Derivatives

How calendar put spread on Bajaj Auto stock can make money

KS Badri Narayanan | Updated on November 20, 2021

Option trading indicates that Bajaj Auto is likely to move in a range of ₹3,500-₹ 3,800

Bajaj Auto (₹3,550) shares are ruling at a crucial level. The stock finds an immediate support at ₹3,481 and the next one at ₹3,375. A close below ₹3,258 will change even the long-term outlook negative for Bajaj Auto.

On the other hand, the stock finds an immediate resistance at ₹3,608 and the next one at ₹3,692. Only a close above ₹3,858 will change the long-term outlook positive for Bajaj Auto. We expect the stock to move in a range with a downward bias.

F&O pointers: The stock of Bajaj Auto saw a rollover of just about 14 per cent to December series. Bajaj Auto December futures closed at ₹3,558.70 and November futures ₹3,544.95.

This indicates most of the rollovers were on the long side. Nevertheless, option trading indicates that Bajaj Auto is likely to move in a range of ₹3,500-₹ 3,800.

Strategy: Traders can consider calendar-put spread on Bajaj Auto. This can be done by selling ₹3,500-November put and simultaneously buying ₹3,500-put of December series. As the options closed with a premium of ₹16.85 and ₹61.30 respectively, this will cost traders ₹44.45/share i.e., ₹11,112.50 (market lot: 250 shares).

The maximum loss would be the net premium paid and that will happen if Bajaj Auto manages to sustain above ₹3,500. On the other hand, profit potentials are huge if the stock slides sharply. We advise traders to hold on to the position for at least two weeks and review later. Traders who can take higher risk can straight away buy ₹3,500-put of December.

They can exit if the premium touches ₹120 or on a fall to ₹25.

Follow-up: Traders can exit from HDFC Life with a loss, as the stock moved contrary to our expectations.

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

Published on November 20, 2021

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