With profits becoming tougher to generate, savvy investors are increasingly switching to more cost-efficient trading strategies to bet on
Indian equities.
Over the past few months, these investors, mostly foreign investment banks, have been using trading combinations of long-dated Nifty options to achieve this objective.
The steady rise in activity in long-dated options (option contracts which expire many months from now) over the past few months can be attributed to increased use of these strategies, broadly referred to as synthetic forwards, said market participants.
"Bulk of the activity in long-dated options of late are for synthetic forwards...its use for volume trades are much lesser," said Ashish Maheshwari, derivatives head at Antique Stockbroking.
A synthetic forward is a combination of long and short positions involving financial instruments, having a similar risk-reward profile as another instrument.
Through long-dated options, these investors aim to replicate the exposure of index futures by creating positions in call and put options of identical strikes and expiries. So, if an investor wants to imitate the exposure of long Nifty futures, he would buy a long-dated Nifty call and sell a long-dated Nifty put with similar features.
Conversely, he would sell a long-dated Nifty call and buy a long-dated Nifty put, if he wants to mimic short Nifty futures.
Analysts said the synthetic forward positions through options have the characteristics of Nifty futures with longer expiry, which is not available as a product.
In these trades, the investor is using the money that he has received as premium from selling options to finance buying the options, as part of the trading strategy.
A key advantage that the investor gains from such trades in long-dated options is that he saves on costs such as rollover and brokerage, which he would otherwise incur in options that expire within every three months.
Market players said the pricing of these strategies are mostly negotiated between parties involved, with premiums demanded for long-dated options being relatively steep.
"The cost-effectiveness depends on to what extent can the parties negotiate because buying of long-dated options do not come cheap," said Dolat Capital V-P (derivatives) Vijay Kanchan.
The total number of contracts traded in long-dated options over the last four months to February has trebled. In February, the total number of contracts was 90,531, against 77,692 in January, 56,260 in December and 30,929 in November.
Over the past few months, these investors, mostly foreign investment banks, have been using trading combinations of long-dated Nifty options to achieve this objective.
The steady rise in activity in long-dated options (option contracts which expire many months from now) over the past few months can be attributed to increased use of these strategies, broadly referred to as synthetic forwards, said market participants.
"Bulk of the activity in long-dated options of late are for synthetic forwards...its use for volume trades are much lesser," said Ashish Maheshwari, derivatives head at Antique Stockbroking.
A synthetic forward is a combination of long and short positions involving financial instruments, having a similar risk-reward profile as another instrument.
Through long-dated options, these investors aim to replicate the exposure of index futures by creating positions in call and put options of identical strikes and expiries. So, if an investor wants to imitate the exposure of long Nifty futures, he would buy a long-dated Nifty call and sell a long-dated Nifty put with similar features.
Conversely, he would sell a long-dated Nifty call and buy a long-dated Nifty put, if he wants to mimic short Nifty futures.
Analysts said the synthetic forward positions through options have the characteristics of Nifty futures with longer expiry, which is not available as a product.
In these trades, the investor is using the money that he has received as premium from selling options to finance buying the options, as part of the trading strategy.
A key advantage that the investor gains from such trades in long-dated options is that he saves on costs such as rollover and brokerage, which he would otherwise incur in options that expire within every three months.
Market players said the pricing of these strategies are mostly negotiated between parties involved, with premiums demanded for long-dated options being relatively steep.
"The cost-effectiveness depends on to what extent can the parties negotiate because buying of long-dated options do not come cheap," said Dolat Capital V-P (derivatives) Vijay Kanchan.
The total number of contracts traded in long-dated options over the last four months to February has trebled. In February, the total number of contracts was 90,531, against 77,692 in January, 56,260 in December and 30,929 in November.
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