Derivatives

Why bull-call spread on HDFC Life can be a profitable strategy

KS Badri Narayanan | Updated on November 13, 2021

The stock’s November futures witnessed unwinding of open positions in the last 10 days

The outlook for HDFC Life Insurance Company (₹720.3) remains positive. The stock finds immediate resistance at ₹727 and the next one at ₹745. A conclusive close above the latter will trigger a fresh rally. In that event, the stock can reach a new peak of ₹825.

On the other hand, HDFC Life sees immediate support at ₹696 and crucial one at ₹659. The long-term bullish outlook will be in danger if the stock closes below ₹659.

F&O pointers: HDFC Life Insurance November futures witnessed unwinding of open positions in the last 10 days from 2.02 crore shares to 1.64 crore shares even as the stock moved up strongly. This indicates profit booking by traders as they preferred to book profits rather than carrying over the position. Option trading indicates that the stock could move between ₹700 and ₹750.

Strategy: We advise conservative traders to consider a bull-call spread on HDFC Life. This can be used by selling ₹730-call and simultaneously buying the ₹720-call. They closed with a premium of ₹9.35 and ₹13.75 respectively. That means, the strategy will cost traders ₹4.40 a contract. As the market lot is 1,100 shares per lot, traders need to spend ₹4,840, which would be the maximum loss one can suffer. That will happen if the stock slips below ₹720.

On the other hand, a profit of ₹5.6 or ₹6,160 is possible, if HDFC Life moves past ₹730. We advise traders to hold the position till expiry or exit if the profit is achieved.

Traders with a high risk appetite can go long on HDFC Life Insurance futures with a stop loss at ₹706. If the stock opens higher, traders could shift the stop loss to ₹721 and further to ₹727 for an initial target of ₹748. We would like to reiterate that this strategy is for traders who can withstand wild swings and can meet margin commitments.

Follow-up: Indian Hotels had provided profit opportunities. Traders could exit from the earlier positions on Hindustan Aeronautics (at a profit) and AU Small Finance (at a loss).

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

Published on November 13, 2021

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