Investments + options = Short-term peace + long-term prosperity

Future and Option

Let us begin by acknowledging that risk management is what brought options into existence. While we realise the importance of long-term horizons in investments, we also appreciate the tactical advantage of timing.

Today we’ll talk about one such tactical way of investing. It involves adding options to existing and new investments.

Two separate sets of techniques for both, managing current investments and making fresh investments, at these elevated levels will help in capitalising on opportunities presented to us.

1. Current investments

Let us first address the current portfolio. Most of the stocks that we might have must have already gone up or are in some or more profit. Had they achieved their long-term target, we would have gone out of them. The fact that we still have these stocks means the targets are higher.

We have to take care of two things:

a. Ensure that profit seen but not booked is not missed

For this, we have a simple solution. Each one of us has a least profit-making level in any stock that is already making money. For example, for a stock X bought at 100 and trading at 112, I may have 110 as the least I would like to make. This level can be identified from a system or can be a result of individual expectations.

Action: Buy a put option of the strike of the least profit level — 110 strike in our case.

b. Managing investment and expectations

All of us have some investment objectives where the stock looks fully priced. When the market has run over 10-15 percent, we may feel 5-7 percent closer to those targets. For Example, I may feel Stock X has the objective of 115. To capitalise on such closeness, we can just accept an obligation to sell the stock at that price by selling a call option

Action: Sell call option at the strike price closest to the investment objective —115 in our case.

This will require margin but by showing just the intention to sell the investment at 115 (via selling 115 call). We can enhance returns by 0.5 -1.5 percent on a monthly basis, depending on the time of execution and closeness of the strike.

2. Fresh investments

While seeking to capitalise on an opportunity, we sometimes step back looking at the rise in prices but remember, rising stocks rise faster. At the same time, a lack of confidence after a certain run-up may not let us go more aggressive.

The solution lies in reducing the short-term risk by buying an option to sell or the put option alongside the investment.

Action: For the Stock X trading at 112 today, buy Stock X (F&O Lot size quantity) + 112.5 (closest available strike) put.

Please note:

1. Out of multiple expiries, choose the farthest expiry to buy put

2. Choose the closest expiry to sell call

3. Only for Investments in the stocks in F&O with the invested quantity greater than the F&O lot size.