F&O Strategy: Call spread on Chola Investment & Finance

K. S. Badri Narayanan | Updated on: Apr 09, 2022

The company is in discussion with 10 more firms to scale its business Andrii Yalanskyi | Photo Credit: Andrii Yalanskyi

Expect the stock to maintain the upward trend

The outlook for the stock of Cholamandalam Investment & Finance Company (₹741.75) is bullish. While the stock finds an immediate support at ₹692, the next major one is placed at ₹666. A close below the latter will change short-term outlook negative. However, If the current trend sustains, the stock can climb to ₹913. We expect the stock to maintain the upward trend.

F&O pointers: As the price was hovering between ₹710 and ₹700 in the first five days of trading in April, the counter shed open interest marginally. However, a sharp rise on Friday triggered accumulation of open positions in April futures of the stock. This contract closed at ₹746.10, a good premium of ₹4.35 over the spot close of ₹741.75, signalling traders are willing to carry over their positions. Options trading indicates a movement in the range of ₹720-800.

Strategy: We advise traders to sell two lots of 800-call option and simultaneously buy one lot of 740-strike call, which closed with a premium of ₹11.9 and ₹32.9, respectively. As the market lot is 1,250 shares, this strategy would cost traders ₹11,375 (i.e., ₹32.9 - ₹23.8). This strategy is for traders who can understand and take high risk.

While the loss would be limited to the premium paid (₹11,375) if the stock stays at or dips below current levels, losses will increase if it rallies above ₹860. The position will yield a profit between ₹1,125 and ₹63,625 depending on where it settles between ₹750 and ₹850 on expiry. The maximum profit will happen if Cholamandalam rules at ₹800. The position will hit a loss of ₹11,375 again if the stock rises to ₹860. Thereafter, for every ₹10 rise from there, the loss will increase by another ₹10,000. Simply put, if the stock hits ₹870, the loss would be ₹21,375 and so on, indicating higher risk. So, exit at a profit of ₹20,000 or exit if loss mounts to ₹11,500. Risk-averse traders can stay away.

Follow-up: Hold LIC Housing Finance bull-call spread strategy.

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

Published on April 09, 2022
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