Optionalysis: Portfolio Trades In a Trending Market


This is an archived post for Capital Mind Premium subscribers, sent on Feb 03, 2014. Click here to know more!

In today’s Option Strategy we’ll run through a trading plan for the next day. While the market has moved in a strong downtrend today, a number of stocks are demonstrating the kind of weakness we might be able to cash in on through options.

This will introduce us to a diversified option strategy instead of a single stock or index focus. Right now, remember that option premiums are very low with a volatility expectation that is just 18%, and going short options involves considerable risk, both through adverse reversals of the trend, or through an increase in time value due to an increase in volatility expectations.

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  1. Dear Deepak,

    A small naive query here.

    To profit from DLF downturn, why would you suggest writing calls at at a strike price of Rs. 145 in stead of buying put options -as I understand writing a call would expose us to limited upside but unlimited downside, while buying a put will limit downside to only the premium paid, no? What am I missing here? Generically too, when is it useful to write a call in stead of buying a put?


    • Mehul, because I don’t think the downmove will be sharp. The idea of buying an option is only when you see a very fast move. Right now, while the technicals indicated a downmove, it was going to be a slow one, and options would lose time value severely. I have of course bought options in another stock mentioned, where we expect a faster move.

  2. Deepak, thanks for this enlightening article (House Index), read it for the first time on Capital Mind. Also went thru option analysis, it was clear but i did not take a position, just learning at the moment.

    Sorry to digress, would like to know your view on TechM? Is it overvalued and what would be its fair value according to you? Am holding for about a year now.

    tks and rgds

    • TechM just announced very good results and I’d stick with the stock. There’s no “fair value” in stocks, according to me, stocks that have momentum just keep going :)

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