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HDFC Bank quarter earnings: What if you had bought OTM options contracts?

19 January 20245 mins read by Angel One
HDFC Bank's net profit surged by 33%, rising from Rs 12,259 crore to Rs 16,372 crore in Q3 of FY24.
HDFC Bank quarter earnings: What if you had bought OTM options contracts?
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HDFC Bank, India’s biggest private sector bank, announced its December quarter results yesterday, leading to significant pressure on the stock price in today’s early morning trading session. The results not only created pressure but also had a harsh impact on both the Nifty and Bank Nifty indices.

Investors who were well-prepared and positioned with proper risk-reward strategies generally benefited from these market movements. Similarly, if you had bought a proper position with HDFC Bank stocks before this announcement, you would have benefited from this significant movement.

At the start of the day, HDFC Bank’s shares opened at Rs 1,570 per share on the NSE, representing a 6.5% decrease from the previous day’s closing price of Rs 1,679.15 per share. As of now, the stock is trading at Rs 1,590.50, with intraday highs and lows of Rs 1,596.80 and Rs 1,560, respectively.

Furthermore, the company’s stocks have generated a 3% return in the last three months and a negative return of 2% in the last one year.

100% return with Options: 

Let’s say you had bought an options contract to trade the earnings results. For this, we need to look at the chart of HDFC Bank’s technical to identify its proper resistance and support levels for choosing the option contract strike price.

According to the chart, the hurdle for HDFC Bank was around Rs 1700, which was Rs 21 points from the previous day’s closing price—too close. Instead, we can consider a range of 100 points on both sides from the last day’s closing price, which would be a proper out-of-the-money (OTM) range. This leads us to the 1780 Call option and the 1580 Put Option. However, we have selected these options strikes based on the chart. To trade this strategy effectively, if the delta is zero for your strategy, it would be more suitable.

On the last day, these option prices closed at Rs 7.65 per lot for the 1780 call option strike and around Rs 5.75 per lot for the 1580 put option strike. Let’s assume you purchased these at Rs 7.5 and Rs 5.5, respectively. The cost and the max loss would be as follows:

Option Strike  Call / Put  Lot  Qty  Buying Price  Total Premium 
1780 Call 1 550 7.5 4125
1580 Put 1 550 5.5 3025
Total Premium (Dr)  7150 

Now it’s time to evaluate the profit made by these option strikes during today’s opening of the trading session.

Option Strike  Call / Put  Lot  Qty  Buying Price  Opening Price  Profit / Loss 
1780 Call 1 550 7.5 4.05 -1898
1580 Put 1 550 5.5 24.85 10643
Total Profit  8745 

So, upon observation, the total cost of the options was Rs 7,150, and the profit made in the very first tick amounted to Rs 8,745. This represents an impressive gain of 122%. What if someone still holding these strike prices then the profit would be:

The Only Risk 

Knowing the risk before taking any trade would prevent making oversized positions. The only associated risk with this scenario is if the underlying doesn’t react and opens almost flat, then theta and implied volatility may cause losses.

Moreover, before engaging in any futures and options contract, experience often prevails over knowledge. Understanding options in Greeks is also a must.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.

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