What if you had bought one lot of Power Finance Corporation’s option contract?

Buying an option is favourable when there is strong momentum in any stock or index, but it’s not guaranteed, as the market is supreme and can prove everyone wrong. For beginners, it is not recommended to dive directly into trading options. It requires skill, in-depth knowledge, and substantial expertise in trading options. Also, trading options naked is very risky compared to using hedges.

Options serve as hedging tools, although nowadays, they are frequently traded in both stocks and indexes because they demand less money when a trader buys an option contract, selling the same contract requires a significant amount of money.

If you are an option contract holder, time decay (theta) is your enemy, whereas it serves as a source of income for the seller. In short, buying options requires careful observation and implementation before investing your hard-earned money in any option contract.

In this article, we will explore the situation when someone bought only one lot of a Power Finance Corporation’s Call option on the day after the last contract expired on October 26, 2023. For a proper analysis, we will consider the closing price of the next day, which is October 26, 2023.

On October 27, the shares of PFC opened at Rs 234.5 per share, reached an intraday high and low of Rs 241 and 232, respectively, and finally closed the day at Rs 237.55 per share. On the same day, the 240-strike call option contract closed at Rs 7.20 per lot. The lot size for the same strike is 3875 quantities, so the total value amounts to Rs 27,900, which is the amount you spent to buy a lot.

From the date of purchase, the share of PFC Limited gained around 17% and finally concluded the day at Rs 277.20 per share. Meanwhile, the option contract with the same strike price closed the day at Rs 34.80 per lot, representing a 383% increase during the same period. If we calculate the profit, it stands at Rs 27.6 per lot, resulting in a profit of Rs 1.07 lakh in value terms. This means that Rs 27,900 became Rs 134,850, representing a 383% gain within just thirteen days.

Stock Chart (Daily): 

Option Payoff Chart: 

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.