Last Monday (27 January), our Upstox News desk published insights and potential trading ideas about Bajaj Auto. The company announced results after the market close on 28 January. When a company announces earnings, traders speculate on the company’s prospects.
Over the last few quarters, the returns of Baja Auto on the day after earnings have been quite volatile. Here is a snapshot.
At the time of publishing, options data was implying that Bajaj Auto would move between +/-8% between then and expiration on 27 February. If you had thought that this stock would be more volatile, then you could have bought a straddle (simultaneous purchase of a call and put option). A long straddle was trading for ₹660.
So, what happened?
As of the market close on 5 February, the stock is up 6.5% and was up 2.7% on the day following the announcement. By the market close, prior to the announcement, the straddle value rose to ₹726 (+10.0%). However, after the announcement, the straddle value fell to ₹644 (-2.4%) due to a collapse in implied volatility.
The peak end-of-day return was on Saturday’s close when the straddle value climbed to ₹860 (+30%). As of 5 February, the straddle was at ₹668.50 (+1.2%).
Overall, a solid trade for those who decided to be long straddles.