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A bear put spread is a vertical spread in which you are long the higher strike price put and short the lower strike price put, both of which expire in the same month.

The strike price of the short strike, represented by point A, is lower than the strike price of the long put, represented by point B, implying that the investor will always have to pay for the deal. The fundamental goal of the short put is to help pay for the upfront cost of the long put.

Profit/Loss

A bear put spread’s maximum profit is derived by subtracting the difference between the two strike prices from the premium paid. At expiration, the strike price falls below the lower strike price.

The maximum loss is the trade’s cost. At expiration, the stock must trade over the upper strike price.

Breakeven

The breakeven point for a bear put spread is the higher strike price minus the trade cost.

Breakeven = long put strike – debit paid

Example

A Rs.2.50 bear put spread would consist of buying a 50-strike price put and selling a 40-strike price put, with a Rs.10 wide strike width (50-40), which is the maximum profit the investor could make on the trade, minus the premium paid to enter the trade, in our example Rs.2.50, leaving the investor with a maximum profit of Rs.7.50.

If this put spread is out of the money, time decay works against the investor because they need more time for this transaction to become lucrative. If the vertical has both strikes in the money, time would be on the investor’s side since they would want this transaction to end as soon as possible so that there is no more time for it to go against them.

Conclusion

This is not a method that should be used frequently until there is indication of an expected downward swing.

Without that, it’s a lower-probability strategy that relies on the stock falling in price before the expiration date. It needs less capital to engage than merely acquiring shares, implying lower risk, but it is still seen as a trade with a lower possibility of success.

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The Bull Put Spread is a vertical spread strategy in which the investor sells a higher strike price put option, represented by point B, and buys a lower strike price put option, represented by point A, both inside the same expiration month.

The investor will receive a premium or credit, as the higher strike price put will have more value than the lower strike price put.

If the investor believes the market will remain flat or rise, they will employ this method. The lower put option is used as a hedge in case the market trades lower, allowing the investor to limit their maximum loss.

Profit/Loss

• The maximum profit an investor can expect from this trade is the credit they received. The investor will profit the most if the stock closes above the higher strike price at expiration.

• The maximum loss can be computed by subtracting the strike prices from the premium received. This is achieved when the strike price at expiration exceeds the aforementioned strike price.

Breakeven

A bull put spread’s breakeven point is the higher strike price minus the premium received.

Breakeven = short put strike – premium received

Example

A 70-75 bull put spread worth Rs.2 would involve selling a 75-strike price put and purchasing a 70-strike price put. If the stock remained above the 75-strike price, the maximum win would be Rs.2.

Having a Rs.5 strike width (70-75), reflecting the maximum loss if the deal ends below both strike prices, less the premium earned to enter the trade, in our example Rs.2, leaving the investor with a maximum loss of Rs.3.

If the put spread is out of the money, time decay works in the investor’s favour since they want the deal to expire so they may keep the full premium received. If the vertical has both strikes in the money, time will work against the investor since they will want this trade to continue, providing them more time for the stock to grow in price.

Conclusion

This is a wonderful strategy to adopt if an investor believes a stock is going up but is unsure of the timing or wants to provide himself a buffer in case the market trades sideways or slightly lower.

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Within the same expiration month, the bear call spread is a vertical spread options strategy in which the investor sells a lower strike price call option, represented by point A, and buys a higher strike price call option, represented by point B. The investor will earn a premium or credit since the lower strike price call is more valuable than the higher strike price call.

An investor entering this trade has a potential profit that is limited to the premium they received when they executed the trade and a potential loss once the stock raises above their short strike price in an amount larger than the premium they received.

If the investor believes the market will remain flat or fall, they will employ this method. The higher call is used as a hedge in case the market trades higher, allowing the investor to limit their maximum loss.

The Bear Call Spread Strategy

The bear call spread is an options strategy that works by allowing the options to decay gradually day by day until the expiration date, resulting in both options expiring worthless and the investor keeping the entire premium.

• It is better to use the approach when it is anticipated that a stock will trade sideways or fall in price.

• This method is popular among many traders and is appropriate for all investors since it allows them to implement a high probability trade with minimum risk.

When implied volatility is high, the vertical call spread is most effective because option pricing rises, allowing the trader to earn a bigger premium on the deal.

Profit/Loss

The maximum profit an investor can expect from this trade is the credit or premium obtained. If the stock closes below the lower strike price at expiration, the investor will earn the most.

• The maximum loss can be estimated by subtracting the premium received from the difference between the two strike prices. On the expiration date, the stock price must end above the higher strike price.

• In general, if short calls expire in the money, the trader will be assigned the stock position upon expiry. When calls go deep into the money, though, there is always the possibility of early assignment.

Breakeven

The breakeven point for a bear call spread is the lower strike price plus the trade cost.

Breakeven = short call strike + premium received

Example

A Rs.2 55-60 call spread consists of selling a 55-strike price call and purchasing a 60-strike price call. If the stock stays below the strike price of 55, the Rs.2 premium represents the maximum win.

With a Rs.5 wide strike width (60 -55), the maximum loss is Rs.3, less the premium earned to enter the transaction, in our example Rs.2, leaving the investor with a maximum loss of Rs.3.

If the vertical has both strikes in the money, time will work against the investor since they will want this trade to continue, giving them more time for the stock to plummet in price.

Conclusion

This is a wonderful strategy to adopt if an investor believes a stock is trading sideways or lower but is unsure of the timing or wants to provide themselves a buffer in case the market goes sideways or slightly up.

Many traders flocked to the bear call spread because of its high potential of success and little risk, but if the stock moves against them, they might lose significantly more than their initial investment. Those interested in executing a spread with a lesser probability of success but a far lower potential loss might consider the bear put spread or the bull call spread.

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The strike price of the short call, represented by point B, is higher than the strike price of the long call, represented by point A, implying that the investor will always have to pay for the trade. The primary goal of the short call is to help pay for the initial cost of the lengthy conversation.

Profit/Loss

• A bull call spread’s maximum profit is computed by subtracting the difference between the two strike prices from the premium paid. This is achieved when the strike price at expiration exceeds the aforementioned strike price

• The maximum loss is the trade’s cost. At expiration, the stock must trade below the lower strike price.

Breakeven

A bull call spread’s breakeven point is the lower strike price plus the cost of the trade.

Breakeven = long call strike + net debit paid

Example

A Rs.2.50 call spread would consist of buying a 55-strike price call and selling a 65-strike price call, with a Rs.10 wide strike width (65 -55), which is the maximum profit the investor could make on the trade, minus the premium paid to enter the trade, in our example Rs.2.50, leaving the investor with a maximum profit of Rs.7.50.

If the vertical has both strikes in the money, time would be on the investor’s side since they would want this transaction to end as soon as possible so that there is no more time for it to go against them.

Conclusion

The recommendation, this is not a strategy that should be executed very often unless there is evidence of an expected upward movement. Without that it’s a lower probability of success trade that relies on a stock to trade higher.

It needs less capital to engage than merely acquiring shares, implying lower risk, but it is still seen as a trade with a lower possibility of success.

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The covered call strategy entails the trader placing a call option against stock that they intend to buy or already own. In addition to collecting a premium for the sell, the holder of a covered call gains access to the benefits of owning the underlying asset all the way up to the strike price, where the stock would be called away.

• The covered call strategy has numerous applications. Some utilise the method to increase profits on stocks they own while markets are basically flat.

• This is popular option strategy among traders, because, besides the premium, investors can benefit from capital gains should the underlying asset increase in value. Out of the money (OTM) call trades are placed when the outlook is neutral to bullish.

When to Make a Covered Call

The covered call strategy is often initiated 30 to 60 days before the expiration date. This enables the trader to profit from time decay. Of course, the best moment to adopt the plan is determined by the investor’s objectives.

• If the goal is to sell calls and profit from the stock, a small difference between the stock price and the strike price is preferable. If you want to sell both the stock and the call, you should be in a position where the calls are assigned.

• Some investors sell calls and purchase stocks at the same time. This strategy is called a buy-write, and it’s used to decrease the cost basis of recently purchased stocks. With cover calls, there is no additional margin requirements on the stock as you own it. 

• When selling the call, a suitable premium is 2% of the current stock price (the premium divided by the stock price). You should determine how much profit you can make from the technique and set a premium accordingly. If implied volatility is high, investors will obtain a bigger premium when shorting options.

For this reason, many investors like holding the stock, and then sell call options with a high premium to help cushion the risk of loss from a downward movement in the stock

Profit/Loss

The maximum profit with this strategy is the difference between the strike price and the current stock, plus the premium received for selling the call options contract. Beware of the pitfalls of this strategy, though. The potential loss of this strategy can be substantial.

This loss occurs when the underlying asset’s price falls. In contrast to stock trading, the downside is slightly less severe because to the premium earned, which will buffer any downward stock movement.

Breakeven

The gap between the current stock price and the premium paid for selling call options is the breakeven point.

Example

Consider the following example to better understand OTM calls: In May, a trader purchases 100 shares of stock at Rs.20 and writes a Rs.2 OTM call on June 25. If the stock price is Rs.28 when the option expires, the strike price of Rs.25 is less than the stock price.

The writer will incur a loss on the shares but profit on the calls since they will expire worthless. If the price had dropped to Rs.17, the trader would have lost Rs.3, but because they sold calls for Rs.2, their net loss would be Rs.1.

Conclusion

Covered calls are a great way to generate additional income from owning stock and suitable for investors with all skill levels.

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The investor uses the short put option technique to wager on whether the stock will climb or remain flat until the option expires. If the put option expires worthless or in the money (above the strike price), the trader keeps the entire premium, representing their maximum profit on the investment.

• When it comes to single option trades, selling a put option is one of two bull market strategies, the other being the long call option.

• As seen in the graph, if the buyer wishes to exercise the contract, the seller of the short put is compelled to purchase the stock, in most cases 100 shares per contract, at the strike price A.

• Selling a put option can be beneficial to investors since it allows them to improve their revenue by obtaining a premium from other traders who believe the stock will decrease. As a result, while adopting the short put technique, the investor receives the premium, which protects them from a flat market with no change.

• When selling put options, an investor should keep a close eye on volatility levels. The higher the volatility, the greater the danger to the investor, but the larger the premium for taking on this type of options bet.

Short puts are utilised to get a better price on pricey stocks. In this case, an investor would sell puts at significantly lower strike prices, at the level at which the investor would want to buy the stock.

When Should You Use the Short Put Strategy?

Selling a put option should be considered if an investor feels a stock will remain above a certain price point or if they intend to purchase the stock at a lower price point. In this case, the investor will sell put options with a specified expiration date in mind in order to receive a premium.

• This isn’t always a negative thing. For example, if an investor wants to buy a stock at Rs.50 but it is now trading at Rs.55, they could sell a put option with a strike price of 50 and gain a Rs.3 premium. If the stock continues to trade higher or fails to hit the Rs.50 strike price, the investor will win handsomely.

• Of course, this is still Rs.5 less than where they planned to buy the stock originally. They now have a cost basis in the shares of Rs.47 because they received a Rs.3 premium when they sold the put option contract.

Buying and selling put options This is a win-win situation; either they pay Rs.3 to watch the stock rise in value, or they get to acquire the shares at a far lower price than they originally planned to pay.

Profit/Loss

Maximum Gain = Net Premium Received

The maximum loss for a short put strategy is unlimited as the stock can continue to move against the trader, at least until it reaches zero.

Breakeven

A short put option’s breakeven is calculated by subtracting the premium from the strike price.

If a stock is selling at Rs.100 and an investor wishes to sell a Rs.2.0 90-strike price put, the breakeven point is Rs.88.00.

Example

• If a stock XYZ is trading at Rs.100 and an investor wishes to acquire it for Rs.90, they can sell a 90 strike-price put option and receive a Rs.2 premium.

• If the stock falls below Rs.90, they will be forced to acquire the shares, which they desired, at a cheaper price. They were also paid Rs.2 for their efforts.

However, if the stock continues to rise or never falls below Rs.90, they will not be able to purchase the stock, but the Rs.2 premium they received is theirs to retain.

Conclusion

The short put is a strong technique since traders are paid to either buy the stock at a lower price point than it is now trading or to watch the stock climb higher. In either case, the trader wins.

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The long put options trading technique grants the right to sell an underlying stock at the set price, point A, as shown on the graph. When a put option is purchased, the investor is betting that the stock will fall below the strike price before the expiration date.

Using a put instead of shorting the stock decreases the investor’s risk because they can only lose the cost of the put, as opposed to the limitless risk of shorting the stock.

• If the stock increases, the long put option will expire worthless, leaving the holder with merely the option’s cost. Similarly, an investor who shorted the stock will continue to lose money as the company rises in value.

• When purchasing puts, especially short term, there is a need for investors to be careful. If an investor buys many put contracts, their risk also increases. This is because the options can expire worthless, whereby the investor would lose the entire investment.

When Should You Purchase Put Options?

• Put option contracts can be purchased for a variety of reasons, including speculation (the investor believes a stock’s price will decline).

• A long put can also be used as a hedge against existing stock to protect an asset against a rapid drop in value, often known as a protective put.

If the stock that is already held suddenly drops in value, owning a put option would increase in value, offsetting the stock’s losses.

Purchasing a Put Versus Shorting the Stock

Shorting the stock and purchasing put option contracts are the most popular tactics for investors who want to take a bearish position in the firm.

Shorting a stock is a risky endeavour because a stock’s price might climb indefinitely, resulting in endless risk. Buying a put is an alternate bearish approach because an investor can only lose the cost of the put, therefore the risk is restricted.

However, purchasing a put option allows you to profit from a stock’s downward movement while limiting your risk to the premium paid for the option contract.

Profit/Loss

Maximum Loss = Net Premium Paid

The maximum gain for a long put strategy is limitless because the stock can continue to fall in value until it reaches zero.

Breakeven

• A long put option’s breakeven point is derived by subtracting the premium from the strike price.

• If a stock is now selling at Rs.100 and an investor wishes to purchase a 90-strike price put for Rs.2.0, the breakeven point is Rs.88.00.

Example

If stock XYZ is trading at Rs.100 and the investor believes it will fall, he may purchase a Rs.2 put option with a strike price of 90.

If the price falls to Rs.85, they will make Rs.5 on the 90 put, but because the option cost Rs.2, their net gain will be Rs.3.

However, if the stock continues to rise or never falls below Rs.90, they would lose their Rs.2 investment.

Conclusion

The long put is an investment strategy that allows the investor to bet on the stock’s decline. The investor must be prepared to lose the entire premium if they are incorrect.

When the underlying price falls, traders can make far more through put ownership than through short-selling. The dangers associated with short-selling are unbounded because the stock price has the potential to climb indefinitely.

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The short call option strategy, also known as the uncovered or naked call, entails selling a call without owning the underlying stock. Short call options should be avoided by those who are new to options because they are a high-risk strategy with limited profits.

More advanced traders use a short call to profit from unique situations where they receive a premium for taking on risk. Let’s take a more in-depth look at the short call option strategy.

When the forecast for the underlying asset is negative to neutral, investors initiate the short call strategy. If the buyer of the short call exercises the option, the trader is obligated to sell the stock at the strike price.

• This is not to be confused with a short put option, in which the seller is obligated to purchase the stock at the strike price. In the chart above, the trader begins to lose money if the stock advances past strike price A.

• Wait until the strike price is one standard deviation out of the money (the stock price is lower than the strike price) before implementing this option strategy.

• With a short call, the trader wants the implied volatility (IV) to decrease as this will reduce the price of the options they’re short.

Here, if the investor decides to close the position before the expiration date, the trade will cost them less to buy back. Similarly, decreasing time to expiration is also a positive factor with this strategy because the less time to expiration, the lower the value of the call option, enabling the investor to close the position for less.

When Should You Use a Short Call?

The other alternative is to purchase put option contracts. In exchange for a premium, the seller of a call option bets that the stock will not rise over a certain price (strike price) before the option expires.

• This type of bear market trade is frequently entered when a stock has already had a significant run to the upside, particularly in a short period of time, and technical indicators, such as RSI or Percent-R, indicate that it is overbought.

• By selling a short call, the trader becomes bound to the option’s buyer, ensuring that they will deliver the stock to the call option’s buyer if the stock rises above the strike price.

• If the stock price remains below the strike price, the holder of the short call option keeps the entire premium as profit.

If the stock price rises above the strike price, the long call holder will exercise the option, forcing the short call holder to buy the shares at the current market price and deliver it to them at the lower price.

Profit/Loss

Maximum Profit = Net Premium Received

The greatest loss for a short call strategy is infinite because the stock can continue to rise indefinitely.

Breakeven

A short call option’s breakeven is computed by adding the premium to the strike price.

If a company is selling at Rs.100 and an investor wants to sell a call with a strike price of Rs.110 for Rs.2.00, the breakeven point is Rs.112.00.

Example

If the stock moves up to Rs.115, they will be required to buy the shares at Rs.115 and then return it to the call buyer at Rs.110, losing Rs.5.

However, because the option seller paid Rs.2 for selling the call, their net loss is Rs.3. If, on the other hand, the stock continues to fall or never hits Rs.110, the trader retains the Rs.2 premium as profit.

Conclusion

The short call option strategy is ideal for experienced investors who wish to profit by selling volatility when markets are overbought. The premium received decays over time, allowing investors to keep the entire premium or repurchase it later at a cheaper price.

• Aside from individual companies, some investors like to sell call index options. One justification for trading index options is that they are thought to be less volatile than individual stocks.

• Profitability with this method is restricted owing to the unlimited risk involved if the stock continues to rise. Traders prefer to sell calls because the potential reward is considerable if the option is far out of the money and the trade is properly timed.

If an investor expects a stock to fall in price, he or she might consider a bear call spread. This allows the investor to earn by selling at a premium while also allowing them to lose money if their analysis is incorrect.

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Adani Ports shares become multibagger from their 52-week lows of Rs 394.95 as the price topped Rs 790 last week, but the stock has subsequently retreated roughly 9%.

CLSA has kept its ‘buy’ rating on Adani Group and raised its target price to Rs 878 from Rs 792. The trading firm stated that APSEZ is preparing for its next phase of growth.

Adani Ports announced a 5% year-on-year (YoY) increase in consolidated net profit for the quarter ending March 31, 2023, at Rs 1,159 crore. In the previous fiscal year, it reported a net profit of Rs 1,103 crore. In Q4FY23, the company’s income from operations increased by 40% to Rs 5,797 crore, up from Rs 4,141 crore in Q4FY22.

The company outperformed its highest-ever revenue and EBITDA guidance issued at the start of the year. “Our strategy of geographical diversification, cargo mix diversification, and business model transition to a transport utility is enabling robust growth,” APSEZ CEO Karan Adani said.

The financial situation

The Adani Group’s shares was trading at Rs 724.45, down 1.34 percent, at 09:29 a.m. The stock was among the worst performers on the Nifty 50.

According to ICICI Securities, profit after tax was lower than expected due to an unusual charge of Rs 1,273 crore, headed by a non-cash impairment produced by the sale of Myanmar port assets.

EBITDA margin increased to 56.4 percent from 49.7 percent a year ago.

Despite current EXIM market downturn, Adani Ports has maintained its FY24 estimate, which includes 10-12 MMT volumes from the newly acquired Karaikal port, according to ICICIDirect’s first cut.

Concerning the Concor transaction, management will make a cautious decision when the divestment resumes,” it added.

These deals cost roughly Rs 18,000 crore in total investment. ASPEZ also spent over Rs 9,000 crore on capital expenditure (capex) last year.

Following the release of Q4 data, Adani Ports shares fell 2% to Rs 721.1 on Wednesday, from a previous closing of Rs 734.30 on Tuesday.

Budget for Fiscal Year 24

• Cargo volumes are expected to reach 370-390 million metric tonnes (MMT), generating revenue of around Rs 24,000-25,000 crore.

• The predicted EBITDA (profits before interest, taxes, depreciation, and amortisation) is in the range of Rs 14,500-15,000 crore.

• Furthermore, total capital expenditure (capex) for the year is estimated to be approximately Rs 4,000-4,500 crore.

According to JM Financial’s report, management forecasted port volume of 370-390 million tonnes for FY24 (9-15 percent YoY), while retaining its FY25 volume objective of 500 million tonnes.

Shares of Adani Ports turned multibagger from their 52-week lows at Rs 394.95 as the stock hit Rs 790 last week amid the optimism over fresh inflows, the Supreme Court verdict and sale of non-core assets. However, the stock has corrected about 9 per cent since then.

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The company, which had a net profit of Rs 81.34 crore in the previous fiscal quarter, said it intends to raise up to Rs 750 crore through a rights issue to its shareholders.

Apollo Hospitals Enterprise reported a net profit of Rs 146 crore for the March quarter, up 50.5 percent from Rs 97 crore the previous year. The bottom line, however, fell far short of the analyst’s projection of Rs 198 crore.

The company, which had a net profit of Rs 81.34 crore in the previous fiscal quarter, said it intends to raise up to Rs 750 crore through a rights issue to its shareholders.

Revenue climbed by 21.3 percent to Rs 4,302.2 crore in the third quarter, meeting forecasts of Rs 4,302.7 crore. The company’s revenue in the previous year’s similar quarter was Rs 3,546.4 crore.

However, the company’s standalone net revenues increased to Rs 1,203.69 crore for the quarter under review, up from Rs 998.18 crore for the same period a year ago, according to a BSE filing by Apollo Hospitals Enterprise.

As a result, the EBITDA (earnings before interest, taxes, depreciation, and amortisation) margin fell to 11.4 percent from 13.1 percent in the previous quarter.

In a separate filing, Apollo Hospitals stated that its Board of Directors has agreed to recommend a dividend of Rs 5.75 per share (115 percent of the share’s face value) for the fiscal year.

The company’s Digital Health division posted an EBIT (earnings before interest and taxes) loss of Rs 84.4 crore, up from Rs 74.2 crore in the previous quarter. The arm’s EBIT loss in the previous quarter was Rs 8 crore.

Since the digital arm’s losses increased quarter over quarter in Q4, analysts and investors will be looking for management’s comments on its digital business and the hospital segment’s prospects.

The business also stated that it will cover the losses at Apollo HealthCo through internal accruals over the next six months, implying that the hospital giant’s margin pressure will likely remain year on year in the coming quarters.

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