SAIL: Consider Bull-Call spread

KS Badri Narayanan | Updated on June 08, 2020

The long and medium-term outlook for SAIL (₹33.50) remains negative, unless the stock moves past below ₹53.7. However, the recent bounce back from ₹20.15, the short-term outlook has turned positive for SAIL. While the immediate resistance appears at ₹36.40, SAIL finds a major resistance at ₹44.50. On the other hand, it finds an immediate support ₹28.40 and a conclusive close below that level will trigger a fresh fall on the stock that could drag the stock to its year-low level. However, we expect the stock to move in a narrow range with a positive bias.

F&O pointers: The SAIL June futures at ₹33.50 just turned into a premium with respect to the spot close of of ₹33.40, signalling the exit of short positions and fresh build up of long positions. However, built-up of open positions was not secular, as open interests slipped from 3.87 crore shares on June 2 to 3.58 crore shares on June 4. However, on Friday, open positions gained momentum to end at 3.78 crore shares, along with sharp rise in the price. Option trading indicates that SAIL could move in a wide range of ₹25-35, as traders prepared themselves for extreme swings.

Strategy: We advice traders to consider a bull-call spread on SAIL. This can be initiated by buying ₹32-call and simultaneously selling ₹33-call. These options closed with a premium of ₹3.05 and ₹2.50 respectively. That means one has to incur an initial outflow of ₹0.45 per lot or ₹8,635 (market lot 15,700 shares), which would be the maximum loss one can suffer in this strategy. For that to happen, SAIL has to rule below ₹32.

However, a maximum profit of ₹7,065 is possible if SAIL closes at or above ₹33. We advise traders to hold the position if the loss hits ₹5,500 or the full profit target is achieved. Also, this strategy involves higher margin commitments.

Follow-up: Though, NTPC moved in the opposite direction in the initial few days, it bounced back on Friday. Hold NTPC positions, as advised.

Published on June 08, 2020

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