Stocks Corner: How to make money in Options Trading

We asked readers to mail their queries about stocks they want to buy, sell or hold. Here's the response to their queries.

Narendar Lokwani of StockFundoo advises about good, bad and ugly stocks.

You can mail your queries to stockfundoo@rediffmail.com.

I am interested in trading in stock and nifty options. Can you please guide on how to be profitable in options trading.

Options are a major trend in Indian stock markets now, with turnover in options category being significantly higher than that of stocks, index or derivatives category. Just to take an example, on February 23, 2013, turnover for index futures at NSE was Rs 7,220 crore, turnover for stock futures was Rs 16,574 crore and turnover for index options was a whooping Rs 87,077 crore.

So options have become an instrument of choice for traders -- both retail and institutional traders -- in Indian stock markets. As our Finance Minister remarked recently, Indian markets are primarily non-delivery based, meaning majority of trades do not result in deliveries and are cash settled. Options in Indian market are cash settled as well with no delivery taking place at the option expiry date (which is always the last Thursday of every month).

Simply speaking, an option is a bet on direction of either the underlying index e.g. Nifty or a given stock. When a trader is taking a position in options, s/he is either buying or selling an options contract, and is making a bet that either the underlying instrument will rise in price or fall in price before the monthly expiry date. Obviously, if the direction is predicted accurately, the trader stands to hold a profitable position, which s/he can close at or before the expiry date.

Options are basically of two types: call option and put option.

A buyer for a call option is taking a position that underlying instrument e.g. the stock or Nifty index, would rise in value before expiry date.

A buyer of put option is taking the opposite position that the underlying instrument e.g. the stock or Nifty index, would actually fall in value before expiry date.

However, there are few more things to keep in mind, before you jump in options trading. One should be aware of the strike price and days remaining before expiry as well.

Options decay in value as their price is dependent on variable known as theta, which is also known as the rate of decay. Simply speaking, if you are an options buyer, your options will lose a little bit of value each day, even if the underlying instrument is not moving at all, due to time decay.

Due to this reason, professional traders or large institutions are biased towards options selling, rather than options buying, as they can benefit from this time decay if underlying instrument is not moving at all. However, option selling is akin to selling insurance and hence is detrimental to an individual retail trader as the potential liability can be significant if volatility increases overnight.

Another way to benefit from options is to take a combination trade in options.

A trader expecting the stock or index price to change dramatically in next few days can buy an options straddle.

A long straddle involves purchasing both a call option and a put option on the same stock or index at the same strike price and expiry date.

For example, if Infosys is coming up with its quarterly results and investors are not sure whether it will be a positive result or not, one can buy a call option and put option at same strike price, preferably closer to current stock price. If results are good, call options would rise in price and would make up a profitable trade, else if results are less than expected put options would result in profits for the trader.

Another simple way to trade in options for a trader already holding a stock is to execute a covered call.

This strategy has to be adopted in bearish markets for stocks which are not expected to rise in price. If a trader is holding a stock in cash segment, he can sell the corresponding call options for the stock. When the stock declines in price as expected, the call options would be worthless and seller of call options would get to keep the option premium which s/he would have received while selling the call options. If the stock goes up, since the trader is already holding the stock in cash market, s/he would get compensated with the price rise of his holdings. This is a useful strategy for slightly bearish markets.

This is a simple primer, however options trading is a complicated subject and one needs to do significant research before jumping into options trading. With the high options volumes witnessed in Indian markets, options trading is much more coveted than cash trading or futures trading and here to stay for long.

Disclaimer: This article is for information purpose only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products /investment products mentioned in this article or an attempt to influence the opinion or behavior of the investors /recipients.

Any use of the information /any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.

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Can you please tell me why Delta Corp is underperforming as I am holding 3263 shares @ 140 since October 2010. Will I get my investment price within 2 years?

Delta Corp is a concept stock and is the only listed Indian company in casino business. Delta Corp operates two offshore casinos in Goa and another onshore casino is coming up in Daman region. The current casino gaming capacity is about 700+ gaming consoles. Delta Corp is launching its onshore gaming operations in the Union Territory of Daman as well. Third offshore casino is also set to be operational in Goa shortly.

From its Goa based offering, Casino Royale is currently India's largest live offshore gaming casino with 480 gaming positions. Casino Caravela is another live casino offering 190 gaming positions.

In hospitality space, Delta Corp owns Daman Hospitality Pvt. Ltd (DHPL), which owns the largest resort and convention complex in Daman. The hotel is in the five-star deluxe category with 189 rooms, 29,000 sq ft of indoor events and meeting space and 70,000 sq ft of outdoor pools and events space.

Latest revenues for Delta Corp were sales of Rs 103.4 crore and a net profit of Rs 14.86 crore for the quarter ended Dec '12. This is lower in comparison to YoY revenues for Delta Corp. For the Dec 2011 quarter the revenues were Rs 146.37 crore and net profit was Rs 23.67 crore. This slowdown in revenues and profits has impacted the stock price.

Looking at charts, Rs 142 was the highest price ever for Delta and you seem to have entered at its peak. Technically support for Delta Corp is at 51, and it would be a tough bet to get Rs 140 in the near future. Resistance levels are at Rs 84 and at Rs 110. You should aim for Rs 110 in next 12-18 months.

Please provide your views on TransGene Biotek. I am holding this stock from a very long time.

Transgene Biotek is a very interesting microcap stock. It has two decades of biotech expertise and unfortunately markets don't value stocks like this properly, because of lack of visibility and business model.

Transgene began as a firm manufacturing and selling diagnostic kits and moved on to biotech research, including the research and development of vaccines. One of its first major successes was development of genetically engineered Hepatitis B vaccine technology which was sold to Serum Institute, Pune in 1999, which continues to sell vaccines based on this technology.

It has a sizable portfolio of under development drugs and any more blockbuster success from this portfolio will move the scrip in positive direction.

Looking at charts, the firm has seen crazy heydays when stock was worth Rs 300 apiece, and currently it is trading at 99 per cent discount to that price. So what has gone so wrong for Transgene?

One, promoter shareholding is less than 10 per cent. That sends the signal that effectively no one really owns the company now.

Secondly, there was an attempt at delisting, which failed. At Rs 2.63 a share, and market cap of Rs 17 crore, effectively one is getting all the IP and technology for a very small price.

Thirdly, large scale selling by GDR holders, the foreign ownership has come down from 73.44 per cent to 27.44 per cent and this has crashed the price to these penny stock levels.

Overall, support may come at Rs 2.1, and now it is as good as a lottery ticket to hold. Any more blockbuster drugs to unlock may cause the series of upper circuits once again. Existing shareholders should hold, however new investments is only for investors with high-risk appetite.

I have 1208 shares of Jain Irrigation Systems at Rs 112 per share. Please suggest what to do, I can wait for 2-3 years for good returns?

Jain Irrigation is a marquee firm in Drip Irrigation technology and has proven products and technology in this space. The firm has many firsts to its name. Jain irrigation is pioneer of micro irrigation systems in India and is the largest irrigation company in India.

Other than its irrigation division, in its Pipe Division, the firm is the largest manufacturer of Plastic Pipes in India. In its Plastic Sheet Division, firm is largest manufacturer of PVC & PC sheets in India and is the only manufacturer producing widest range of Plastic Sheets (PC & PVC) under one roof. Firm has a successful food processing business as well and is initiating new business in solar panels as well.

The challenge that Jain Irrigation faces is over dependence on making sales through government subsidies and hence the firm is making a transition away from this business model. For the latest quarter profits have in red. Revenue is flattish from past five quarters and new business model is yet to make serious inroads. Promoter holding has also come down in last quarter from 31 per cent to 27.46 per cent. The firm is a regular dividend paying company.

Technically speaking, it has a support at 60 and can be expected to reach Rs 90 levels from here on. One can average a bit here and new investors can take an entry here with a SIP kind of investing in mind.

I am holding 100 shares of SHREE RENUKA SUGAR at Rs 55 per share. Could you please suggest whether to average at current price for good profits in next 1 year?

Shree Renuka Sugars is one of leading manufacturer of sugar in India, and one of the largest sugar refiners in the world. The company operates eleven integrated sugar mills globally (four in Brazil & seven in India) and two port based refineries in India.

The company operates eleven mills globally with a total crushing capacity of 20.7 million tonnes per annum (MTPA). The company operates seven sugar mills in India with a total crushing capacity of 7.1 MTPA and two port based sugar refineries with capacity of 1.7 MTPA.

In its ethanol business, firm manufactures fuel grade ethanol that can be blended with petrol. Global distillery capacity for ethanol is 6,240 KL per day (KLPD).

In its power generation business, firm produces power from sugar cane by-products for its own consumption and also for sale to the state grids in India and Brazil. Total power cogeneration capacity is 555MW with exportable surplus of 356 MW.

Quarterly revenues of Renuka are in uptrend and have grown from Rs 697 crore in Dec 11 quarter to Rs 1846 crore in last quarter Dec 12. Firm is trading close to its book value of Rs 26.4 and promoter holding stands at 38.06 per cent which is slightly higher than 37.36 per cent two quarters ago.

Technically speaking, sugar stocks are consolidating for long and Renuka is currently at 75 per cent discount to its peak price of Rs 120. Technical Support is nearby at Rs 26 and one can average this stock at the current price or even take a fresh entry.

The Rangarajan committee report for total decontrol of sugar sector will benefit the sugar stocks tremendously.