Fast-moving consumer goods (FMCG) companies are not usually covered in the news as intensely as banks or technology. Their products find a place in every household, and regardless of how an economy is doing, revenue is more or less stable. This stability makes the FMCG stocks ‘defensive’, and this stability is reflected in the option activity associated with them.
Why FMCG Stocks are Unique in F&O
Most sectors show high variability in their options volume driven by news cycles. FMCG stocks have their own distinct pattern. As consumption for soaps, packaged foods, etc., barely reduces even when there is a slowdown in the economy, the earnings of these companies are predictable. People trading derivatives seek low-volatility stocks, and this is what brings them towards FMCG companies.
Some of the unique features of FMCG options activity are:
- Lower price variance when compared to cyclical sectors
- Low implied volatility in non-event periods
- Steady open interest, which does not rise and then fall suddenly
- Regular patterns related to festive demand and rural consumption trends
This does not mean that FMCG options are dormant but that the signals obtained through them may be small in magnitude yet reliable. Two stocks make this easy to see in practice: ITC and Hindustan Unilever. Both sit in the same defensive bracket, yet their option chains tell slightly different stories once you look closely.
Interpreting The ITC Option Chain
ITC option chain is a good example because of the fact that it is not an exclusively FMCG stock. Apart from cigarettes and packaged food items, the company has its hands in the hotels, paperboard and agriculture sectors. Thus, the option chain may sometimes react to segment-specific news while the stock maintains its defensive nature.
Intriguing points to note about the option chain of ITC include the fact that the strike level open interest may react sharply during Union Budget announcements due to the influence of tobacco tax changes. In addition, apart from Budget periods, the open interest would be building up steadily, and implied volatility would remain under control unless there is a corporate restructuring or demerger.
Interpreting The Hindustan Unilever Option Chain
Unlike ITC, Hindustan Unilever option chain is a pure-play FMCG company with a large presence. The products of Hindustan Unilever include those relating to personal care, home care, food items, etc.
Option chains of Hindustan Unilever show tight strike spacing near the current price, which reflects steady involvement of institutions. Open interest builds up steadily leading up to quarterly results, unlike sudden bursts due to positioning by analysts and fund managers before earnings announcements. Factors affecting implied volatility include rural demand commentary, input cost trends on account of palm oil and crude derivatives, monsoon trends, etc.
What Is Needed From the Stock’s Options Activity?
When it comes to interpreting the option chains of both these stocks and other defensive stocks, certain key points need attention. These are:
- Whether the open interest build-up is steady or in a single surge
- Implied volatility compared to the historical range of the stock, instead of the general market average
- Whether there is activity around a known upcoming event, like the Union Budget or quarterly earnings
- Put-call ratio movements during the rural demand/monsoon news cycle
Many trading platforms provide access to such strike-level data in real-time for the trader.
Conclusion
The options on defensive stocks reflect a different kind of rhythm driven by budget cycles, consumption trends and consistent institutional interest as opposed to market news cycles. Such stocks have a different appeal for those looking for measured setups as opposed to high volatility situations.
