, which accrues interest.
A put option is the opposite of a call option. The seller feels confident of the index not falling below a certain level, and so sells it. He receives premium for selling the option, which is credited to the client’s account. If the market remains above the level of the option minus the premium received at expiry, the client gains. The buyer holds the opposite view. A call option seller has view that markets won’t cross a certain level.
Wealth managers claim that they pocket the premium 9 out of 10 times, enabling them to generate alpha, or to outperform market returns for their cli ents.
The long dated op tions include puts expiring in June and , December from 2016 through 2019. Take the case of the 8500 strike put on Nifty expiring on December 29, 2016.
SK Joshi, head of wealth management at Khambatta Securities, spotted an opportunity to earn a fat premium for his client by selling the December expiry 8500 put as early as June 13. He received premium of `429 apiece. The unrealised gain his client had on Friday was `319 as the option price had fallen to `110.
Same is the case with the 8000 put expiring on December 29. Trader Aadil Sethna sold the put at `485.
Since then the option price has fallen a staggering 90%, leaving Sethna with an unrealised gain of `439.
However, Joshi adds a word of caution. “Remember this isn’t speculation. Rather, we’re using such structures to increase the clients’ returns on the underlying Nifty portfolio. We are backed (have underlying shares) and this strategy is commensurate with our fundamental analysis of the market.“
The added benefits a seller enjoys is putting 60% of the margin amount in the form of stocks or fixed deposits and the rest as cash. In the above instance the total value of the 8500 put was `6.4 lakh. The seller has to put around 8% margin (`51,000) on one lot (75 shares) of which `20,400 is in cash, the rest collateral. The seller’s unrealised gain on Friday stood at a whopping 47% of the margin outlay in less than 2 months.
In the rare event of the market falling below the seller’s breakeven, given the high premium that increases the margin of safety, Joshi advises clients to buy Nifty ETFs given his long-term bullishness on the market.
For instance, the client’s break even in the 8500 option is 8071 (8500429 premium received). From the current level, that will require markets to fall by more than 8% for the HNI to lose by maturity . The margin of safety is further increased by selling multiple options, including a few call options, which cause gains to the seller when the market falls.
Yogesh Radke, head of quantitative analysis at Edelweiss Financial Services, says that activity in far dated options is part of multi-legged strategies by HNIs and institutional clients with differing objectives. — Neal Bhai Reports