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Although the Indian market is trading in the red zone in the morning session, one stock that witnessed a good demand at the opening tick is Samvardhana Motherson International Ltd (NS:). The company is an auto parts manufacturer with a market capitalization of INR 66,476 crore and trades at a TTM P/E ratio of 44.45.
The stock witnessed a sharp cut of 2.9% yesterday and closed the session below its key support of INR 96. This was an indication of bears starting to pounce on the stock harder to drag it to further lower levels, but today it opened with a good uptick, currently trading 1.72% up at INR 97.5 (spot).
As the breakdown was confirmed on the previous day, this higher level might become a better opportunity to initiate sell positions. For traders still having a bearish view on this counter, here’s an options strategy to capitalize on the down move.
It is called a Reverse Jade Lizard.
– 100 CE at 2.4
– 98 PE at 3.45
+ 97 PE at 2.9
In simple words, traders need to go short of 100 CE & 98 PE and long on 97 PE at the CMP mentioned above. This strategy would require a total margin of around INR 1.95 lacs and hence it is not suitable for small accounts.
Risk & Reward
The stock has the highest profit potential if the contract expires between INR 98 – INR 100, which is INR 20,945 per lot. This is roughly around 12% return on margin deployed. On the lower side, the profit will start to decline below INR 98 and will be capped at INR 13,845 per lot below INR 97.
Simply, once the profit starts to decline below INR 98, it will get locked at INR 97 and there will be no loss on the downside. So, if the contract expires anywhere below INR 97, a profit of INR 13,845 per lot is confirmed.
As this is a bearish strategy, there is a risk on the upside. If the stock crosses INR 100, the profit will start to decline till the breakeven level of INR 103 where it will turn to 0. If the stock even surpasses INR 103, then the loss will start and will keep on increasing with the momentum of the stock.
Image Description: Daily chart of Samvardhan Motherson International with volume bars at the bottom
Image Source: Investing.com
The potential for a loss is unlimited as there is no hedge on the upside. In case the stock reaches INR 100, the strategy should be squared off at a relatively lesser loss than waiting in the hope of a fall. This is a high-risk high-reward strategy.
Read More: 2 Breakdown Shares of Wednesday that Bears Pounced On!
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