I have bought a 365-strike call option on DLF for ₹8.5. Now it is at ₹3.55. Should I hold till expiry or buy and average the position? Or should I exit?
The stock of DLF fell off the resistance at ₹365 last week. This is a strong barrier as the 50- and 200-day moving averages and a falling trendline lies at around ₹365. Besides, the scrip has largely been moving in the sideways range of ₹340-365 since the past six weeks.
Therefore, the likelihood of the stock rallying past ₹365 or slipping below ₹340 is less as it stands. Comparatively though, the probability of the support at ₹340 being invalidated is high given the overall market conditions. So, holding the 365-strike call option is not ideal, given the prevailing conditions.
So, we suggest exiting the trade.
Alternatively, you can hold the call and sell the 370-strike call option so that you can reduce the loss. Currently, the option premium is at ₹2.45 and so, selling this would result in an inflow of about ₹4,043 (premium multiplied by the lot size which is 1,650 shares).
Considering how the stock has been moving, it is likely to stay below the resistance at ₹365 until the end of this expiry. So, selling 370-strike call at the current level of ₹2.45 means you might gain the entire premium. Even if the stock rallies and breaks out of the range, the 365-strike long call that you already hold will act as a hedge and put a cap on the loss.
Nevertheless, note that you might have to bring in additional margin. Selling an option on DLF will require margin between ₹1 lakh and ₹1.25 lakh. But since you already hold a call long position in the same stock for the same expiry, your margin obligation can come down significantly. You might approximately need to chip in an additional margin of around ₹30,000 to write a 370-strike call option on this stock.