Derivatives

Why bull call strategy for M&M

Akhil Nallamuthu | Updated on February 06, 2021

Buy ₹900-strike call (premium of ₹27.15) and sell ₹920-strike call (premium of ₹21.4)

The stock of Mahindra & Mahindra (M&M), which has been in an uptrend since March last year, has been witnessing periods of intermittent corrections since then.

The stock declined during the latter half of January this year, but the depreciation was arrested by a strong support at ₹750.

 

On the back of this, the stock bounced and broke out of the previous high of ₹843.8 with good volume and registered a fresh 52-week high of ₹893.5 on Thursday before ending the week at ₹865.5 This has opened more space on the upside and the stock can post more gains. Key supports are at ₹835 and ₹750 and until the stock remains above these levels, the trend will be bullish.

F&O pointers: The February futures of M&M also went up and wrapped up last week with a premium at ₹866.7. It added nearly 4.5 lakh shares and the combined open interest (including options and futures) went up by a healthy 35.6 per cent in the past week.

The price appreciation along with increase in open interest is positive for the scrip.

Strategy: The trend is bullish but there is a considerable resistance in the band between ₹920 and ₹930. Hence, traders can consider executing a bull call spread options strategy (February expiry) by buying ₹900-strike call (premium of ₹27.15) and simultaneously selling ₹920-strike call (premium of ₹21.4). Thus, the net outlay will be ₹5.75 per lot, i.e., ₹8,050 (lot size: 1,400 shares) which will be the maximum loss on expiry. Maximum attainable profit is ₹19,950 if the stock closes above ₹920 on expiry. But one can consider exiting if profit mounts to ₹16,000 at any point in time before expiry.

Follow-up: Strategy on SBI hit the profit targets.

Published on February 06, 2021

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