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When risk premiums are high, vertical spread is the way to go: Shubham Agarwal

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Option premiums do rise or fall with absolutely no change in Price or Time also. This happens when the assumption of risk among option traders, especially option sellers go up.When risk premiums are high, vertical spread is the way to go: Shubham  Agarwal

Options are great instruments to dodge the risk. With a capacity to create a pay-off where there is no limit on the amount of money you can make but there is still comfort on the potential loss. It always stays limited to the premium we pay.

However, for getting this kind of comfort we do have to be careful about a few things other than just the price movements. If you are guessing about Time, you are right but that is not it. Yes, we do have to make sure that we execute the entry and exit in a timely fashion so that the decline in premium that certainly happens with the passage of time does not hurt us.

Here we are talking about one more aspect. That aspect is the risk premium. Option premiums do rise or fall with absolutely no change in Price or Time also. This happens when the assumption of risk among option traders, especially option sellers, goes up.

Taking the recent example of Nifty, we saw a down move in Nifty in recent weeks. As a result, the risk of falling rose significantly. This has created a significant impact on the Option Premiums as well. Just to give an approximation, the Nifty Option closest to the current level of index with the same time to expiry a few weeks back was roughly 50 percent cheaper than now.

This rise in premium due to rise in risk level will definitely help Option Buyers. However, after a fall like this one, if Nifty witnesses a comeback and rises the risk premiums will go down pushing the Option Premiums also down. The exact opposite scenario.

To avoid that there is a very simple solution. Convert you Option Buy position into a Vertical Spread position. Vertical Spread here means, Buy and Sell into Options of same Kind (Call/Put), same underlying stock/index and same expiry.

We can create this by Buying a Call/ Put with strike close to current market price and simultaneously Selling Higher Strike Call/ Lower Strike Put.

How to Create a Vertical Spread

Stock X @ 100

Buy Call 100 @ 5

Sell Call 110 @ 3

Net Premium Paid = 2

Max Profit = 110- 100 – 2 = 8 (Difference of Strikes minus the Net Premium Paid)

Max Loss= 2 (Net Premium Paid)

Yes, we are losing out on the unlimited profit potential but at the same time we are bringing down our initial cost significantly. Also, the drop in risk premium will now happen in both the options at the same time so no need to worry about that either.

When do we do this?

One of the easiest to access indicators of Risk Premium is India VIX. An index that gives you a number representation of riskiness in the market. If India VIX goes up by more than 20-30 percent from the recent low, convert your Option Buy Trades into Vertical Spreads. India VIX is computed by NSE and is available for free over the internet.

Finally, Vertical Spread is just the tip of the iceberg. There are a lot of combinations of options like this that can help us with such problems that could potentially ruin our profit potential.

Disclaimer: The views and investment tips expressed by investment experts on are their own and not those of the website or its management. advises users to check with certified experts before taking any investment decisions.

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Mukesh Ambani, Britain's Issa brothers face off in final battle for Boots

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Issa brothers are going up against Mukesh Ambani, who's been working on a bid for the Boots drugstore chain together with buyout firm Apollo Global Management IncPhoto: Bloomberg

Britain’s billionaire Issa brothers and Indian tycoon  are preparing to face off in the final battle for the  drugstore chain, one of the UK high street’s most recognizable names.

The Issas are seen as the party to beat ahead of next week’s deadline for proposals, after they submitted the highest offer in the first round, people with knowledge of the matter said. The duo are going up against Ambani, who’s been working on a bid together with buyout firm Apollo Global Management Inc.

Bidders are now sizing up Boots’ billions in pension guarantees -- which they’ll have to take on -- as they figure out how much they can pay for the business, the people said. They’re also working around the clock to arrange financing in a difficult market, which has gotten that much tougher due to the war in Ukraine, soaring inflation and rising interest rates, according to the people.

That’s a lot to sort through, and suitors are getting a few extra days to firm their bids up after the chain’s owner Walgreens  Alliance Inc. pushed back the May 16 deadline to later in the week, the people said.

Empire Builders

A deal would fit in well with the Issas’ empire-building ambitions. In recent years, they’ve gone on an acquisition spree that’s turned their main company EG Group into a global gas station and convenience store colossus. They’ve snapped up UK supermarket operator Asda Group Ltd. and the Leon chain of fast casual restaurants.

The brothers, who are pursuing  together with TDR Capital, seem to have found a neat solution to the financing issue: they’re considering piling more debt onto Asda and selling some of the supermarket chain’s assets to help fund the acquisition, people with knowledge of the matter said this month.

The emergence of Ambani, first revealed by Bloomberg News in April, promises to keep the race competitive. Apollo is known to be wary of overpaying on deals, which has led it to lose auctions for British  like Asda and packaging firm RPC Group Plc. Teaming up with India’s second-richest person could give it more firepower: Ambani is an experienced operator who’s keen to expand the retail arm of his conglomerate Reliance Industries Ltd.

One outstanding question is how close Walgreens will be able to get to its asking price of 7 billion pounds ($8.5 billion). Bidders had pegged its worth around 5 billion pounds, though it’s possible they will boost their proposals following due diligence, the people said. The  drugstore unit being sold by Walgreens -- which has the Boots chain in the UK at its core -- also includes a smattering of retail operations elsewhere, plus attractive private-label brands like No7 Beauty Co.

Litmus Test

Retail-focused private equity firm Sycamore Partners has also been touted as one of the suitors still remaining. Representatives for Walgreens and the bidders declined to comment.

The Boots sale has emerged a litmus test for dealmaking in the UK as credit markets become increasingly fragile. The easy financing conditions that supported a series of debt-fueled takeovers of British  last year have mostly come to an end. Indeed, banks that funded the private-equity buyout of Wm Morrison Supermarkets Plc had to sell some of the debt at a steep discount and are now facing losses, Bloomberg News has reported.

Whoever comes out on top, the hard work will just be getting started. Boots has a sprawling network of more than 2,200 stores across the UK, many of which need sprucing up. The high street has been hit by slowing demand in recent years, and they’ll need to refocus Boots’ business to adapt to these changing consumer habits.

There’s also the cost of living crisis to contend with. UK retailers have warned of “clouds on the horizon” after recording a sharp slowdown in sales as higher prices cut into spending power.

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