We resume after the weekend.
While finalizing our stock selections for Option Buying, we generally keep these factors in view:
Trend– Whether the stock is showing strength or weakness over a 30 day and two week period.
Number of contracts traded should be at least around 100.
Most important is the Implied Volatility. Barring a few cases, we go far Out of Money Options in Volatile Stocks so that with sudden price movement in right direction, we get good returns. There is no percentage in OTM Options in low volatility stocks.
But then there is extremely high volatility in certain stocks which again complicates the trades. Extreme volatility leads to very high premiums which makes earning a profit very difficult. I agree that real big profits can come out of such trades, but then losses could also be very big.
Let us have a look at some of these VERY VOLATILE options only to study the possibilities. No trade is being suggested in any of them.
Jaiprakash Associates :
The price on Friday was Rs. 14.60.
Look at the price of CALL 15. It is Rs. 1.25. A premium of more than 8%.
Similarly PUT 15 has a premium of Rs. 1.70 as it is ITM by Rs. 0.40.
Implied Volatilty is near 100 for these strikes.
Moves of more than 10% should happen very quickly to make the Option Worthwhile. Lot Size of 28000 is also no help as the outflow will be around Rs. 35000-40000.
Going for CALL 17.5 or PUT 12.50 would mean really far strikes.
With luck, this can make money but difficult.
I used to trade Options in this stock almost on a daily basis three years ago. It was volatile then but has become extremely volatile now.
Look at the IV ( Implied Volatility ) column in the Option Chain below:
Figure of 140 tells the story. PUT 15 is 10% away but the premium is Rs. 1.65 which is 11% of the stock price. A real huge premium to pay. To get any gain out of this trade, we would need stock to move down by more than 25%. A tough order indeed.
A small gain of few points may be possible but we are in it for all or nothing.
PC Jewellers :
It was most volatile stock last month. Again it is volatile and so much that the strikes are set at Rs. 50 distance. We are having Rs. 50 strikes in NIFTY which quotes above 10000 and here is a Rs. 155 stock with Option Strikes set at Rs. 50 gaps.
See the IV and be impressed.
No trade suggested in this too.
Selections Today :
We have reviewed what not to do. That is easy. The real question is what should we buying.
One of the readers had made a selection based on all the parameters and I agree with him.
The stock is at 52 week high.
Volumes in Options are okay.
Implied Volatility is near 40. Not extreme like in the above examples, not very low.
The stock is KPIT.
CALL 320 at Rs. 3.20 would be my selection. Lot Size is 4500.
The other selection was made in previous post:
I am repeating it here:’
PNB PUT 80 at Rs. 3.00.
Along with the 7 selections made on June 01, we now have a total of 9 Options to monitor. Calls–3 ( KPIT, M&M and INDUSINDBK) Puts– 6 ( PNB, BHEL, SBIN, BHARTIAIRTEL, RELCAPITAL and VEDL)
With US Markets closing higher on Friday, we may see some up move today. Let us see how our Options work out.
Trade cautiously, trade profitably, keep looking for opportunities.
Disclaimer: This post and examples are for teaching purpose only and are not meant as advice/suggestion to trade in these stocks. Trading in Futures and Options can lead to big losses and should be done with appropriate knowledge and advice only. Mentioning the stocks here does not imply that I have a trading position or likely to take a trade in these stocks.