NTPC: Call options spread may benefit conservatives

KS Badri Narayanan | Updated on June 01, 2020 Published on June 01, 2020

Lack of long-term PPAs is likely to hit many thermal assets K_R_DEEPAK

The long and medium-term outlook for NTPC (₹97.85) will be negative, as long as the stock rules below ₹145. After the recent bounce back from ₹73, the short-term outlook had turned positive for NTPC. While the immediate resistance appears at ₹104, NTPC finds a major resistance at ₹118. On the other hand, it finds an immediate support ₹92.90, a conclusive close below ₹86.5 will trigger a fresh fall on the stock. We expect the stock to move in a narrow range with a positive bias.

F&O pointers: The NTPC June futures at ₹96.8 still rule in a discount with respect to the spot close of of ₹97.85. This signals, existence of strong short positions in the counter. However, over the last few days, it has been witnessing unwinding of short positions and addition of longs. Option trading indicates that NTPC could move in a wide range of ₹80-110, as traders prepared themselves for extreme swings.

Strategy: We advice traders to consider a bull-call spread on NTPC. This can be initiated by buying ₹97.50-call and simultaneously selling ₹100-call. These options closed with a premium of ₹3.80 and ₹2.90 respectively. That means one has to incur an initial outflow of ₹0.90 per lot or ₹4,320 (market lot 4,800 shares), which would be the maximum loss one can suffer in this strategy. For that to happen, NTPC has to rule below ₹97.50.

However, a maximum profit of ₹1.60 or ₹7,680 is possible if NTPC closes at or above ₹100. We advise traders to hold the position till expiry or the target is achieved. Also, this strategy involves higher margin commitments.

Alternatively, traders, with a high-risk appetite could consider going long on NTPC futures with a stop-loss at ₹94.5. If the futures opens on positive note, the stop-loss can be shifted to ₹97 and aim for an initial target of ₹104 with trailing stop-loss. This for for traders who can withstand high swings and have deep pockets.

Follow-up: Hindalco moved on expected lines. Though the ₹125-call call turned illiquid at this point of time, we see it gaining traction going forward.

Published on June 01, 2020
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