Derivatives

How to do a bear-put strategy on Tata Steel

KS Badri Narayanan | Updated on February 20, 2021

Buy ₹670-put option and simultaneously sell ₹660-put option; the strategy will cost ₹6,970

After a sharp rally in the past one year, Tata Steel (₹670.7) is facing strong pressure to maintain the momentum. Only a close above ₹725 will reconfirm the bullish trend for Tata Steel. The stock finds immediate support at ₹641 and the crucial one at ₹596. A close below the latter will alter the current long-term bullish view on the stock, while a close below ₹553 will change the outlook to negative for Tata Steel. We expect the stock to remain volatile during the settlement week with a negative bias.

 

F&O pointers: The Tata Steel February futures closed at ₹672.10 and the March futures at ₹673.75 against the spot close of ₹670.70. The premium of futures indicates long positions getting rolled over. Close to 22 per cent of Tata Steel futures open positions have got rolled over till now. Option trading indicates a range of ₹600-720 for Tata Steel.

Strategy: Traders could consider a bear-put spread on Tata Steel using current month series. This can be initiated by buying ₹670-put option and simultaneously selling ₹660-put options. These options closed with a premium of ₹12.55 and ₹8.45 respectively. The strategy will cost investors ₹6,970 (market lot: 1,700 shares) which would be the maximum loss if Tata Steel closes at or above ₹670.

On the other hand, a profit of ₹10,030 is possible, if Tata Steel closes below ₹660. Hold the position till expiry.

Alternatively, traders who can understand risk and have enough money to meet margin commitments even during extreme volatility, can consider going short on Tata Steel March futures with a stop loss at ₹705. If Tata Steel opens on weak note, the stop loss can be shifted to ₹682 initially and then to ₹672 for a target of ₹641.

Follow-up: Stop-loss would have triggered on DLF.

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Published on February 20, 2021
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