Nifty could gain 4-5% with GST bill push
MUMBAI: Bullish derivative traders are betting on the Nifty gaining in December on hopes that the NDA government would be able to push through the Goods and Services Tax (GST), the country’s biggest indirect tax reform, in Parliament’s ongoing session.
Brokers are advising savvy clients to create options strategies that could help them play the markets if this crucial reform bill passes the Upper House of Parliament where the ruling party is in a minority.
Here is how a wealthy HNI or individual trader with an appetite for risk can play this strategy, according to brokers and experts that ET spoke with. You can start by playing the bull call ratio spread strategy which involves the simultaneous purchase of a lower strike Nifty call option and sale of two higher strike call options.
You can buy an 8000 Nifty call and sell two Nifty 8300 calls, which would help reduce the upfront cost of the lower strike call. Traders buy call options when they expect an underlier – in this case Nifty -to rise. When this happens, the value (or premium) of the call options rises. Brokers said expectations of passage of the GST bill – considered a crucial economic reform -could boost the market in the coming days that could drive up Nifty call option premiums.
IIFL’s head of de rivatives Hemant Nahata said trad ers expecting a positive outcome in the Parliament could be “well in place” to play the bull call ratio spread.
If the bull-call strategy is initiated close to the provisional closing price of the calls last week, it entails traders purchasing an 8000 call for Rs 132 a share and selling two 8300 calls for a combined Rs 68 a share. The credit received from selling the 8300 calls reduces the net cost of the 8000 call Rs 64 (132-68) a share. A call buyer too pays a premium to purchase an option, while a seller receives a premium for selling the option.
The maximum gain accrues if the Nifty closes at 8300 during or at the end of the current series. Here the gross profit (less brokerage and taxes) is Rs 236 -(83008000) – 64. The 8300 calls sold end outof-the-money for the buyer, which helps the seller pocket the premium.
Traders will begin losing money in the strategy only if the Nifty breaches 8536 (8300+236), or 7.5% above Friday’s closing of 7943, which brokers feel is unlikely, or if the Nifty stays below 8064.
The contrarians in the market are betting on a rally after December 15 even if the Fed goes ahead with the rate hike as it would remove an uncertainty for the market.
Read full article: Economic Times
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