P. R. Sundar recommended an options strategy on HDFC Bank with max gain potential of 6.73%

Discussion in 'Traders Corner' started by Michael Gonsalves, Jul 17, 2022.

  1. Michael Gonsalves

    Michael Gonsalves Member Staff Member

    Jun 26, 2016
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    P. R. Sundar recommended an options strategy on HDFC Bank. The strategy has no downside risk. It makes money even if the stock opens flat or gap-up. The max gain is 6.73%. The strategy is at risk only if the stock opens aggressively higher, which appears highly unlikely given the so-so results

    Most people are afraid of dealing with options because they fear that there will be unlimited losses. However, this is not correct. Options strategies can be implemented in a manner where the loss is within defined limits of risk tolerance. Also, even if the trade goes bad, one can salvage it if one has enough capital to make adjustments.

    In fact, options strategies are a convenient way to make consistent income.

    P. R. Sundar, the noted trader and trainer recommended an options strategy in HDFC Bank on the eve of its Q1FY23 results. The strategy is known as a "Ladder Ratio". It involves buying 1x of an OTM Call and selling multiple lots of a higher OTM Call.

    The pay-off chart of the strategy is as follows:


    As one can see, there is no downside risk. If the stock opens flat or if it gaps up, the strategy yields a positive result. If the stock closes at 1400 on expiry, the trader can take home the maximum profit of 6.73% of the capital.

    The strategy also benefits from the "IV Crush" which will happen after the results are declared.

    However, the drawback of the ratio strategy is that it exposes the trader to unlimited risk on the upside. One should have the ability and capital to manage the trade in that circumstance.

    HDFC Bank's results are mediocre

    According to experts, HDFC Bank's results are mediocre and are unlikely to result in much upside price action.

    Sandip Sabharwal, the noted expert, described the results as "uninspiring" and warned that the stock will continue to under-perform.

    Danger of dealing in stock options

    It should be noted that dealing with options in stocks is fraught with more risk as compared to dealing with Index options. In fact, P. R. Sundar himself suffered a loss in excess of Rs 1 crore when his trade in HDFC Limited went horribly wrong (see P. R. Sundar suffered a loss of Rs. 1.3 Crore in HDFC Options trade. He has explained his learnings).

    He also suffered a crippling loss when a similar trade in Infosys, on the eve of its results, went haywire. However, he was able to salvage the trade by firefighting.He explained the precise adjustment trades in a youTube video embedded below.

    He also cautioned that traders with less than Rs 1 crore of capital should avoid trading stock options because the adjustment trades require huge capital.