I have queries on the following stock options. MFSL 700-strike call bought for ₹6.10, and ABB 3400-strike call bought for ₹111. Both are April 2023 expiry. Should I take the put option to hedge my position? Kindly advise on the next plan of action. I have additional margin for buying call or put options. Also, please suggest whether I should average my position.
S P Shetye
MFSL (₹634): Since August 2021, the stock of Max Financial Services Ltd (MFSL) has been in a downtrend. But of late, the support at ₹700 and ₹670 had been providing some respite. However, with the breach of these supports a few weeks ago, the bears seem to be gaining more momentum. Yet, there is a chance for the stock to see a corrective rally to ₹670. So, hold the options for now and exit at the prevailing price when the underlying stock hits ₹670. Also, currently, the price of the 700-strike call is at ₹2.95. Meaning the value remaining is not significant unless you have a huge number of lots. So, you can take risks by holding the call.
On the other hand, you can consider buying put options as the probability of a fall from the current level is high. Consider buying the 620-strike put whose premium closed at ₹12.05 on Friday. The stock has a support at ₹580. So, you may liquidate the put option when the price falls to ₹580.
ABB India (₹3,397.1): The stock of ABB India has been on a rise since early February. However, in the last one month, it has been facing a stiff resistance at ₹3,430. That said, the compression in price action over the past month shows a bullish bias. Consequently, the probability of the stock breaking out of ₹3,430 is higher compared with the probability of a fall from the current level. Such a breakout can result in a sharp rally to the price band of ₹3,700-3,750. Therefore, we recommend holding the 3400-call option.
You can as well consider buying more calls but only after the stock surpasses the resistance at ₹3,430. Until then, hold on to your existing position. Upward averaging is not a popular trading method, especially with respect to options. But given the likelihood of a sharp rally, you can take risk if your risk per trade metric is at comfortable levels.
Send your queries to derivatives@thehindu.co.in
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