Market Strategy

Stock Strategy: Consider calendar put spread on L&T

| Updated on October 20, 2012 Published on October 20, 2012


Larsen Toubro (Rs 1,632.7): L&T witnessed a sharp surge since June low to register its 52-week high recently. However, the stock now finds strong resistance at current levels. Only a close above Rs 1,785 will change the long-term outlook positive for L&T. It will face a lot of intermediate resistances till such time. L&T finds immediate support at Rs 1,605 and a close below this level will drag it to Rs 1,470 and even to Rs 1,305, which is a crucial level for the stock. The company board is meeting on Monday to declare September quarter results.

F&O pointers: The rollover of L&T futures to November series is about 14 per cent, as against market-wide rollover of 19 per cent. Option trading suggests neutral view as both calls and puts saw unwinding of open interest positions.

Strategy: Traders could consider buying L&T 1600 November put that closed at Rs 33. While the maximum loss could the premium paid, profit is unlimited should the stock dwindles. If the stock reacts immediately, then time value will also enhance trader’s profit. Market lot is 250.

Alternatively, traders could consider calendar put spread on L&T. This can be initiated by selling L&T 1600 October put and buying 1600 November put. They closed with a premium of Rs 9.9 and Rs 37.55 respectively. This will result in a net outgo of about Rs 27.5.

A calendar put spread profits primarily from the faster decaying of the near-term short position and the slower decaying of long option. This strategy is ideal for a trader whose short-term sentiment is neutral. Ideally, the short-dated option will expire out-of-the-money. Once this happens, the trader is left with a long option position. So calendar put spread is best suited when one feels that the underlying asset is expected to stay stagnant or within a tight price range in the short-term and breaks out to downside in future.

Here the maximum profit occurs if L&T stays flat around current levels till October expiry and moves down quickly in November series. Maximum loss is the premium paid; this happens if L&T moves sharply downwards in October series itself. This strategy is strictly for traders who understand options very clearly.

Follow-up: Last week we advised traders to consider long-straddle using Reliance Industries 820 strike. It is slightly out-of-the-money. However, further downslide will result in profit.

K.S. Badri Narayanan

Note: Feedback or queries (on positions) may be sent to f&, by Sunday noon. Replies will be published on Monday.

Published on October 20, 2012
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