Why sell deep OTM call in Tata Power this week

K. S. Badri Narayanan | Updated on: Dec 12, 2021

The long-term outlook for the stock of Tata Power (₹228) is positive. In the short-term, it may move sideways with a downward bias. The stock finds an immediate resistance at ₹250 and a close above that level will trigger a fresh rally that can take Tata Power towards ₹275 - ₹280 level. Immediate support appears at ₹201 and a major one at ₹180.

F&O pointers: As the stock swung wildly, open positions of Tata Power futures dropped considerably in the last few days.

From a high of 11.13 crore shares on December 2, open interest in Tata Power December futures dropped to 10.39 crores on Friday (December 10), signalling unwinding of long positions.

Trading in options indicate a wide range of ₹200-250.

Strategy: We advise traders sell ₹250-call option of Tata Power that closed with a premium of ₹2.90. This strategy is strictly for traders who can understand risk involved and will be able to manage margin commitments for wild swings. Risk-averse traders can stay away from this.

As the market lot is 6,750 shares, this strategy will ensure an inflow of ₹19,575, which will be the maximum profit one can earn. To achieve the maximum profit, Tata Power should settle at or below ₹250 at the time of expiry. A move above ₹252.90 will start affecting the position negatively.

Alternatively, traders who wish to play slightly safe can sell ₹260-call that closed with a premium of ₹1.70, which means an inflow of ₹11,475 (maximum profit). However, as in the above, selling ₹260-call also involves risk of considerable loss if Tata Power rises sharply. So, this strategy too is not for risk-averse traders.

Follow-up: We advise traders to hold the bull-call spread strategy on Tech Mahindra.

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

Published on December 11, 2021
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