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Play a Put Ladder on SBI as a hedge: Analysts

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.

, ET Bureau|
Dec 10, 2019, 08.06 AM IST
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Savvy investors holding shares of State Bank of India could initiate a short put ladder on the derivatives counter as a hedge against the limited expected downside, said analysts.

“While the stock is the preferred banking name among the PSU lenders, some headwinds can be seen taking the stock to 290 odd levels,” said Rajesh Palviya, derivatives head at Axis Securities who recommends the strategy.

The strategy comprises purchase of a 310-strike put option, sale of one 300-strike and sale of one 290-strike put option. Based on Monday’s closing, the purchased 310 costs Rs 8.2 a share (3,000 shares make one contract) while the sale of the 300 and 290 strikes 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 one’s broker. 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 are worth a combined Rs 50.

“The odds shorten for the trade as SBI isn’t likely to expire below Rs 290 in the short term,” said Chandan 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.

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