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.

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