Query on how to solve this Option Problem

Hello everyone. I really need help big time. I am pursuing MBA and I have a very important assignment to be solved on Options. It would be really kind if someone can explain in detail the solution please.

here goes-
An investor holds 5000 shares of Bajaj Finance in his portfolio on October 3. After the
recent strong run-up in the share price the investor is of the opinion that the upside on
the shares is capped for now. He believes that the share price will not rise above Rs.1900
till end of October. What option strategy should he follow in this case? Construct the
strategy and compute the daily unrealized gains and losses on the strategy assuming that
the positions are entered at closing prices of October 3 and unwound on expiry date of
October 2017. Use historical options data from NSE website.

Thanks in advance

@Lets_Invest @Srinivas @Spaceship

I know a person who is dam good in Options.
It’s a pass from my side to @nithin :+1:

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Hmm… this is quite straight forward. If you believe that price won’t go above Rs 1900, you would have shorted/written the 1900 calls on Bajaj Finance. Strategy also called covered calls.

Since Bajaj finance closed below 1900, the entire premium received for shorting on October 3rd would be your profit.

Option historical prices aren’t available on Kite. So you will have to download the bhavcopy from NSE website for everyday in october. You will be able to find out what was the closing price of 1900 CE of Bajaj finance. You can then do a daily P&L from 3rd till the october expiry.

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So as the question asks to calculate unrealized gain/losses for each day, would we have to calculate profit or loss only on the call option premium shorted. or will we also have to take into account the 5000 shares that we own. and combine both the profit and loss ? or profit/loss for shares would be separate and profit loss on shorting calls will be separate?

If the person holds 5000 shares in delivery then you need to clarify about his buying price. He can write a call of 1950 strike range when the price moved up beyond 1900 against the view of investor.

His position is hedged already because he holds shares in delivery so writing call in this case may not be a risk & also the share is already in overbought range further above by 1900 so the price is expected to decline in upcoming days significantly.

Bajaj finance is your investment, option is like a hedging trade. So options P&L separately. If you took both these positions at the same time as a trade, then combined P&L

The price of bajaj finance futures (underlying) moved upto 1985 range. So 1950 levels should have been good strike price to consider. Because investor would be tracking price movement daily & would not blindly enter into trade at 1900 strike because he is also long on 5000 shares in delivery!!

The price moved upto 1985 levels. So if written a call at 1900 would go in loss position for 1 week.

Best strike price to choose would be 1950 when futures were trading in same range. But yes the price did further moved till 1985 but it wont create panic as the investor is already long in delivery and 1950 strike sounds good enough for the underlying to decline from 1985 levels to below 1950 by expiry.

but the trader is in an assumption that it wont cross 1900 … so ideally writing 1900 CE was the best

Well if he’s assuming it & writes a call at 1900 strike then I doubt if the person will continue to hold it till 1985 levels. He would already exit it in loss. This happens all the time. You are only looking past data but on a real time you would be tracking the prices daily & I doubt if anyone will continue to hold it in loss when expiry is not far & underlying is at 1985 levels. You would not expect a closing below 1900 by expiry! & rather prefer to close the position.

From the problem given , we can assume that he/she is an INVESTOR and doesnt want to sell his/her shares even after the october expiry.

Trader needs to close only his option postions that inittaed on 3rd to be closed on octover expiry.

  1. Sell 1900 CE for 49Rs ( investor is confident that the price wont cross 1900Rs )
  2. Buy 1860 PE or 1840 PE for 59Rs or 43Rs ( Protect the equity )

Net Pft in the option position with 1900 CE & 1860 PE = 49 -59 + 115 = 105Rs
Net Pft in the option position with 1900 CE & 1840 PE = 49 -43 + 92 = 98Rs

Why would u waste money buying a put when you are already writing a call !!

to protect the portfolio …

in the given date, BAjFINANCE moved 1868 to 1747 … down by 121Rs
with the above strategy we might have minimized the loss to 16Rs or 23Rs

Brother we were discussing only October series :smile:

Bro , i took october series data :roll_eyes:

On October 3rd price BAJFINANCE stock was 1868 and on the expiry day it closed at 1747.
And 1900 CE on oct 3rd was 49RS , 1860 PE was 59Rs and that of 1840 PE was 43Rs ( approximately ).
On october expirt they closed at 0 Rs , 115 Rs and 92Rs respectively.

This looks like a typical assignment in CFA 1 option basics on how to handle the portfolio.

As the three months high of BAJAJ FINANCE is 1985.90 there may be the possibility that in future the share shows some good movement because the stock for which you are asking it is fundamentally good

Apart from this risk an integral part of any investment to avoid or reduce it in engagging some other financial instrument to hedge the stock would be best alternative for it.

that can be done through buying a put option of 1900 strike price if that individual have fear that from now stock price wiil not increase will no more increase , here above put option give you a right to sell that underlying stock at 1900 only that you can exercise when the price of stock decreasing .

there may be the possibility if the price of stock sudden increases then you will not exercise the contract and can sell it to another person,


Lol bro why would anyone waste money buying unnecessary PUTS when you are already writing call of 1900 & also have long positions in delivery. Also you would have ended up in losses wherein the underlying went high upto 1985 !!! Would u have still kept your position open even after suffering big M2M settlement losses.

Your call position would be in loss wherein u wrote 1900 CE , your PUT bought at 1840 or 1860 both would be in loss when underlying was going upto 1985 .

Having suffered multiple M2M losses in both positions, would you still keep continuing holding your positions indefinitely expecting a major downside? !!

If this is your strategy then I m sorry to say anything further!!

You are only justifying a strategy based on analysing past data!! Realtime trading with open positions in F&O you would have exited in loss.

dude … you are not getting the plot here …

here INVESTOR needs to protect his HIS LONG POSITION
given assumption is that stock price wont go above 1900 ( GIVEN ) …

  1. so he should write 1900 CE ( we both agree here )
  2. now he needs to protect his long equity. he SHOULD either buy 1860 PE or 1840 PE to protect his long equity

on october 3rd we dont know whether it goes to 2000Rs or 1750Rs. but we should work on the best solution for the given problem

Your call position would be in loss wherein u wrote 1900 CE , your PUT bought at 1840 or 1860 both would be in loss when underlying was going upto 1985 .

We are long in equity , and net will be still in +ve even if it closed on 1985 on the expiry day [ 49 -59 +1985 - 85 = +22Rs ].
If we had NOT BOUGHT the puts we will be in net -ve [ 49 -1868 + 1747 = -72Rs ]

This is an assignment bro.
Assume you are working in PMS and you are assigned a task. You have to protect BAJFINANCE postion and your TA team given you a report that 1900 is the peak.
Cant explain further if you cant get this .

If this is my position and i conclude that BAJFIN wont cross 1900 aftre the upmove , i would just liquidate the entire holding and wait for the downside to enter again ( before expiry ).

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@tushjain00 I hope you got your Assignment done.
Now, you have multiple answers.
Submit assignment as soon as possible. :+1:

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