Option costs in Tata Steel rise as stock extends rebound

Demand for options in Tata Steel increased as shares of the country's biggest producer of the alloy climbed for a third straight day.

The cost of at-the-money options in the stock gained to 37.1 at 3:56 pm in Mumbai from 35.82 on Tuesday. Implied volatility increased as the shares rose 2.3 per cent to Rs 262.30, the highest close since July 24.

"Shares are rising on speculation the government is considering raising import tax on flat steel products," Rajendra Wadher, director at PRB Securities, said by phone. "Traders are selling calls as part of covered calls to hedge their share purchases."

The government may raise the levy to around 12.5 per cent, a gain of 2.5 percentage points, Bloomberg TV India reported Tuesday, citing steel industry officials it didn't identify. The gains come after the shares dropped to their lowest level in almost two years Friday. They've tumbled 36 per cent in 2015 through Tuesday.

Tata Sons, the holding company of the Tata group, will purchase a 2.18 per cent stake held by Tata Steel in Titan Co, a watch maker and jeweller, Titan said in a filing to the stock exchange.

Tata Steel call options with a strike price of Rs 280, and 250 puts, had the highest number of outstanding contracts.

The 50-stock CNX Nifty index rose 0.6 per cent to 8,567.95. The India VIX Index, a gauge of demand for protection against stock-market swings, dropped 1.1 per cent to 14.66.