F&O Strategy: Bull-call spread on Bajaj Auto

The stock of Bajaj Auto (₹3,914.45) rebounded from the support at ₹3,140 in early March and rallied. However, it faced a barrier at ₹3,900 and so, it has been charting a sideways trend over the past couple of months — it has been oscillating between ₹3,600 and ₹3,900.

But a fortnight ago, the stock broke out of ₹3,900 and marked a fresh 52-week high of ₹4,091. Although the price moderated and closed at ₹3,914.45, the likelihood of a rally from here looks high as the decline is most likely a corrective one.

So, we expect the stock to gain momentum from here and rally to ₹4,270 in a month. But this is a considerable resistance, the rally might not extend beyond ₹4,270 and we expect the stock to end the current expiry below ₹4,270. So, we need a strategy to capitalize on the potential rally that we might see in the next one or two weeks. Options can be a good instrument in catching short-term price movements. Since our expectation is that the stock will rally to ₹4,270 and thereafter it could stay flat, bull-call spread can be an ideal strategy. So, here is our trade recommendation.

Strategy: Bull-call spread on Bajaj Auto can be constructed by buying 4000-strike call and simultaneously selling 4300-strike call. On Friday, these options closed with a premium of ₹72 and ₹13.75, respectively. Therefore, 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 will be about ₹14,562, which will be the maximum loss. 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 a lot size of 250 shares.

Exit this position when the stock touches ₹4,270 or hold until expiry, whichever occurs first.

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

Published on

July 30, 2022

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