Market Strategy

Consider a bull call spread on RIL

K.S. Badri Narayanan | Updated on December 21, 2013 Published on December 21, 2013

Reliance Industries (Rs 893.6): While the long-term outlook for Reliance Industries remains neutral, in the short-term, the stock could rise. The stock has been moving in a broader range of Rs 660-960 in the last two years. Last week, Reliance displayed some resilience. The stock is likely to touch the upper band of the range. Only a close above Rs 1,012 will change the long-term outlook positive for the counter.

F&O pointers: Reliance Industries witnessed a healthy rollover of 28 per cent in open interest positions. This indicates that traders are willing to carry over their positions, expecting a further rise for the stock. Option trading also indicates Rs 900 as crucial, as activity was centred on that strike.

Strategy: Traders could consider a bull call spread strategy. It involves two calls with the same expiration but different strikes. The strike price of the short call is higher than the strike of the long call, which means this strategy will always require an initial outlay (debit). The short call’s main purpose is to help pay for the long call’s upfront cost.

Here, traders could consider selling Rs 960-call and simultaneously buying Rs 900-call of January. This will cost Rs 5,000 initially.

The maximum profit is different between the strike price minus the net premium paid, which works out to around Rs 10,000. The maximum loss a trader could suffer in the strategy is the net premium paid, which is about Rs 5,000.

The maximum gain is capped at expiration, should the stock price do even better than hoped and exceed the higher strike price while the worst that can happen is for the stock to rule below the lower strike price at expiration.

Alternatively, traders can consider buying Rs 920-call, which closed at Rs 21.1. While the maximum loss in the strategy is the premium paid, the profit is unlimited if the Reliance Industries jumps sharply. Traders could keep the stop-loss at Rs 9 for a target of Rs 45.

Follow-up: Last we advised traders to consider short strangle on Coal India. This strategy has, so far, worked well. Traders can wait till expiry and exercise their rights just ahead of settlement to reap maximum benefits as indicated last week.





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Published on December 21, 2013
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