In the evening of the 29th of January, Bajaj Finance announced their recent quarterly results. This means that when the market opened on the 30th, traders and investors assessed those fresh numbers and made trades accordingly. On 28 January, we published on article on Upstox News that discussed the recent trading behavior of this stock and a potential long or short straddle options trade depending on your thoughts.
As of the market close on the 28th, a Bajaj Finance straddle (27 February expiry) traded for ₹593. Since a straddle is the purchase of a call and put using the ATM strike, the ATM strike was 7600. The implied price move using the straddle’s price was +/-7.8% between 28 January and 27 February – which includes the earnings announcement date.
What happened?
- On 29 Jan, Bajaj Finance traded up from ₹7607 to ₹7760; a gain of 2%. Interestingly, the stock rose on the prior trading day (27-28 Jan) by 4.3%.
- The underlying increase from ₹7607 to ₹7760 resulted in an increase in the straddle’s value of +6.3% (₹593 to ₹630).
- When big events happen, option implied volatility rises. We saw that as the IV increased for these contracts from 31.95% to 32.35%. Usually, you will see a bigger increase.
- At the close of the announcement day, Bajaj Finance was at ₹7902. This is another gain of 1.8%.
- Despite the gain in price, the value of the straddle fell from ₹630 to ₹577.
- The reason for the decrease in straddle price, despite a sizable underlying move, is that the implied volatility fell to 28.12% (from 32.35%).
Overall, you would have done better if you only held a long straddle for the 1 day leading into the announcement (a gain of +6.7%). If you held through the announcement, this trade would have had a -2.7% loss.