Friday, August 23, 2013

Sell Tata Steel 310 Call at 0.60 premium

Tata Steel has moved up sharply from the lows of 195 (7th Aug) to 180 (23rd Aug) due to short covering and improving fundamentals of steel domestically. However a 44% rise has been too steep in short period of time and hence might face significant resistance going forward. As on 29th May 2013, the stock started it's steep fall from 322 odd levels to a low of 195, and technically a 61.8% Fibonacci retrenchment ends at 275 odd level which could broadly be a big supply zone. 

Valuation wise Tata steel is trading at around 6 times EV to EBIDTA which is expensive compared to Arcellor Mittal Valuation which is trading at around 5.6 times EV to EBIDTA based on FY-14. Considering all these factors once can sell 310 call option of Tata Steel at current premium of 0.60 and generate 1.2% return on margin amount in 4 days.

Total Return from the trade:

Considering one is able to sell the Aug Call option of Tata Steel 310 strike price at current market premium of 0.60 he/she can generate following return from this trade:

Assuming 1 lot of Tata Steel (1 lot = 1000) 310 Call option is sold at Rs 0.60
Total premium collected = 1000 * 0.60 = Rs 600
Total Transaction cost assuming Brokerage cost including STT and other taxes at Rs. 50 per lot = Rs 50
Margin money required: Rs. 46000 (15% of total value)
Total return = 550 / 46000 = 1.2% in 4 trading days.

Risk: Since the above trading strategy is naked call writing, if the stock goes above 310.60 and closes above this level then there will be a loss of Rs.1000 for every Rs.1.00 above 310.

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