Tuesday, May 5, 2015

Options activity in MAY 2015

Action Taken
Short PUT (Sold) INFY 1800 @ 6.80 expiring on 28-MAY
Short PUT (Sold) CANBK 350 @ 5.00 expiring on 28-MAY
Bought 16 shares of ANDHRA BANK from the profit earned last month @ 76 a piece.
Long PUT (Bought) CANBK 310 @ 3.60 to hedge my position

Status (3 days to go)
INFY spot @ 2020; option @ 0.10 {1800} [ last closing @ 0.10, probability of profit: 100% ]
CANBK spot @ 335; option @ 16.50 {350} [ last closing @ 7.50, probability of profit: 0% ]

Sold @ 0.50
CANBK spot @ 335[ last closing @ 0.30, probability of profit: 5%]

Assumptions & Analysis
As discussed in last month's blog, wanted to explore growth stocks which were beaten down like TCS, Infosys. With next earnings reports 3 months far, these stocks are going to operate in narrow range. Another major advantage with IT stocks is that they are going to benefit from depreciating rupee.
Benefiting from CANBK good returns due to high volatility which is carried over to this month, selling 1 SD from mean strike at high premium of INR 5.00; also 350 is a fair value for the stock, which in worst case breached is a good point to go long on stock. I would buy 1000 shares of CANBK at settlement price. I can then short strangle (Sell 1 OTM Call and Sell 1 OTM Put) thereby collecting double the premium.
Since CANBK stock price down really close to strike price, I wanted to buy lower strike option  to hedge my risk. So I wanted to Long (Buy) 320 PUT, but due to low liquidity and huge gap in ask/bid price, could not buy the option at fair price (Rs 2 - 3); Hence my idea of doing a VERTICAL PUT SPREAD strategy is not going to work even in future because of unavailability of lower strike PUTS to buy. I am planning for another strategy to hedge my risk during deep sell offs.
Anyways have placed a bid to buy 310 PUT @ 0.20 which according to me won't trigger.

Getting ready for next month
With fed set to increase interest rate which will cause dollar to gain strength thereby reducing rupee strength, all IT companies will benefit from this. Planning to sell INFY 1900 PUTS next month.

Total: 84,336 INR (Invested/locked in amount)
Max Profit:
5.00 * 1000 = 5,000 - 30 (commission) = INR 4,970
6.80 *   125 =   850 - 30 (commission) = INR    820
Unlimited on CANBK PUT 310 (This might expire worthless)

Max Loss:
Unlimited on INFY PUT
Since I bought CANBK 310 PUT, max loss is limited to Rs. 40,000

Monday, April 27, 2015

Options activity in APR 2015

Action Taken
Short PUT (Sold) CANBK 360 @ 1.15 expiring on 30-APR-2015
Short PUT (Sold) KTKBANK 110 @ 0.15 expiring on 30-APR-2015

Status (0 day to go)
CANBK 360 is @ 0.00 [ dropped from 0.05, probability of profit: 100% ]
KTKBANK 110 is @ 0.00 [ no activity, probability of profit: 100% ]

Assumptions & Analysis
Entered position when stock price was @ 396, intra day price was up by Rs. 6 which caused option price to drop from 1.6 to 1.15 (premium collected).
Now this is a mistake as put was sold when stock spiked upwards putting a dent on premium. Second mistake was to collect a very low premium of 1.15; which is very less for the unlimited rish potential on the trade. Probability of win for option seller if strike is 1 standard deviation (SD) away from mean stands @ 84%; As spot price was 396 on sell date; 1SD is approximately Rs.35 from spot price, hence sold put at strike 360.
Margin requirements:
15% of strike price (110) on KTKBANK = 0.15 * 2,20,000 (2000 lot size) = Rs. 33,000
15% of strike price (360) on CANBK = 0.15 * 3,60,000 (1000 lot size) = Rs. 54,000
Total: 87,000 INR (Invested/locked in amount)
Max Profit:
1.15 * 1000 = 1,150 - 30 (commission) = INR 1,120
0.15 * 2000 =    300 - 30 (commission) = INR 270
Max Loss: Unlimited

Lessons Learnt
1. Never collect low premium; 1.15 is not even 0.5% of stock price; will try to collect at least 1% premium next month.
2. Since Bank Nifty was pressured in the month of April due to poor corporate earnings caused stock to fall to 376 just 4 days prior to expiration. I should have minimized risk by having Credit PUT spread instead of just selling PUT.
Should have bought CANBK 340 PUT @ 0.40; this would have put my maximum loss if happened ever at approximately Rs 20,000 ( Rs 20 * 1000 [contract price] )
3. Since the earnings were round the corner and volatility about to increase from the point of sell date to expiry, I should have waited few more days. Volatility of above PUT I sold increased from 30% to 50% in matter of few days. PUT was trading @ 1.80 on APR 24.

Profit of INR 1,120 from selling CANBK PUT.
Profit of INR    270 from selling KTKBANK PUT.

Profit as percentage of investment = (1390/87000) = 1.60% which is 19.2% / annum.

Getting ready for Next month
1. I would like to go with selling CANBK PUT, as it still has high volitility (35 - 40%). I am willing to sell PUT 1SD away from 30 day moving average of 380 which is approximately 340. I do not see any trading happening on NSE on this, which makes me to rethink to sell 350 PUT which is now trading around INR 4.50
2. I am not going to sell KTKBANK PUT as volatility and liquidity are too low.
3. Since FED has decided and postponed the interest rate hike till US economy stabilizes, Indian market is bit safe for now from Carry Trade unwinding (In short, money flows out of India, which causes market to tank). Selling PUTs can still be profitable.
4. I want to explore selling PUT of growth stocks like TCS, HCL and Infosys which got beaten down after earnings.

This blog is for continuous learning, please drop in your questions/suggestions.

Useful Links

NSE Option Chain:


NSE Historical values:

DerivativesTrading - Selling options in NSE

It is a myth that Options Selling is always done by big institutions such as investment bankers, hedge funds, arbitrators; let us also understand how it can benefit retail investors to generate fixed income.

5 Step system for selling options (Calls and Puts)
1. Never ever sell an Option (a Put or a Call) if there is a catalyst or event
2. If sold (against point 1), make sure this Catalyst or Event does not happen too soon for stock to react. i.e. option expiry should be very close to Event (not letting stock to consolidate)
3. Never sell option Cheap:
Though it is sold far out of money, low option premium is not worth the risk you are exposed to
4. Only sell option when volatility is high:
Sell when volatility is high and is about to get contracted by the time option expires. Reason being, when volatility is high, premiums are very high and it drastically drops when volatility drops.
5. Define exit plan:
As options sellers can be exposed to infinite loss (puts are better as stocks cannot go lower than 0)

More to come....