Today, the equity market has been discounted by almost 50% from its peak. Investors are bearish to enter in this market. In the current scenario Indian equity markets are reacting with global cues. So, any positive cue of stabilization in global markets will start showing uptrend in our markets too. To take the advantage of this uptrend with minimum risk exposure in these scenario investors should follow the 90/10 strategy which will keep them in the loop. Now, there might be few questions rising in the mind of investors such as, what is 90/10 strategy? How they will be benefiting with this strategy?
Basically, the 90/10 strategy involves purchasing calls on the same number of shares of stock that would have been purchased outright, then investing the difference in a fixed income security such as government bonds. The name of the strategy is derived from the most common proportion in which the investments are allocated: 90 percent in government bonds and 10 percent in index or stock call options. This strategy is particularly appropriate for an investor who is not interested to risk his/her capital by investing in the stock market but wishes to participate in the growth of the stock market with limited risk exposure. Interest on the government bonds covers part of the possible loss on the calls. This strategy permits the investor to benefit from favorable stock price movements while limiting the downside risk to the call premium less any interest earned. It is particularly effective approach in periods of high interest rates because of greater interest income.

Example:
The common stock of ABC sells at Rs. 2000 per share. The purchase of 100 shares will cost Rs. 200,000. Let’s also assume that this investor’s upper limit on investment is Rs. 200,000.
Now, let’s assume that the stock call option’s strike price is fixed at Rs. 2000 per share, with a premium of Rs 200 per share. Therefore, if the investor wants to buy the hundred shares it would cost him/her just Rs. 20000. This, in turn, would leave him/her Rs. 180,000 to be invested in something safer, such as government bonds.
Suppose the government bonds mature in six months and earn 6 percent interest. The Rs. 180,000 would earn interest of Rs. 5400 (Rs. 1,80,000 x 0.06 x 6/12). This interest reduces the investor’s cost of the call to Rs. 14600 (Rs. 20000 - Rs. 5400). The Rs. 14600 also represents the investors maximum risk exposure compared to the Rs. 200,000 cost if the 100 shares were purchased outright.
The beauty of this strategy is that although the risk is limited, the potential capital appreciation is not. Once the market price of ABC increases beyond the strike price, the call buyer could realize the same rupee appreciation at expiration as that of an investor who owns 100 shares of the common stock. Therefore, this strategy limits risk to the net cost of the call while still enabling investors to realize capital appreciation.