September 8, 2015

TATA STEEL options strategy

Stock has corrected 40% this year and is currently trading at 230.

Lifetime high is 1000+ and 7 year low is around 150. Last 3 year trading range 200-600.

View is of limited downside. Stock is bluechip facing difficult times.

Strategy:


- buy 1000 shares delivery LTP 230
- sell 1000 calls strike price 230 LTP 10 (IV is 55% - excellent for writers)
- premium as percentage of strike price: 4% (max earning this month)
- investment under Rs.250,000/- ... check with broker
- maximum profit: Rs.10,000/- less brokerage
- max loss: unlimited theoretically as you are holding delivery and stock can go down.

Trade to be repeated every month.... wherever stock closes on expiry OR position is closed, you must write next series call with strike price around expiry level.

Outcome:
- full profit if stock is sideways or bullish
- you are losing out on potential upside if stock blasts from current levels
- in event of decline, you earn the premium but face risk of loss in cash holding.

For whom is this trade suitable for: someone willing to take delivery of stock for long term and is happy with 2-3% return per month. This someone should also understand risks of option writing.


Note: I have done exactly same strategy with SBI.

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