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I have the following two positions: a) 510 quantity of Bank Nifty 46400 PE (Feb 7 expiry) bought for ₹738 b) 9,600 quantity ITC 480 CE (February expiry) bought for ₹3.30. Please advise whether to hold or exit – Rajesh Bhattacharyya
Bank Nifty (45,900): The index fell off the resistance at 46,600 last Friday. This is a strong barrier where both the 20- and 50-day moving average coincides. It is currently hovering around 45,900.
Since you are holding puts, it’s good for you that Bank Nifty has slipped below 46,000. However, note that there is support at 45,500. This can arrest the fall if not help the index in a rebound. On the other hand, there is a resistance band of 46,000-46,200.
Therefore, the next swing in price depends on the direction in which Bank Nifty breaks the 45,500-46,200 range. Crucially, you are holding weekly contracts, which exposes you to time decay risk. Hence, a consolidation at the current level can result in option price falling as time passes by. Hence, our recommendation would be to exit this trade now.
Fresh trades can be initiated along the direction of the breach of the 45,500-46,200. With respect to new trades, we suggest buying monthly options rather than weekly ones to reduce the potential loss arising out of time value loss.
ITC (₹442): The stock has been on a descent over the past month. ITC’s stock met with a resistance at ₹480, which triggered the fall. However, over the past few sessions, it has largely been charting a sideways trend. Thus, the selling momentum appears to have receded.
Moreover, the stock has a strong support between ₹434 and ₹438. The 50-week moving average lies at ₹438, making it a considerable base.
So, you can consider holding the call options.
But the strike price of 480 you hold is far from the current market price of the stock. A recovery to this level before the end of the current expiry is doubtful. Hence, you can consider liquidating this position and for the same amount, you can buy a lower strike call.
For example, 96,000 quantity means, you hold six lots of 480-strike call, which is currently trading around ₹1.3 per lot. Exiting six lots means, you’ll get an inflow of ₹7.8 (₹1.3 multiplied by 6). With this, you can buy 2 lots to 455-strike call, currently trading at around ₹4. Buying 2 lots will result in ₹8, which is almost the same as the amount that you receive by exiting 480-call.
Lowering the strike means, the probability of the option becoming in-the-money is higher.
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