Derivatives

Why you should sell deep OTM call on Motherson Sumi

KS Badri Narayanan | Updated on October 09, 2021

In the short run, expect the stock to move in a range between ₹199 and ₹269

The long term outlook for the stock of Motherson Sumi Systems (₹237.15) remains bullish, though in the short term it is expected to move within a range. The stock finds an immediate support at ₹217 and the major one at ₹199. If the current trend continues, Motherson Sumi can be expected to touch new peak at ₹278. Nevertheless, in the short run, we expect the stock to move in a range between ₹199 and ₹269.

F&O pointers: The counter entered in derivatives recently. Open interests fluctuated even as the stock, after hitting at ₹269, cooled a bit. Currently, open interest stands at 3.27 crore shares. Option trading indicates a range of ₹220-250 for the stock.

Strategy: Since our expectation for the stock is to move in the range, traders can consider selling a deep out of the money ₹280-call on Motherson Sumi. The option closed with a premium of ₹2.70 on Friday. As the market lot is 3500 shares a contract, this strategy will create an inflow of ₹9,450, which will be the maximum profit one can earn. Maximum profit will occur if Motherson Sumi closes below ₹280 on expiry. This strategy is for traders who can take high risk and others can stay away as the loss potential are huge.

On the other hand, loss will start to accumulate, if Motherson Sumi surges past ₹282.70 (break-even point of the strategy). Besides limited profit, this strategy is risky as it will require higher margin commitment, if the stock rises sharply.

Follow-up: Hold BHEL option strategy for one more week, despite the position currently being at a loss. Also, hold Infosys option recommended in the previous week, as the company is set to declare Q2 result on October 13.

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

Published on October 09, 2021

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