Derivatives

Why a diagonal bull-call spread on HAL could be a smart strategy

KS Badri Narayanan | Updated on October 23, 2021

Despite a strong correction last week, the long-term outlook remains positive for the stock of Hindustan Aeronautics Limited (HAL) (₹1,327.15) as long as it rules above ₹1,126. From a high of ₹1,566 on October 18, the stock crashed to a low of ₹1,295 on Friday. In the short-term, we expect the stock to swing wildly between ₹1,470 and ₹1,260. The stock finds an immediate resistance at ₹1,385 and support at ₹1,301; we expect it to maintain the bullish trend amid volatility.

F&O pointers: HAL October futures saw a sharp swing in open interest positions, too, in the last few days. On Friday, it shed over 6 per cent in open positions along with sharp drop in price, signalling long unwinding. Option trading indicates that the stock could move in ₹1,300-1,500 range.

Strategy: We advise traders to consider a diagonal calendar call spread on Hindustan Aeronautics. This can be done by selling the current month ₹1,340-strike call option and simultaneously buying the next month ₹1,400-strike call. These options closed at a premium of ₹22.05 and ₹49.75. As the market lot is 475 shares per contract, this strategy will cost traders ₹13,157.50, which will be the maximum loss.

On the other hand, profit potential is huge, if the stock holds below ₹1,340 till the current month expiry and rises sharply next month well above ₹1,400.

Traders can hold the position for at least two weeks and review later. Though the November options are not that active currently, we expect the volumes to gain momentum from this week. October contracts will expire on Thursday.

Follow-up: We advise traders to book profit on Hero MotoCorp (long put recommendation) and exit Motherson Sumi (short call options) with profits.

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

Published on October 23, 2021

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

This article is closed for comments.
Please Email the Editor