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I’ve bought 16 lots of 480-call option of REC at ₹9 and 4 lots of PFC 460-call option at ₹11. Both are January series. Shall I hold or exit?
Prasant Padhy
REC (₹412.9): The stock of REC witnessed a decline in price over the past couple of weeks. However, the overall bull trend is intact and the fall in price is likely to be just a correction.
The stock is now hovering around its 20-day moving average support. Below this, there is a strong base at ₹390. Until ₹390 holds, the bias will be bullish.
However, the strike of the call option that you’ve bought is far away from the current level. This trade becoming profitable is unlikely. So, we suggest modifications as follows.
Exit all 16 lots of 480-call, which closed at ₹5 on Friday, and immediately buy four lots of 420-call, which closed at ₹19.2 last week.
Here, there will not be additional money outflow. But here, the probability of making profits is much higher as the stock is bullish. Exit 420-call at the prevailing price when the stock price hits ₹440.
PFC (₹382.6): Your position in the call option of Power Finance Corporation (PFC) is similar to REC. The stock is in a bull trend, but the strike price of 460 is far from the current market price of ₹382.6. Therefore, we suggest similar modifications in this trade as well.
Liquidate 4 lots of 460-call, which closed at ₹3.4 on Friday, and buy 1 lot of 400-call, which ended Friday’s session at ₹14. Here, the probability of the trade becoming profitable is higher.
Do note that buying many lots of option contracts is not advisable. Especially so when both the companies you hold are from the same industry. This increases your risk. So, maintain a small lot size unless you are fully aware of the risk.
While making the changes that we suggested above, consider scaling down the lot size to reduce the risk.
With respect to strike price, always prefer at-the-money strikes or strikes nearby this level. Buying far out-of-money options appear cheap, but the probability of success is very low.
Send your queries to derivatives@thehindu.co.in
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