F&O Strategy: Bull-Call Spread on Bajaj Auto

Bajaj Auto (₹3,914.45) stock rebounded from the support level of ₹3,140 in early March and gained momentum. However, it faced a hurdle at ₹3,900 and hence, it has been in a sideways movement over the past few months – oscillating between ₹3,600 and ₹3,900.

But a fortnight ago, the stock broke above ₹3,900 and marked a 52-week high of ₹4,091. Although the price moderated and closed at Rs 3,914.45, a rally from here is more likely as the downside is most corrective.

Hence, we expect the stock to gain momentum from here and rally to ₹4,270 in a month’s time. But this is quite a resistance, the rally may not extend beyond Rs 4,270 and we expect the stock to close the current close below Rs 4,270. Therefore, we need a strategy to capitalize on the potential rally that we can see in the next week or two. Options can be a good tool in capturing short-term price movements. Since we expect the stock to rally to ₹4,270 and after that it may remain flat, a bull-call spread can be an ideal strategy. So, here’s our business recommendation.

strategy: The bull-call spread on Bajaj Auto can be created by buying a 4000-strike call and simultaneously selling a 4300-strike call. On Friday, these options closed with a premium of ₹72 and ₹13.75 respectively. Hence, the net premium outflow will be ₹58.25 (₹75 minus ₹13.75) per lot. Since the lot size of one lot is 250 shares, the total outlay would be around ₹14,562, which would be the maximum loss. The maximum profit is ₹60,437 – the difference between the strike price minus the net cost of the spread, which is ₹241.75 (₹300 minus ₹58.25), multiplied by the lot size of 250 shares.

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Exit the position when the stock touches ₹4,270 or hold till expiry, whichever is earlier.

Note: Recommendations are based on technical analysis and F&O positions. There is a risk of loss in trading.

Published on

30 July 2022