Derivatives

How to profit by selling Coal India call options

KS Badri Narayanan | Updated on March 13, 2021

This approach will capture the time value premium of the contract

The long-term outlook remains negative for Coal India while in the short-term, we expect it to move in a narrow range. The long-term outlook will turn positive if the stock closes above ₹253. The stock finds an immediate support at ₹143 and a resistance at ₹160. Only a close above ₹165 or below ₹125 will give a clear trend for the stock. As the company has fixed March 16 as the record date for interim dividend (₹5), Coal India is likely to witness higher volatility on Monday and the share price will be ex-dividend.

 

F&O Pointers: Coal India March futures have seen unwinding of open positions in the past few days along with a marginal fall in share price. Open positions slipped from a high of 4.45 crore shares on March 5, to 4.07 crore shares on Friday (March 12). This indicates, traders are not interested to carry over their positions and preferred to book profits. Option trading indicates ₹135 and ₹170 are key support and resistance level.

Strategy: We advise traders to sell ₹165 call option, which closed at ₹1.05. As the market lot for Coal India contract is 4,200, this strategy will ensure an inflow of ₹4,410, which will be the maximum profit one can earn. However, loss could be unlimited if Coal India surges sharply. A close above ₹166.05 will start pinching traders. For that to happen, Coal India has to surge over 10 per cent before the expiry, which is nine days from now. This strategy is to capture the time value premium of the option. Besides, premium of put options appears costly.

Risk-averse traders can stay away from this strategy. Strictly, this strategy is for traders who can understand risk in selling options and withstand volatility by meeting margin commitments. Maximum profit will happen if Coal India closes at or below ₹165 at the time of expiry. We advise traders to hold the position till expiry for better profit prospects or if the premium value slips to ₹0.20.

Follow-up: Strategy on HDFC Bank failed and would have hit stop-loss.

Published on March 13, 2021

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