Derivatives

Sun Pharma: Why bull-call spread trade is the right strategy this week

KS Badri Narayanan | Updated on April 10, 2021

Sell the 660-strike call and simultaneously buy the 640-strike call

The stock of Sun Pharmaceuticals remains at crucial level. If the current trend sustains, the stock could reach ₹702. If it manages to go above that level, that would turn the long-term outlook positive. On the other hand, if Sun Pharma fails to sustain at current levels, it could find support at ₹603 and the major one at ₹549. A close below the latter will change the outlook to negative for the stock, which could then weaken to ₹363 level.

However, we expect the stock to maintain the current bullish trend.

F&O pointers: The Sun Pharma April futures closed at ₹640.60, a premium of almost ₹4 over the spot close of ₹636.75. Open positions on Friday saw a sharp jump along with rise in share price, signalling a fresh accumulation. Option position signals a strong support at ₹620. On the call side, 650-strike saw higher accumulation. However, trading in options indicates that call writers are hesitant, signalling that the chance of the price moving up is higher.

Strategy: Traders could consider bull-call spread on Sun Pharma. The strategy can be initiated by selling the 660-strike call and simultaneously buying the 640-strike call. These options closed with a premium of ₹18.50 and ₹10.95 respectively. That means, this strategy will cost investors ₹7.55/contract or ₹10,570 (market lot: 1,400 shares).

The maximum loss in this strategy is the premium paid (i.e. ₹10,570), if Sun Pharma sustains at ₹640 or dips. On the other hand, a profit of ₹17,430 is possible if the stock closes at or above ₹660. We advise traders to hold the position till expiry.

Follow-up: Last week, we had advised a put-spread strategy on Titan. The stock moved on expected lines on the first three days and did provide a profit opportunity but bounced back on Thursday and Friday.

Published on April 10, 2021

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