Thursday, January 9, 2014

Sell Indian Oil (IOC) 180 put at 1.10

With all the buzz and fuzz about Indian Oil Corporation divestment to meet the fiscal deficit target, IOC stock has been under continuous pressure for quite long. But with all the news flow it appears that govt. wants to sell the stake but at higher price. At current market price of around Rs.197, the stock is a bargain buy and available at a fraction of it's replacement cost. The stock is also trading near 3 year low. Hence there is high possibility that govt. might not go ahead with IOC divestment until price recovers.

Considering all these factors one can sell 1 lot (1000) IOC 180 put at current market premium of Rs 1.10 or higher to generate a return of 4.17% in 15 days. Even if the divestment happens now it is highly unlikely that the price will be set below 180.

Total Return from the trade:

Considering one is able to sell the Jan 2014 Put Option of IOC 180 strike price at current market premium of 1.10 he/she can generate following return from this trade:

Assuming 1 lot of IOC (1 lot = 1000) 180 Put option is sold at Rs 1.10
Total premium collected = 1000 * 1.10 = Rs 1100
Total Transaction cost assuming Brokerage cost including STT and other taxes at Rs. 50 per lot = Rs 50
Margin money required: Rs. 25200 (14% of total value)
Total return = 1050 / 25200 = 4.17% in 15 trading days.

Risk: Since the above trading strategy is naked put writing, if the stock goes below 178.9 and closes above this level then there will be a loss of Rs.1000 for every Rs.1.00 below 178.9.

1 comment:

  1. It seems the IOC divestment plan has been deferred at least for near future. Hence the trading idea given above should go well for the month.


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