Derivatives

How to use a bear-put spread on L&T stock

KS Badri Narayanan | Updated on February 27, 2021

Sell ₹1,400-strike put while simultaneously buying the ₹1,440-strike put

The short-term outlook has turned negative for L&T (₹1,442.50). The stock finds an immediate support at ₹1,400 and the crucial one at ₹1,385. A close below the latter has potential to drag L&T to ₹1,234. On the other hand, for the long-term bull rally to sustain, the stock has to close above ₹1,545. If L&T manages to close above this level, it can reach ₹1,675. However, we expect the stock to move with a negative bias in the coming days.

F&O pointers: L&T March futures closed at ₹1450.60, a good premium over the spot price of ₹1,442.50. This signals existence of long positions. The counter witnessed a steady accumulation of open interest despite being volatile in the last few days. Option trading indicates that ₹1,400 will act as a strong support and ₹1,600 as resistance.

 

Strategy: For L&T, we advise traders to consider a bear-put spread. This can be constructed by selling ₹1400-strike put while simultaneously buying the ₹1440-strike put. These options closed with a premium ₹36.85 and ₹53.95 respectively. As the market lot is 575 shares per lot, this strategy will cost traders ₹17.10 per lot i.e., ₹9,832.50, which will be the maximum loss. This will happen if L&T closes at or above ₹1,440.

A profit of ₹13,167.50 is possible, if L&T slips to ₹1,400. We advise traders to hold the position till expiry day or at profit.

Alternatively, traders, with deep pocket and patience could consider buying ₹1380-strike put directly, which closed at a premium of ₹29.65. This will cost traders ₹17,048.75, which will be the maximum loss, if L&T fails to slip below ₹1,380 level. We advise traders to exit position with a profit ₹10,500 or a loss of ₹6,500.

Follow-up: Stop-loss would have triggered in Tata Steel counter, which spiked sharply contrary to our expectations.

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Published on February 27, 2021
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