This is the follow-up of the options strategy discussed here.
This month was like a feast for option sellers if someone has followed the strategy discussed earlier.
During the first week of January when the market was touching 5300 I sold the following call options of February
5700 Call option at a premium of 28 Rs (20x number of options)
5600 Call option at a premium of 45Rs (15x number of options)
5400 Call option at a premium of 79Rs (3x number of options)5200 Call option at a premium of 210Rs (x number of options).
The x in brackets is the distribution of options I have sold. I have given this to demonstrate how you can change your risk profile and return ratio.
Here the 5200 option carries the maximum risk, and that’s the reason why I got maximum premium for that. As I mentioned that I am a medium risk taker this market from my point of view has gone up far ahead of its fundamentals in the short-term. This is the reason I want to capitalize on any short term aberrations in valuations. My breakeven point for this option is 5410. This means if the market were to go up above 5410 on a closing base on Feb 25th I will have loss in the 5200 call option selling.
To mitigate this I sold higher out of the money call options of 5400 (break even at 5479), 5600 call option (breakeven 5645) and 5700(break even 5728). Also I sold more of 5700 call options since it carries less risk.
All these options have been sold around Jan 1st week and second week with an expiry of Feb 25. Now after the crash all these options are reduced to a minimum because of the time decay and the adverse market conditions.
Given below is the current value of all these options.
5700 Call option – 2.5 Rs
5600 Call option – 3.45Rs
5400 Call option – 7.90Rs
5200 Call option - 26Rs
Given the market conditions I am almost sure most of these options will expire unexercised
You can calculate the returns from this kind of a trade. The margin for selling one lot is around 18000Rs (And this is almost same for 5200 and 5700 options). So if I calculate the least returns on a 5700 Call say for 2 months (you can also cover it now if you want) it will be around 1400Rs for an investment of 18000 for 2 months. This itself is around 45% returns per annum with a very low risk strategy.
And for this you do not have to shell out money as I have mentioned. Pledge your existing shares and pool the margin money and reinvest the premium got.
Since all these options have reduced to penny Friday I have reversed the trade I covered the 5700 and 5600 call options so that I can release my margin and sold some out of the money put options.
4600 Put option at a premium of 70Rs (x number) (breakeven 4530)
4500 Put option at a premium of 35Rs (5x number)(breakeven 4465)
4400 Put option at a premium of 23Rs (10x number)(breakeven 4377)
Even though I am bearish on the market in the short term I do not expect it to touch 4500 by February since the budget event will keep the tempo of the market slightly high.
Now lets see what is the fate of these options :-)
2 comments:
Sajith,
It is good strategy I heard that MFs and FII will use this strategy. I saw your answer to my question which was posted in Stockezy.com
I believe you started this blog recently.
Thanks
Ravikanth
Yes its a very good strategy. The only thing is that you have to understand the risks that are associated with it. Which you will get by experience. Yes mutual funds and FII's do use this strategy to maximize their returns mostly on the last day. Here the retailinvestors are at slight disadvantage because per lot we will lose almost 3 Rs as commission unless you do large volumes
Yes this blog i started recently, Earlier i had one blog which i used to write in 2007. I couldnt devote much time at that time for that and i had to discontinue it. This one i plan to publish regularly my learnings and experience with stock market
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