Sunday, February 1, 2009

Investment Strategy…. Options

I wanted to suggest a strategy for investment – actually wanted to do so for a long time but thought must run some simulations myself before I make public. Before you go out an grab it – remember that all suggestions carry a risk and that risk is yours and yours alone.

For this strategy I will recommend the underlying stock to be NTPC. A stock that I have spent time studying – Let me enumerate reasons that I feel will go in it’s favour. Firstly, it has a short term bearish outlook that is likely to last just a few days at the most and a long term bullish outlook (Hey! the outlooks are mine and mine only – I do not follow the idiot box). The short term bearish outlook is due to the stock trailing along the upper Bollinger Band coupled by indications likely to turn overbought (giving ideal time to enter stock on positive side – and take a negative position immediately). The long term bullish out look is based upon fundamentals including the infrastructure development of power.

Ofcourse there are tons of other considerations – so please listen up:- ntpc

  • The 14 day ATR is 8.37 I will bring out the importance a little later.
  • There is a rising wedge in making – the day it breaks this range the force will be great and 20-30 Rs move is what I expect.
  • ADX is 26.
  • The total investment as of yesterday closing was 13.25 (7.35 for call, 5.9 for put). that turns out to be Rs 21531.25/-

After this let us analyse the investment…


If the closing price on 26th Feb is between 180 to 190 – we loose it all. At 166.50/- or at Rs 203/- we recover the cost in toto. Any move below or above these two levels is pure profit. Probability of the price ending 203 is 34% and 166 is 23%.image

If it gets caught in a range as it is now – then the put should be squared off around 160 (lower end of the Bollinger band and then wait for a jump. In all the probability it will go just to the middle of the bollinger band and then bounce back. With that there is another option – though it is a bit riskier. Buy Put on monday and then buy the call near 180. that will reduce the total investment and shrink the breakeven price. But it is a fact that if we are without hedging and the price climbs up (fuel price cut is in its favour) then you loose more than what you gain. I will keep updating on this strategy. On an average the price of NTPC has moved 30 Rs in a month for last three months. This kind of move can give you good money – especially if it happens during first 15 days of the month.

Why the ATR is important is that if for 3 to 4 straight days we have directional move – it will be enough for us to be in money. With the price 189 point something on last closing why I chose nearer call and further down – put is that the basic trend of the stock for past three months (since it touched 130 odd bottom) is trending up. So I will keep on running this synthetically and hope that we turn green soon.


And yes I will be updating the market thoughts about Monday later…



Uma said...

great TA on NTPC :)

S S Cheema said...

Thanks as always Uma. Do you agree or disagree? - frankly I weigh your ideas in gold and remember - you started me on the path of options?

S S Cheema said...

Uma: can you point out the place where I can pick up a list of high beta stocks?