Market Strategy

Use bear call spread to benefit from Leyland's u-turn

K.S. Badri Narayanan | Updated on March 12, 2018 Published on November 17, 2012


Ashok Leyland (Rs 27.5): After the sharp surge in recent times, Ashok Leyland is testing strong resistance at current level. The stock finds immediate resistance at Rs 29 and support at Rs 26.15. A close below the support has the potential to drag Ashok Leyland towards Rs 22, where it finds a crucial support. A conclusive below this level will change the outlook bearish. On the other hand, a close above Rs 32 will change the long-term outlook positive for the stock. In that event, Ashok Leyland will move past the all-time high it recorded around Rs 41. We, however, expect the stock to dip below the immediate support level.

F&O pointers: The Ashok Leyland futures witnessed unwinding of long positions on Friday. It shed over eight lakh shares (or 7 per cent) in open position along with fall in share price. This indicates that traders are not willing to carry over the position after the stock’s recent rally. Options are not very active. However, a little cue available from option trading indicates 25 is very crucial level.

Strategy: Traders could consider bear call spread on Ashok Leyland using 27.5 and 25 strikes, which closed with a premium of 0.5 and 2.4 respectively on Friday. The bear call spread strategy is one of the best strategies to be adopted when one feels the stock is either range-bound or falling. In this strategy, the trader receives a net credit (Rs 1.9) because the call he/she buys is of a higher strike price than the call sold.

If the stock falls or stays around the current level, both the calls will expire worthless and the investor can retain the net credit (Rs 1.8), which is the maximum profit. If the stock price rises above the strike price of the higher strike call (27.5) at the expiration date, then the bear call spread strategy suffers a maximum loss, which works out to 60 paise.

This strategy is suggested only for traders who can understand the option concept and can hold it till expiry.

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

Published on November 17, 2012
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