Buying Deep ITM Call

Need expert advice over this scenario.

Say i want to buy 50CE @premium Rs.30 of ABC whose spot price is Rs.80. As per order book there are buyer & seller both but zerodha doesn’t allow to buy it saying illiquid option. My sole purpose is to excerise and take delivery, so no case of not able to square-off on expiry. Further position will be hedged with 1 lot of 77.5PE @ premium Rs.1.5. So in case stocks crashes to Rs.40 by expiry, i am not at risk of loosing entire 50CE premium.

Since i am already holding this stock at much higher price, averaging it @50 looks fine to me.

  1. Do correct me if iam wrong with this strategy.
  2. How can this trade be executed with zerodha.
  3. If zerodha doesn’t allows, any other broker ?

Don’t just look at the LTP but also glance at Ask-Bid prices, I am sure you will get the answer.

Not significant difference, though more than what use to be before march month, but my sole motto is to take delivery on expiry so these bid prices shouldn’t matter much. Right?

Please elaborate, my understanding so far:
1)u have bought at more than 50(strike price)+30 (premium paid)=80, say at 100.
2)u want to average down by buying at 50+30, ready to take delivery too, so why not buy in cash @80?
3)for hedging u have already bought 77.5 pe at 1.5, u can buy it even with cash buy@80.

Or am I missing anything/lots of things??

I can think of a scenario where u would like to execute such trade: when the scrip no longer remains a buying option below price of 50 keeping everything like in your example.

Practical example could be ITC,
Say in my opinion, it’s a buy till 150 (cmp 180).
So I buy 150 call at 30+
Hedge it by buying PE of say 170.

So I will get itc delivered at expiry day if it stays above 150and I pay 150 plus 30+.
I might earn few bucks through 170 pe if it falls below 170 bringing my effective buying price lower than 180.
If price goes below 150, I will AVOID buying, as it is no longer a buy call ,and I will earn money through 170 pe.

Any comments?

Yes you came close to what i wanted to ask.

i have 1lot @Rs.176 since 2018. Didn’t averaged it till date.

I can buy 1lot at 80CMP, its also fine.

But i wanted to buy at Rs.50 seeing its technical charts so thought of buying 50CE with ATM PE for hedge.

I think my calculation might be wrong, if you can correct

Lot Size: 4000
Premium to be paid for 50CE @30: Rs.1,20,000
50CE Total cost: 4000×50 = Rs.2,00,000.

What will be my final delivery price 80 or 50.
Since I have already paid 30 premium, rest 20 i need to pay on expiry. Right ? But as per your calculation though i have already paid 30 premium still i need to pay 50 more on expiry for delivery.Bit confused with this.

If its 80 then it’s useless.Better will to buy in 1000 quantity with every good fall.

Whatever premium u have paid is paid:not recoverable UNLESS u square off/sell your 50CE at prevailing market price.
At the time of delivery it will be charged as 50×lot size.
Your effective price would be 50+30.

Confused with this…Then why it said theoretically that options give choice to buy stock at desired price… Then its better to sell 50/60PE (Cash secured put). Right??

Selling Cash secured puts are better options in my opinion.
However analysing your trade-idea gave me food-for-thought for buying ITC!

If stock goes to 100, you lose 30 Rs premium but you get the stock at 50 thereby saving you Rs 20. You can treat this as savings or sell at market price at 100 to achieve 20 Rs Profit.
And yes, cash secured Put is a better option.

Actually the stock im referring is IOC. Didn’t average it out for 2yrs seeing global sentiments. But now crude is crashed and as per chart around it was looking good buy around 50. Seeing crude prices doesn’t seems for IOC to fall to 50. So was exploring if there an opportunity to buy at 50 through options. Selling OTM PE doesn’t give opportunity to buy until IOC falls below 50, can only eat premiums till that…

Btw what food for idea you got? :slight_smile:

Still churning-not yet made up my mind. But I expressed my views on ITC. I would like to buy it till it doesn’t go below say 150. So if I buy in cash today at 180 and it goes below 150, experts feel it might go to double digits as well-so I will be in deep loss.
Instead of buying in cash, I might explore buying 150 call at a premium of more than 30 and wait till expiry. If it breaks below 150 I will lose my premium (say it goes to 140, I will lose at max my premium say 35 rs. Buying at 180 and then scrip going 140 will make me poorer by 40!) and as per my original plan I will AVOID buying ITC below 150. If it stays more than 150:- may it be 160 or 250, I will get delivery and my buy price would be 150+premium paid. I might consider selling some OTM call to partially finance my long call premium.
Not able to plan properly as no juice left in April expiry, and hardly any liquidity in may series.

It was a nice interaction.
Will surely share with u if can come with a “executable” plan to trade ITC.

Just a simple query: playing with oil marketing companies in such turbulent times for crude is a good idea?