3 ways to shop for a stock (Understanding Options-I)

Suzlon's closing spot price on NSE on 12 Mar'10 is 75.70

Lets assume your analyses (and not gut feeling, pl) says that it is likely to go up from here.

Also, lets assume you have Rs.2,00,000/- with you for this trade.

You can trade in it in following ways:-

1) You buy 2600 shares in Cash-N-Carry / Delivery (some money will be left after broherage)
Total holding = Rs.1,97,000/- approx.

A 5% swing will get you a profit of Rs. 9850/- approx.

2) Suppose you are sure about the movement of the stock and would have loved to take a bigger position (say 12000 shares and not 2600) if you had more funds.

For this you use Futures of Suzlon.

You can buy 12000 shares of Suzlon (4 futures lots of 3000 each @margin 44,000/- per lot) for Rs.1,76,000/-. margin

Total holding = Rs.9,08,000/-

A 5% swing in your favour will get you a profit of 45,400/- approx.

A 10% swing will result in a profit of 90,000/- plus (a 50% return on your margin!!)

But a negative 5% swing will result in 45,400/-,a 10% negative swing will result in over 90,000/- debit to your account!

3) Again, lets assume a situation when you want to buy 12000 shares of suzlon but don't have
1,76,000/- as margin to keep. Lets assume you have just 32,000/-

Or, even if you have the funds, you are not willing to sleep with a risk mentioned above. You don't trust automatic Stop loss and want to control your maximum loss in some sureshot manner.

For this you have the option of "options".

Here you can buy 4 Calls of strike price 75/- of March series (equivalent to 12000 shares @ 7800 margin per call as per rates on 13/3 closing). Total Margin Rs. 31,200/-.

Here maximum you can lose is 31,200/- even if (God forbid) the sky was to fall and the profit is unlimited!!!

How to shop for your stock is now your choice!!!