Dear All,
Domestic markets have been on edge ahead of
general election results. Given uncertainty of political outcome there has been
surge in volatility. This gives an opportunity to sell covered options.
The above chart show, substantial increase in 1 month
USD/INR volatility.
Trade Structure:
Sell USD/INR for May end and also sell put
option of strike 70- premium 80 paisa.
|
|
68.80
|
69.00
|
69.20
|
69.40
|
69.60
|
69.80
|
70.00
|
70.20
|
70.40
|
70.60
|
70.80
|
|
Future Payoff
|
1.00
|
0.80
|
0.60
|
0.40
|
0.20
|
0.00
|
-0.20
|
-0.40
|
-0.60
|
-0.80
|
-1.00
|
|
Option Payoff
|
-0.40
|
-0.20
|
0.00
|
0.20
|
0.40
|
0.60
|
0.80
|
0.80
|
0.80
|
0.80
|
0.80
|
|
Structure Payoff
|
0.60
|
0.60
|
0.60
|
0.60
|
0.60
|
0.60
|
0.60
|
0.40
|
0.20
|
0.00
|
-0.20
|
As shown above, this structure will lock-in
profit of 0.60 if spot closes below 70.00 levels and gives protection till
70.60 levels. More-over, once election results declared on 23-May there should
sharp decline in volatility and there should be opportunity to exit either
option or forward depending on outcome.
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