Derivatives

Why you should do a bull-call spread on Sun TV

KS Badri Narayanan | Updated on March 20, 2021

Rollover of open interest to April signals positive bias in the stock

Shares of Sun TV Network at ₹478.4 are ruling at a critical level. The stock finds crucial support at ₹438 and a major resistance at ₹529. However, the stock finds an immediate support at ₹458 and a resistance at ₹499.

A close below the major support can drag Sun TV towards ₹370 and change the long-term outlook for the stock negative. Similarly, a close above ₹529 will change the medium term outlook positive and can lift the stock towards ₹572 or even to ₹605. However, we expect the stock to move in a narrow range with an upward bias.

F&O Pointers: Sun TV futures witnessed a strong rollover of open interest to next series, especially on March 19 on the back of strong rally. The rollover of open positions stood at 45 per cent, which is quite high compared with three-month average. Both March and April futures maintain a premium with respect to spot close, signalling long rollovers. Option chain in April contracts is not active while trading in March series indicates that Sun TV can move in a ₹450-550 range.

Strategy: Traders may consider a bull-call spread strategy on Sun TV. This can be constructed by buying ₹480-March call and selling the ₹500-strike call. These options closed with a premium of ₹8.20 and ₹3.70 respectively. This means initially traders need to fork out ₹4.5/contract or ₹6,750 (market lot: 1,500 shares), which will be the maximum loss one can suffer in this strategy. For that to happen, Sun TV has to close at or below ₹480.

On the other hand, a profit of ₹23,250 is possible, if Sun TV shares rises sharply in this series itself and closes above ₹500. We advise traders to hold the position till expiry.

Follow-up: We advised traders to sell ₹165-call option of Coal India. The option has lost premium as expected. We advise traders to book profits.

Published on March 20, 2021

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