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Futures & Options

Closing the Tata Steel Experimental: Furious Rally, Quick Return

Tata-Steel-scaled.jpg

We posted just a day back about an experimental we had taken on December 5th. It was an arbitrage between Tata Steel’s partially paid share, as a long term call option, and a near term call option, to target at 4% return in a month.

As it turns out, a furious rally in Tata Steel means we closed the trade today, in 11 days. This is what we posted:

Exiting the Tata Steel Trade for Rs. 22,100 profit.

  • We entered at 169(long Tata Steel PP) , 42(short call)
  • Current price 190 (Tata Steel PP) and 50(short call)Exit now.
  • We will lose Rs. 8 on the call. We will make Rs. 21 on the PP.

This effectively gives us Rs. 13 profit per share. Size: 1700 shares. We exit at a decent profit of Rs. 22,000 in 11 days.

(Amount invested was Rs. 5 lakh or so, so about 4.4% as a return.)

Does This Experimental Thing Work? Can we do it again?

All such opportunities are interesting, and they might not exist all the time. We recently had:

  • an IDFC experimental where we did 50% in a few months (Read post).
  • A Reliance-PP trade (similar to the one above) for 3.6% in a week, and a POWERINDIA trade that was 2.5% in two months. (Read post)
  • Earlier in the year, we had one in Franklin’s Ultra Short Bond Fund, for 5% in 6 days. (Read post)
  • Last year, an IPAPPM trade for 7% in about two months (Read post)

These are relatively short-term trades, and in those little time frames, the risk-reward is compelling. We don’t often lose (but we have lost in the past, so it’s not guaranteed) but each time, we look at the equation and try to build a high probability of a decent return.

We’ll look for a repeat of the Tata Steel Trade if it makes sense, using January options. Or other concepts that might look interesting, and you’ll see this detailed in #experimentals on Slack. But for now, we have just one open idea, and hopefully that helps close out this year in a fun manner.

All open experimentals are at https://app.capitalmind.in/experimentals/open which is only accessible if you’re a premium member. If you aren’t one, please subscribe!

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