Accelerate on a bumpy road

As Indians and specially Mumbaikars we all have experienced bumpy roads. Clearly, over the years infrastructure and roads in India have improved for better, but still bumps are common. Similar are markets and stocks, the moves are never smooth. There will be bumps and the pace of the move will slower down or it may reverse.

The big opportunities in the market are born out of sharp corrections. It is very important to ride those bumpy times with proper risk management in place, so when the time is ripe we are all set to benefit. One of the most crucial element of stock trading is risk management. Selection of correct instrument for trading answers a large part of this requirement.

One such opportunity came in early February. The stock in discussion is Tata Motors. We all know that the company has been struggling for a while now. The struggle is largely across segments and across geographies. While, early on JLR supported the P&L, but offlate that has also seen pressures. The stock fell around 17% in a single day. From a close of 182 on 7^th Feb it closed at 150 on 8^th Feb. The last time this stock traded at this price was in 2011. It erased 7 years of gains and was down 75% from the peak.

On the face of it, a trade seemed to be in offing. After such deep cuts and uptick is possible atleast in companies which are good in quality. The issue out here was the business which not in shape, but a 75% price correction has priced that in, I thought.

Clearly, neither cash nor futures would have been chosen mode of playing a pull back. Only, if I was planning to pick the stock for long term that I would have looked at cash market. Futures could have accentuated the impact of the bumpy ride. So, buying a call option or initiating a bull or ratio spread could have made more sense.

So, on 11^th February I picked up some 170 Calls at Inr 1.5/-. Clearly expecting a pullback of atleast 10% post such a drastic downfall.

For first couple of days the stock stayed in the range of 150-155. However, by mid of February it slowly picked up to finally reach near 180 levels near the end of the series. That’s when I moved out of the Long position at Inr 10/-.

Such trades can prime facie be done only if the instrument is correct. The dynamics of an instrument is crucial is building a proper risk – return strategy. Options provide the correct most structure for this.

Happy Trading. Cheers!!!