Derivatives

How to beat Budget volatility in the stock of SBI

KS Badri Narayanan | Updated on January 30, 2021

Consider a bull-call spread by selling ₹300-call and simultaneously buying ₹280-call

The stock of State Bank of India (SBI) is ruling at a crucial level. The stock finds an immediate support at ₹269 and the major one at ₹247. A conclusive close below the latter will end the current bullish trend for the stock. An immediate resistance appears at ₹309 and a conclusive close above ₹335 will trigger a fresh rally in SBI that can take it to new heights.

Event: As the Union Budget for FY22 is being presented on February 1, the stock, along with broader market, will see a huge volatility in the short term. However, we remain positive on the stock.

F&O pointers: SBI has witnessed a strong rollover of open positions from January to February series. As against three-month average of 90 per cent, this series saw a rollover of 95 per cent.

The counter on Friday also added 32.88 lakh shares, taking the total open interest to 7.74 crore shares. Option trading indicates a range of ₹250-310 for the stock.

Strategy: Traders could consider a bull-call spread on SBI. This can be initiated by selling ₹300-call and simultaneously buying the ₹280-call. They closed with a premium of ₹10.10 and ₹18.05 respectively. That means this strategy will cost traders ₹7.95 per contract or ₹23,850 (market lot of 3,000), which will be the maximum loss one can suffer. The maximum loss will happen if SBI closes at or below ₹280.

 

On the other hand, a profit of ₹36,150 is possible, if SBI moves above ₹300.

Traders could exit the position at a loss of ₹12,500 or at a profit of at least ₹25,000. As this will be volatile week (due to the Budget and uncertain global markets), premiums can remain high. So, traders with deep pockets who understand the risk elements could consider the strategy.

Follow-up: Both plain vanilla Nifty put option (14,000-strike) and Nifty futures had hit the expected targets.

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Published on January 30, 2021
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