Covered Call On SBI Options

Covered call is one of the easiest option strategy and can be used by  any investor who has little bit of understanding of derivatives market or is ready to learn by investing some time.

Strategy Involves buying the underlying shares of stock (SBI in this case) and also write call options on the same, there are 2 ways in which you can write options -

• In the money (ITM) call options- Write call options for strike price closer or less than the spot price.It is usually used by people who are slightly bearish on the stock or want to make some profit if the stock has already moved upwards.
• Out of Money (OTM) call options - Traders who are not expecting much rise in the price of the options will write options for strike price higher than spot price.

INVESTMENT (Dec 1,2016)

Stock of SBI, Qty # 3000 at INR 255

Total Investment = 7,65,000

INFLOW (Dec 1, 2016)

Sold call option for strike 250 and Premium of INR 13.40

Inflow => 3000 (lot size) X 13.40 = 40,200

PROFIT GRAPH  

in the chart 1,2,3,4,5 represent 230,240,250,260 & 270 respectively

CONCLUSION

This strategy works best when you expect minimum movement in the stock price or are already holding onto the stock and want to make some quick gain from the current portfolio.


If you notice in the table, it helps to recoup some of the losses but can also limit the upside potential, so please choose as per your portfolio and risk appetite.  

De Monetization & Inflation - II

It has been one week since my last post, Demonetization has gone to next phase where 2000 notes are now available from ATMs (Metros cities at least) and lines have started reducing in certain places - saw Bhopal in one of the news channel yesterday.

News of blacks money caught in various states are coming everyday and experts are commenting that there could be 2 Lakh crore rupees which may not come to market at all, leading to substantial reduction in M0 and then M3. Inflation is definitely going to come down and there are other changes that we may soon start to notice -

• Pick up in Non Cash Transactions - E-Wallet/Debit/Credit/On line payments will see jump and more business.
• Banks will have more cash which will lead to reduction in interest rates/deposit rates.
• Reduced inflation will also make good case for reduction in interest rates.
• Credit off take will pick up since Banks have to lend to make up for the increased cost by way of interest that they have to pay on deposits.
• Tax compliance shall improve as people will fear further such moves by Govt. Increased tax collection may reduce  tax rates and will also improve overall balance sheet of Govt.

One major disadvantage will be impact on business for next 2 months or so since there will be liquidity crunch in the market however there are lot of business who have started accepting Online/E-Wallet Payments.

De Monetization & Inflation

Recent move by GOI on 500 and 1000 notes, how is it going to impact the inflation?

Before we go on to understand the impact of above, let us first go through money supply

Money Supply equation gets defined by MV = PT where

M Money supply
V velocity of money
P Price of Goods
T Transactions

As established by many researchers,money supply has direct relation with Price of goods hence inflation.

In Indian context, money supply is defined as total circulation of notes and time/savings deposit in the banking system, Number for Oct28,2016 is INR 124 Lakh Crore - https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=38538

Total Currency is 17 Lakh Crore and Deposits are close to 107 Lakh crore, making the overall money supply in the market to be 124Lakh Crore. With cash reserve ratio of 4% - total currency of 17 Lakh Crore can in fact create money supply of 1000 Lakh crore but SLR keeps this in check.

Now if GOI reduces the currency notes in circulation, i don't think this will have much impact until unless they reduce the amount by big margin and don't change SLR & CRR.

We will need to wait until RBI publishes the next data !!

Real Interest Rates - India Vs Brazil

With the war of words raged by S.Swamy against RBI Governer R Rajan, I thought it will be interesting to see if R.Rajan has really done anything wrong. Below are two graphs - first representing the WPI Index and Inflation while second showing the Repo Rate.

As and when there has been increase in the the inflation there has been a equal/relative increase in the repo rate to curb the inflation. During 2008/2009 there was sharp reduction of interest rates because inflation was low and industry was in dire need of rate cuts.

Now though the inflation is within the comfortable limits but it has started to pick up (Jan'16-Mar'16) and it does help to cut rates too quickly to increase it later when situation is not as demanding as it was in 2008.

Brazil Case - In Brazil the economy is already undergoing recession but Central bank has decided to keep the interest rates high to curb inflation which is reducing the buying power of households. As it reads, inflation is near 10.5% while interest rates are kept at 14.25%.

http://www.bcb.gov.br/?INTEREST

http://www.ft.com/intl/cms/s/0/6488250e-e0d6-11e5-96b7-9f778349aba2.html#axzz4A3U3OJWE 

Real Interest Rate

Real Interest Rate = Repo Rate - Inflation Rate

More is the difference between the Repo Rate, the more attractive deposits become and attracts more money to banks and further reducing liquidity in the market which can help to reduce inflation.

In case of Brazil it is close to 4% while in our case it is almost 1.5% which outlines how far our governor has gone to reduce the rates and help businesses which as per S.Swamy, has been ruined by him.

Has he(R.Rajan) gone too far since inflation already showing its heads up and rates could be increased soon to be back on track which will further make S.Sway unhappy?? only time will tell.