Technical Analysis

Consider a bear-call spread on Tata Steel

K.S. Badri Narayanan | Updated on February 17, 2020

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The Tata Steel stock rules at a crucial level. The stock finds a major resistance at Rs 508 and support at Rs 367. Immediate support appears at Rs 423 and a close below that could drag Tata Steel to Rs 391.

On the other hand, a conclusive close above Rs 508 can lift Tata Steel towards Rs 553. We expect the stock to move in a range with a negative bias.

F&O pointers: Tata Steel February futures added 3 lakh shares in open positions  on Friday. However, historical data for the last two weeks suggests that the open positions in Tata Steel futures fluctuations. Option trading indicates a broad range of Rs 400-500.

Strategy: Traders could consider a bear-call spread strategy on Tata Steel. This can be initiated by buying 440-call and simultaneously selling 430-call.

These options closed with a premium of Rs 9.15 and Rs 14.10 respectively.

This strategy will ensure an inflow of Rs 4.95 per contract. As the market lot is 1,500 shares per contract, traders would receive Rs 7,425. The premium received (Rs 7,425) would be the maximum profit one can receive from this strategy and that will happen if Tata Steel closes at or below Rs 430 at the time of expiry. On the other hand, a maximum loss of Rs 7,575 or (Rs 5.10/contract) is possible in this strategy, if Tata Steel rises above Rs 440. We advice traders to hold the position till expiry (February 27) for maximum benefits.

Follow-up: As expected, Ashok Leyland moved in a narrow range despite Q3 results announcement. We advice traders to book profits going forward

Published on February 17, 2020

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