INSUBCONTINENT EXCLUSIVE:
Savvy investors holding shares of State Bank of India could initiate a short put ladder on the derivatives counter as a hedge against the
comprises purchase of a 310-strike put option, sale of one 300-strike and sale of one 290-strike put option
yield a combined Rs 8.9, making the strategy a net credit one as the trader gets 70 paise
All contracts expire on December 26.
But, traders should note sale of options entails placing a margin with the clearing corporation through
The margin per option sold equals that for going long or short one futures contract
That could also take the form of shares as collateral.
If SBI expires at or above 310, the trader gets to keep the 70 paise, the credit, but
ends up paying brokerage on all three lots
The maximum profit of Rs 10 happens if SBI expires at 290
Here the purchased 310 put ends up in the money by 20, while the 300 put is 10 ITM and the 290 put is zero
After paying off the buyer of the 300 put Rs 10, the trader is left with Rs 10 (excluding brokerage and taxes).
Every point below 290
reduces the profit until 280, the lower break-even point below which unlimited losses begin because of the sale of a lower strike put.
At
280, the 310 put is Rs 30 ITM, the sold 300 put is 20 ITM while the sold 290 put is 10 ITM, or at no loss no profit level
Assume SBI expires at Rs 270
The 310 is 40 ITM, the 300 sold put is 30 ITM and the 290 put is 20 ITM, hitting the trader with a loss of Rs 10 as the sold 300 and 290 put
Taparia, derivatives analyst at Motilal Oswal Financial Services, who suggests the strategy
He also added that 330-340 levels act as effective hurdle for the stock.