I would like to know if MGL is a good candidate for option harvesting. I mean if one were to buy a lot of MGL in cash and keep selling out-of-the-money call options for a steady income.
Hari Shankar
When it comes to option harvesting, any stock that is expected to stay sideways can be a good candidate. On the other hand, if a stock is trending in either direction, it might not be a great idea to sell options.
In that sense, looking at the chart of Mahanagar Gas Ltd (MGL) (₹781.05), it can be ideal to sell options as the stock has largely been stuck in the range of ₹680-850 for the past few months. So yes, MGL, at current juncture is a good candidate for option harvesting.
Here, I’m assuming that by one lot of MGL in cash, you mean you’re indicating 800 shares which is the lot size of MGL derivative contracts. Else, the pay-off can be skewed.
You can consider shorting call options until the stock gives a clear daily close above ₹850. Once this occurs, it will most likely witness a rally which will lead to you missing out on the underlying’s price appreciation, if you continue to hold short position on call options. So, at some point, it is better to stop selling calls and we would say a daily close above ₹850 is that point.
You can also replicate using MGL futures instead of cash position, if you haven’t considered that alternative.
When viewed strictly from options perspective, you can also opt for short strangle strategy since the stock is charting a horizontal trend.
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