Derivatives

Why a calendar call spread on Nippon Life India AMC may work

KS Badri Narayanan | Updated on July 24, 2021

Stock expected to move in a range with positive bias

The outlook for Nippon Life India AMC (NAM-India) (₹401.75) remains bullish. The stock finds the nearest support at ₹380 and the crucial one at ₹340. A close below the latter will alter the current bullish trend . If it manages to hold on ₹395.50, it has the potential to create a fresh high in the near term above the prior high of ₹440. We expect the stock to move in a range with positive bias in the near term.

 

F&O activity: The counter is yet to gain big traction in the F&O market. The July futures saw creation of 1,200 contracts. It witnessed a rollover of 23 per cent to next series. Though, this generally denotes higher rollover at the end of penultimate week of an expiry, low volume makes it less significant. Similarly, options are also not that active, as the counter entered the derivative segment only in March. A little cue available from option trading indicates that the stock is likely to move in ₹390-430 range.

Strategy: Traders could consider a calendar bull-spread on the options contract of NAM-India. Despite volumes being low in August series as of now, we expect the volume to gain traction in the coming week. So, initiate the strategy by selling ₹400-call of the current series and simultaneously buying same strike call of next month series. As these options closed at ₹7.65 and ₹18.55 respectively, this strategy will cost traders ₹17,440 (market lot: 1,600 shares).

The premium paid (₹17,440) will be the maximum loss one can suffer. However, profit potential will be huge if the stock slips or stays at current levels during the current expiry and rises sharply in August. We advise traders to hold on to the strategy for at least two weeks.

Follow-up: As IRCTC moved on expected lines, we advise investors to book profits on Monday closing hours or on Tuesday.

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

Published on July 24, 2021

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