Wednesday, January 20, 2016

A covered call option strategy on SBI Stock

A covered call option strategy on SBI Stock February 2016 Expiry  

With expiration date coming nearer next week for January option expiry we can see some volatility today/ tomorrow on stocks getting adjusted for their value.

As we see yesterday NSE zoomed a bit positive and it being observed SBI Stock at 52 week low prices can there be a possibility to explore a covered call strategy for February expiration date ?

The current SBI Stock price is about Rs 183.

We see the following call option prices ->

180 CALL Feb 2016 expiry Rs 12.50 buy price
190 CALL Feb 2016 expiry Rs. 7.50 sell price

If we buy 180 call and simultaneously sell 190 call we make an investment of 5 Rs. (12.5-7.5) ; The option lot is 2000 stock; so investment 5x2000 = 10,000/- Rs. This is the maximum loss;

Maximum profit is when stock for February closes above Rs.190/- by February expiry ie., 10x2000 = 20,000/- less investment Rs.10,000/- = Max profit of Rs.10,000/-.

So maximum profit of Rs.10,000 or max loss of Rs.10,000/- is the possibility;

What is the probability as of date for stock closing above Rs.190 ? Delta is about 0.40 So probability is about 40 percent; Even for 180 call the delta is about 60 percent ;

We can do little bit adjustment here by selling 165 put for current price of Rs.3/- thus minimizing the exposure to only Rs 2 per stock if we are happy to buy SBI Stock at a cost below Rs.165 definitely by February expiry.


1 comment: