Technical Analysis

Bull call spread on Bharat Forge

KS BADRI NARAYANAN | Updated on January 17, 2018 Published on August 07, 2016

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Thanks to a strong rally on Friday, the short-term outlook has turned positive for Bharat Forge (₹814). Only a close below ₹728 will change the outlook to negative. However, the long-term outlook for Bharat Forge still remains negative. Only a close above ₹986 will alter the long-term view to positive. The stock finds immediate support at ₹768 and resistance ₹861.

F&O pointers: On Friday, futures contract shed over 4 lakh shares in open interest, as traders preferred to book profits rather than roll over their positions, despite a huge gain in underlying. Option trading indicates a strong support at ₹740 for Bharat Forge.

Strategy: Investors can consider a bull call spread on Bharat Forge. This can be initiated by buying ₹820-call and simultaneously selling ₹840-call, which closed with a premium of ₹29 and ₹20 respectively.

The maximum loss in this strategy would be the initial payout, which is ₹9/contract. As the market lot is 600 shares per contract, it works out to ₹5,400. Maximum loss will occur if the stock fails to sustain above ₹820 level at the time of expiry.

However, this strategy can yield a maximum profit of ₹11/contract (or ₹6,600). For that, Bharat Forge has to close at or above ₹840. Alternatively, traders can consider buying ₹840-call option with a stop-loss at ₹10. Traders can book profits if the premium hits ₹45. Traders should aware that this strategy will incur an initial outflow of ₹12,000.

Published on August 07, 2016
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