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Reliance Options Cheapest in Two Years Before Earnings

Reliance Industries Ltd. Chairman Mukesh D. Ambani
Mukesh D. Ambani, chairman of Reliance Industries Ltd. Photographer: Pankaj Nangia/Bloomberg

Options protecting against losses in Reliance Industries Ltd. shares fell to the lowest in two years before India’s most valuable company reports earnings tomorrow.

Implied volatility, the key gauge of options prices, for one-month options is 7.37 points below historical volatility for the past month, near the lowest on a relative basis since November 2009, according to data compiled by Bloomberg. The spread reached a two-year low of 12.16 points on Sept. 20, the data show.

Earnings for Reliance have missed analysts’ forecasts for two of the last three quarters. Its shares have slumped 18 percent this year, compared with the 17 percent drop in the BSE India Sensitive Index, as the Mumbai-based company struggled to reverse a drop in natural-gas output from India’s biggest field.

“Markets are hinting that the worst may be over for the stock,” Gaurav Mehta, derivatives strategist at Ambit Capital Pvt., said in a phone interview yesterday. “Lower risk of an earnings surprise is leading to a drop in implied volatility.”

Reliance will report tomorrow a net income of 57.2 billion rupees ($1.2 billion) for the three months ended Sept. 30, up from 49.2 billion a year ago, according to the median estimate of 20 analysts surveyed by Bloomberg. That would be the most since the three months ended Dec. 31, 2007.

The stock’s 30-day implied volatility has declined 17 percent to 36.56 yesterday from this year’s peak of 44.36 on Oct. 4, Bloomberg data show. The historical volatility has fallen to 43.93 from this year’s peak of 49.50 in September.

India VIX

The shares jumped 2.4 percent to 866.9 rupees as of the 3:30 p.m. close in Mumbai, the highest price in more than two months. They have risen 8 percent this week, the most since the five-day period ended Sept. 2. The Sensex gained 1.2 percent.

The India VIX, which gauges the cost of buying protection against losses in the S&P CNX Nifty Index, slumped 8 percent to 25.98. The gauge has plunged 30 percent from a two-year high of 37.19 on Oct. 4.

Reliance and BP Plc, which owns 30 percent of the KG-D6 gas field, may need up to four years to increase output as the block is harder to tap than previously estimated, a person with direct knowledge of the matter said Sept. 22. Reliance, controlled by billionaire Mukesh Ambani, has sought Indian government’s permission to develop smaller areas to counter a drop from the reservoir, the person said.

Satellite fields in the KG-D6 block and the R-Series fields together have the potential to produce as much as 35 million cubic meters a day of gas, the person said. That would boost output by 78 percent from the current level of 45 million cubic meters a day.

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