This months trading idea is on a stock which is being loved by the street these days but the trade idea is on the contra side. The incremental set of good news, after the lockout at Manesar was lifted, has played it's role and the stock went up from the low of 1080 in mid July 2012 to 1390 as on 4th October 2012, an appreciation of almost 30% in 2.5 months time frame.
Pre July 2012 (the lockout month) the stock made closing high of 1397 in mid May. 52 week high for the stock is 1428 which is just couple of percentage points from the current levels. Now the issue of Manesar lockout is no longer their in the price and the stock will have to move based on the fundamentals of the company and sector. Auto in general is seeing sluggish demand due to weaker consumption trend and markets are worried about the sales post festive season.
So considering the sharp run-up in stock price and uncertainty over post festive demand outlook, the option traders can sell 1500 call option at the current market premium of Rs.10 as the stock is not expected to cross 1500 levels in October series.
Total return from the strategy
Assuming 1 lot of Maruti (1 lot = 250) 1500 Call is sold at Rs 10.00
Total premium collected = 250 * 10 = Rs 2500
Total Transaction cost assuming Brokerage cost including STT and other taxes at Rs. 50 per lot = Rs 50
Margin money required: Rs. 52,500
Total return = 2450 / 52,500 = 4.66% in 15 trading days
Risk: If the stock moves above 1510 and closes above this level then there will be a loss of Rs.250 for every Rs.1 beyond 1510.