Derivatives

Why a bull-call spread on BHEL may pay well

KS Badri Narayanan | Updated on October 02, 2021

The stock of Bharat Heavy Electricals Limited (BHEL) (₹65.60) is ruling at a crucial level and the short-term outlook has turned positive. The stock finds an immediate resistance at ₹71 and a close above will trigger a fresh rally in the stock, which could take it towards ₹78. A close above this level will change the medium-term outlook to positive. On the other hand, BHEL finds an immediate support at ₹58, and a further weakness could drag the stock to ₹50. We expect the stock to move in a narrow range with a positive bias.

F&O pointers: The counter has seen accumulation of open interest positions along with price rise in the last few days. From about one crore shares, open positions jumped to about 11.52 crore shares while the price rose from ₹58 to ₹65, signalling bullish undertone. Option trading indicates that the stock could move between ₹60 and ₹70.

Strategy: Traders could consider a bull-call spread using ₹65-strike and ₹70-strike calls. Traders should simultaneously buy ₹65-call and sell ₹70-call which closed with a premium of ₹5.55 and ₹3.55 respectively. As the market lot is 10,500 shares, this will cost ₹21,000. The maximum loss would be the premium paid (i.e., ₹21,000) and this will happen if BHEL closes at or below ₹65 at expiry.

On the other hand, a profit of ₹31,500 is possible if the stock moves above ₹70. We advise traders to exit if the loss mounts to ₹12,500.

Traders who wish to take risk and have enough money to meet margin obligations, can consider going long on BHEL futures for a target of ₹70 with a stop loss at ₹58 initially. If the stock opens on positive note, stop loss can be shifted to ₹63.75 and then to ₹66.75. Risk-averse traders could stay away from this strategy as the market lot is very high.

Follow-up: Those who are holding Infosys ₹1760-call can continue to hold. Traders can book profits on NTPC recommended two weeks back.

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

Published on October 02, 2021

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