Monday, May 30, 2016

Trading Idea - June 2016

This months trading idea is a contra call on Nifty which has seen very sharp up-move of 500 points in a week. But with every rise the valuation of Nifty is getting richer which is already expensive at 8200.

Nifty chart 5 day

For the month of June one can sell Nifty 8700 call at current market premium of  8.00 thereby generating a return of around 1.35% on the margin amount of roughly 40k

Total Return from the trade:

Considering one is able to sell the June Call option of Nifty 8700 strike price at current market premium of Rs. 8.00 he/she can generate following return from this trade:

Assuming 1 lot of Nifty (1 lot = 75) 8700 call option is sold at Rs 8.00
Total premium collected = 75 * 8.00 = Rs 600
Total Transaction cost assuming Brokerage cost including STT and other taxes at Rs. 60 per lot = Rs 60
Margin money required: Rs. 40000 (approx)
Total return = 540 / 40000 = 1.35% in 30 Calendar days.

Risk: Since the above trading strategy is naked call writing, if Nifty goes above 8706 and closes above this level then there will be a loss of Rs.75 for every 1 point rise above 8706. However the chances of this happening is quite remote given more than 18 time forward PE multiple on Nifty considering an optimistic EPS assumption of Rs. 480 for Nifty for FY-17.

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