InvestorQ : What do I do if my stock has come down and I want to reduce my cost of holding?
Priyanka N made post

What do I do if my stock has come down and I want to reduce my cost of holding?

Answer
image
Aashna Tripathi answered.
3 years ago
Follow

You can apply something called the popular Covered Call Strategy. This works perfectly when the markets have become weak and your stock price has gone down. This is a slight variation wherein you sell higher call option to reduce your cost of holding an equity share. Let us assume that you purchased SBI at Rs.350 and the stock is now down to Rs.310. Your view is that the stock will not cross Rs.350 in the next 6 months. So, each month you can keep writing 350 call option on SBI and leave to expiry. If you earn Rs.5 each month on an average, your earning at the end of 6 months will be Rs.30. That effectively means that your cost of acquisition of SBI has come down from Rs.350 to Rs.320. But, what if the stock price goes to Rs.380? You will lose out on the call option but you are holding the stock so nothing to worry about. But, on the downside the risk is unlimited once your premium income is covered. Therefore, it is suggested that this strategy should be applied ideally on cash market positions rather than on futures position.

0 Views