With Tata Steel stock up more than 21% in October alone and up around 73% (Price as on 21st Oct Rs 337) from the August low of 195, the rally has been more than justified and the stock is no longer attractive on valuations front. High debt and soft commodity prices will continue to put pressure on company's earnings in coming quarters. Technically 100 week average for Tata Steel is around 370 and 20 month average is around 360.
Hence option traders can sell 370 call option of Tata steel of October expiry at current market premium of 0.90 thereby generating a return of more than 1.6% in 8 days.
Total Return from the trade:
Considering one is able to sell the Oct Call option of Tata Steel 370 strike price at current market premium of 0.90 he/she can generate following return from this trade:
Assuming 1 lot of Tata Steel (1 lot = 1000) 370 Call option is sold at Rs 0.90
Total premium collected = 1000 * 0.90 = Rs 900
Total Transaction cost assuming Brokerage cost including STT and other taxes at Rs. 50 per lot = Rs 50
Margin money required: Rs. 52000 (14% of total value)
Total return = 850 / 52000 = 1.63% in 8 trading days.
Risk: Since the above trading strategy is naked call writing, if the stock goes above 370.90 and closes above this level then there will be a loss of Rs.1000 for every Rs.1.00 above 370.90.