Option trade on ICICI Bank
June 27, 2014 - 11:21 amOn May 22 we closed a short term option trade on ICICI Bank (IBN) where the stock was trading around $52 for a solid profit. Since then the stock has retreated as reactions to the election outcome in India have worn off, and stocks have also pulled back. Today IBN trades at $48.61, and we still like exposure to that economy as some diversifaction outside of the US. However, the stock sits right on its 50 DMA which is $48.23 as of today.
While this trade may not be a huge money maker, we can still profit by selling Puts on IBN and collecting premium if the stock trades in a relative range. Considering that it has pulled back from a high of over $52 to $48.61 now, we want to have a little downside protection before we buy the stock. So we are selling the IBN Aug $44 Puts today for .78 cents. If the stock stays drops below $43.22 then we'll buy the stock at $44 minus the premium that we collected for a net entry price of $43.22. However if the stock remains above $43.22 before August expiration then we'll collect 100% of the premium.
Volatility is very low right now, in fact near 7 year lows, so option premiums are not paying much. While Calls and Puts are cheap, the stock market itself is also at a level where it's tough to gauge if it goes higher or lower in the short term. We see a slight pullback in the near term followed by more gains, however any rally from here is to be rented and not owned.