F&O strategy: Call spread on Chola Investment & Finance

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The outlook for Cholamandalam Investment & Finance Company (₹741.75) stock is bullish. While the stock finds immediate support at ₹692, the next major is placed at ₹666. A close below this will shift the short-term outlook to negative. However, if the current trend holds, the stock may rise to ₹913. We expect the stock to maintain its upward trend.

F&O pointers: As the price hovered between ₹710 and ₹700 in the first five trading days in April, the counter lost open interest slightly. However, a sharp rise on Friday triggered an accumulation of open positions in April futures in the stock. This contract closed at ₹746.10, a healthy premium of ₹4.35 to the spot close of ₹741.75, signaling that traders are ready to roll over their positions. Options trading indicates movement within the range of ₹720-800.

Strategy: We advise traders to sell two lots of 800 call options and simultaneously buy one lot of 740 call options, which closed at a premium of ₹11.9 and ₹32.9, respectively. As the market lot is 1,250 shares, this strategy would cost traders ₹11,375 (i.e. ₹32.9 – ₹23.8). This strategy is for traders who can understand and take high risks.

While the loss would be limited to the premium paid (₹11,375) if the stock holds or falls below current levels, losses will increase if it rises above ₹860. The position will return a profit between ₹1,125 and ₹63,625 depending on where it settles between ₹750 and ₹850 at expiration. The maximum profit will occur if Cholamandalam reigns at ₹800. The position will again incur a loss of ₹11,375 if the security reaches ₹860. Thereafter, for every ₹10 increase from there, the loss will increase by another ₹10,000. Simply put, if the stock reaches ₹870, the loss would be ₹21,375 and so on, indicating higher risk. So exit with a profit of ₹20,000 or exit if the loss rises to ₹11,500. Risk averse traders can stay away.

Monitoring: Maintain LIC Housing Finance bullish spread strategy.

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

Published on

April 09, 2022

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