Investors bet on rupee rally with options strategy

Options strategy on rupee: Investors are positioning for a potential rally in the rupee against the US dollar, with the prevailing sentiment predicting the Asian currency to reach 82 by March. The dominant bet anticipates a 1.4 per cent appreciation of the rupee from its current level of 83.14.

Traders at two foreign banks revealed that investors are engaging in a "put spread" option strategy. This involves buying dollar put options with a strike price of 83 while simultaneously selling put options with a strike price of 82. Both options are set to mature in March. The "put spread" strategy is typically employed when investors anticipate a moderate decline in the dollar.

For investors adopting this strategy, the ideal scenario is a rupee valuation of 82 at maturity. The worst-case scenario involves the local currency being weaker than 83, resulting in the loss of the premium paid for the options.

RBI has not deterred 

The Reserve Bank of India (RBI), despite intervening to cap declines, has not deterred investors from placing bullish bets on the rupee. The RBI's efforts to maintain a narrow range for the rupee, absorbing inflows to bolster forex reserves, have not diminished the optimism among investors.

The rupee has emerged as a favoured long position among hedge funds and real money investors. Claudio Piron, Emerging Asia fixed income and FX strategist at BofA Securities, notes that the rupee holds the largest long position among emerging market currencies.

Despite the RBI's intervention, the rupee's implied volatility is at historically low levels. Additionally, the risk reversal on the dollar-rupee turned negative in mid-December, indicating a rare scenario where it costs more to bet on the downside of the dollar-rupee than its upside.

While some express caution about specific strike prices, noting the low probability of significant moves allowed by the RBI, the overall sentiment suggests a bullish outlook for the Indian rupee in the coming months.

(with Reuters inputs)