Selling PE on chosen stocks

F&O
1

Hello All,

I am planning to sell PE’s of the attached 4 stocks based on chart support levels and fundamentals where I am happy to take delivery when it comes to this price. I also know if the market came crashing, I have to take delivery of stocks at the shorted strikes and aware of the losses too. Is there anything else to know of because I am planning to do this on a monthly basis as a cash secured put.

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2

Looks good, provided you are fine with buying these stocks at these levels.

Some tips:

  • If any stock ends up ITM (e.g. Coal India ends at 405), you don’t necessarily have to buy the stock in the same month. You can sell another 410 PE next month (with much higher premium) and rinse and repeat. Only if a stock ends deep in the money that you should buy the stock.

  • Make sure you don’t use cash as margin, but rather some liquid fund ETF. That will provide an additional 7% return per annum which will add up over time.

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3

Thanks for the response DCD.

Yes, I am going to trade with pledged margin only. However for the first point, if Coal India goes to 405, i will be assigned to buy for sure right, cant settle in cash like indices and just move on right? Kindly confirm.

4

Hi @Mahesh2020

Don’t hold your in-the-money puts for Physical delivery. As it is very costly (Zerodha charges 0.25% brokerage). You can exit your Put on expiry date or the day before and either sell next month PE, or buy the shares at spot price at the same time (which is 0% brokerage from Zerodha)

thanks

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5

Hi @dcd , if I close the position before expiry, then assuming the premium hike, because of ITM character the loss widens based on how deep of ITM it is. But you suggest to book loss here in Options and enter into buying at the CMP to save 0.25%. Is this right?

6

Hi @Mahesh2020

Let us take 3 possibilities:

  1. Coal India is around 450 levels at expiry. Here you can simply square off your put for 0.05 or 0.1 Rs. on expiry date and book profit. Then you can decide whether to sell the same stock put for next month or perhaps there are better candidates.

  2. Coal India is ITM, but not much, say Coal India is at 405. Now your put will be at some loss, but it is notional (you were ready to buy at 410, remember?). The price of the put on expiry will be 5 or 5.1, you can book this loss, and sell next month Put at much higher premium this time (as this option is not far out of money the next month premium will be quite good). In fact, now this Put has the option to give you very handsome returns if following month Coal India recovers and ends above 410.

  3. Coal India Put is deep in-the money, say Coal India is at 370. Now it is very difficult to keep rotating the puts due to illiquidity, low time premium etc. Now I suggest you to book loss on expiry day (the Put will be valued around Rs. 40), and buy Coal India at Rs. 370, with no brokerage (only STT etc. will be charged). Now your loss is notional as you can hold Coal India for long term till it comes into profit.

Hope it helps.

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7

I didn’t know that, looks like I have ended up paying too much breakage in the past. How did you get to know about this?

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8

Hi @dcd ,

Point 1 is crystal clear

Regarding point 2: We need to book loss for around 5*2100 = 10500 in options trade and you wanted to sell same strike of 410 which is again a deep ITM for the upcoming month or should I go lower than 350 since the spot is at 370 right? Assuming this much fall happens on fundamental issues, then again, we will be in deep trouble if we sell 410 PE for the next month

Regarding point 3: Even though the loss for stocks is notional, I must book 40*2100 = 84000 in the options trade as loss, hope this is correct. However, if stock recovers, I might come into profit in the future

9

Hi @Divaksh

Please see this link. The 0.25% is applied to the whole contract value, so if a Coal India contract is of 6 Lakhs value, the brokerage will Rs. 1500 + GST.

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10

Hi @Mahesh2020

  1. If Coal India is at 405, the “Coal India 410 PE” will be ITM, but not Deep ITM. Deep ITM will be when say Coal India is trading less than 380. The time premium will be quite good for such close strikes.

  2. Yes that is correct. That is the whole point of covered calls or cash secured puts. If you say, “I don’t mind buying this stock at XYZ price”, you better mean it and have real cash for it :slight_smile: otherwise you will be speculating and may drift away from the original purpose of your setup.

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11

Hi @DCD,

Point 2&3 are now clear, many thanks for your information

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12

Hi!

a few queries in ur excel sheet:

  1. what is the relevance of column of dividend yield here?

  2. how did u calculate leverage?

  3. full form of BE%?

Regards

13

Hello @sandeepsethi,

  1. It is just how much of a dividend yield that was provided by that stocks for the last year. The relevance is, I assume myself as lending my money to someone for this % of dividend in case I take delivery.
  2. Delivery/Margin is what I call it as leverage for a stock that the exchange gives in FNO. Assuming I have 7.2 times of leverage when compared to the cost, if I take delivery
  3. BE% is break even % from where I will start making loss, in all our cases, the downside of a stock.

Hope I am clear. Let me know if you needed more information.

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14

Thank u Mahesh jee

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15

In this strategy , if a stock dives down you can buy the stock at the lower rate , but you will incur loss on sold PUT , so to avoid that , you can buy another PUT far below the sold PUT

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16

Then it is basically a bull put spread right?

17

Yes , But if you really wants to take delivery of the stock , you need to manage the Trade keeping in mind that the Option selling in stocks are highly risky.

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18

I think this strategy is useful for you :slightly_smiling_face:

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