Saturday, November 26, 2011

Trading Strategy of the Month: Sell Bharti Airtel 440 Call of December Expiry

For InvestorZclub readers, this month's trading idea is a little bit conservative due to the fact that the markets across the globe are very volatile and uncertain. We have had significant correction in Indian markets in very short span of time and trading on Nifty seems to be a bit challenging at the start of this December series. Hence InvestorZclub is recommending a strategy on individual stock rather than NIFTY which seems to be quite certain and safe.
Traders can consider selling 440 Call of Bharti Airtel december 2011 series at the current market premium of Rs. 1.00.

The logic behind this strategy is: 

a. Telecom Policy uncertainties are expected to keep all the telecom stocks subdued for sometime

b. Bharti - RIL deal called off where Bharti was expected to exit its insurance business at a valuation of around 3000 crore. So this will continue to weigh on the sentiments of the investors.

c. Lack of positive news flow from the telecom sector is also expected to keep the interest in the sector low.

d. Uncertainties in terms of 3G intracircle roaming

e. Technically, The stock topped out at 440 in August this year and continue to face resistance at 400 levels.
Return from this strategy:
Assuming 1 lot of Bharti Airtel Dec Call (1 lot = 1000 shares) is sold at Rs. 1.00
Total premium collected = 1000 * 1.00 = Rs. 1000
Total Transaction cost assuming Brokerage cost including STT and other taxes at Rs. 50 per lot = Rs. 50
Margin money required: Rs. 61,600 (14% of total call value)
Total return = 950 / 61,600 = 1.54% in 1 month

The trader starts incurring loss when the stock price moves beyond 441. And for every rupee of rise the trader will incur a loss of Rs.1000. But due to several reasons cited above it is highly unlikely that the stock will move beyond 440.

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