A disclosure first – This idea was originally brought to me by ninad during our discussions and I have been analyzing it with ninad and arpit since then. Its amazing how soon one forgets the source of an idea, especially a successful one 🙂
Since my last post on sulzer, the price has corrected to around 1200 levels and is steady at this level. This is roughly around 85-90% of my estimate of fair value. I am now planning to exit this stock over the next few weeks.
The delisting process would take a few months and I plan to keep a track of the stock. If the price drops or some new information comes up to indicate a higher price for delisting, I may initiate a new position.
The returns ofcourse would be 8-10% at best, as the major gains are generally made at the time of the announcement. However an 8-10% gain over a period of 2-3 months is not a bad deal and actually fairly good from an arbitrage point of view. So stay tuned!
On options trade
I have received several responses via comments and emails. The key point of the post is a focus on risk. The most critical aspect when dealing with options to understand and manage risk. I am looking at two ways of doing so
Position size – I have created a small position as I am still a novice in options. If I lose money, it will sting me but not kill me. On the other hand a gain would pay for my coffee for a month – I have expensive tastes !
Focus on downside – My focus has been on much I can lose. One of the reason to post was to hear from other readers on the likely risks in this approach. If you feel that risks which I have not considered in the post, please leave me a comment or drop me an email at rohitc99@indiatimes.com.
A follow up on sulzer
A
Dear Rohit,Whatever little understanding of market I have as a trader,I found that the game is options is all about timing.and if you look at history it is always profitable to buy the options when VIX are at historic low levels and in same way writing options are profitable when VIX are at higher levels,though the caveat lies in judging the direction of the wind:-))And broadly the pricing depends on three major factors like VIX,Time Value and EMA of that particular stock.Currently the VIX of Nifty is below 18,and that does not give me confidence of writing options,but if we evaluate the various macro factors,then it does make sense to protect our LT portfolio by writing covered calls.RegardsAnurag Awasthi
hi anuragyes, writing covered calls works when implied volatility is high. but i would never ever write naked calls ..too much riskthere are too many things which can go wrong. if one writes naked options, you may money 99 times and go wrong the 100th time which will kill you. the odds are not in favor of a small investor.i am not sure how you will protect your LT protfolio by writing covered calls ? maybe increase the returns a bit ..you could set a collar ..but that is getting too fnacy. i personally just prefer to hold and wait for the stocks reach fair value. keeping it simple helps
Dear Rohit,I agree that protecting LT by covered calls,is not at all possible.Sir,I remember you mentioned in one of your post in dec 2009 regarding inflation and interest rate hike,and those signs are already showing,what would be your future analysis on the same.please share.RegardsAnurag Awasthi
Please tell us your view of Tata Investment Corporation. I personally feel its a good fundamental company. i would love to hear from you about this.RegardsMansukh