Stocks

Sell deep OTM call on Coal India

KS Badri Narayanan | Updated on August 17, 2020

Despite a sharp rally on Friday, the outlook for Coal India remains negative. The stock finds an immediate resistance at ₹142 and the key support at ₹123.55. Only a close above ₹167.85 will turn the medium-term outlook positive for Coal India. In the short term, we expect the stock to move in a narrow band of ₹120 and ₹150. Only a break out of this band, will set a clear trend for the stock.

F&O Pointers: Coal India August futures (₹132.20) saw unwinding of 4.7 per cent in open interest positions on Friday, though the underlying stock (₹131.85) gained almost three per cent. This signals that investors prefer to book profits rather than rolling over their positions. However, still some long positions are being held by investors, as the future contract is maintaining the premium over the spot price. Option trading indicates a range of ₹120-140 for Coal India.

Strategy: We advise a risky strategy for traders on Coal India who can understand the margin commitments and have enough funds to meet wild swings. Traders could consider shorting of ₹145-strike call that closed with a premium of ₹1.10. As the market lot is 3,700 shares per lot, this strategy will ensure an inflow of ₹4,070 which would be the maximum profit one can earn from this.

However, loss could be unlimited if Coal India rises sharply in the next few days. Besides, the company may announce quarterly results anytime soon and that may add to volatility.

Hold the position till expiry and if the stock stays strongly above ₹135 on Monday, traders could ignore this call.

Follow-up: Hold short-strangle on Asian Paints for one more week.

(Note: The recommendations are based on technical analysis and F&O positions. There is a risk of loss in trading.)

Published on August 17, 2020

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