Volatility is subdued and stock is on a downtrend, offering little trading opportunity
All eyes are set on Infosys, which kicks off fourth quarter results today, but the stock may not see much action, say analysts.
Wild swings in the counter around the results have offered huge trading opportunities in derivatives segments earlier.
In April 2013, some options traders who had expected a move of around 9% had earned as much as 245% using strategies that work when volatility increases.
This time, the stock is almost 20% down from May last year, and analysts expect volatility of only around 6% on either side.
"We are expecting the stock to witness a volatility of around 6%, and at the money calls and puts premiums are trading at a net sum of around 60-65 points; that is also suggesting the same," said Chandan Taparia, associate vice-president and derivatives analyst at Motilal Oswal Securities.
The stock has been trading in the range of Rs 900-1030 for the last 5-6 months and Taparia expects this range to continue.
"If we look at the combination of at the money calls and puts, they are trading at a net premium of around 6% of the underlying. On the downside, it has multiple support near Rs 900," he said.
Outstanding futures have tripled in the last year, according to Bloomberg data, and it may be time to square off the existing positions, rather than go strangle or straddle, experts said.
"Based on the technicals, the best strategy is to remain short on the stock. Sell the futures and keep the stop-loss of 990. It is time to square off the positions. Technically, the stock is a downtrend," said Subash Gangadharan, technical and derivative analyst at HDFC Securities.
He suggests against straddle because the options are already highly priced. "Based on the recent historical data, compared to historical value, options are overpriced because of high implied volatility," he said.
Taparia also did not favour straddle or strangle as the premium is around 6% the total underlying price. Traders are discounting 6% movement in this stock.
"Implied volatility, which is near 42, post the event is likely to be near 25. So, we are expecting 15% decline in volatility. Because of this, the premium on the upside will decline. We need to get a movement of more than 6% then only the straddle and straddle strategies will make money," said Taparia.
He said either to go with a bull-call spread or bear-put spread, or better strategy, if it comes down, buying with a stop-loss of 900.
For those who are looking to place bets, Taparia recommends butterfly or iron condor strategy.
"We use these strategies to get benefit from range-bound movement with the decline in the volatility. If the stock stays rage-bound, the traders opting for butterfly or iron condor may get return of around 2-3% (of the premium) on immediate basis and 6% return on possession."
Even though the stock is on a downtrend, now may not be a good time for those looking to buy.
"The downside target is 940 and the potential downside is around 905. Based on technicals it is not the right time to buy. May be if it comes to 900 we can evaluate whether to buy or not depending on whether it will find support over there," said Gangadharan.
"If the stock goes down by around 3-4% because of any volatile trigger, that would be the buying opportunity with the stop-loss of 900," Taparia said.
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
 "Infosys")
)
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
)
){kind=small}
){kind=small}
)
)
)
)
)
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}