Analysts Favour a Bull Call Spread
Mumbai: Derivatives analysts are advising clients to do a bull call spread on SBI in light of the bank beating Street estimates on both profitability and asset quality in the third quarter. The stock, which has risen 10% over the past 22 trading sessions on anticipation of a strong Q3 show and accrual of lowcost deposits because of demonetisation, has potential to rise by another 4-5% before derivatives expiry on February 23, they said.
Experts also said that the strategy is favourable because it has a 1:3 risk reward ratio, thanks to expiry of the February series of derivatives being less than 10 days away.
The strategy comprises buying an SBI call option of ₹ 275 strike and selling two call options of the ₹ 290 strike.
The aim behind selling two ₹ 290 strike options is to pocket premium and cut cost of the ₹ 275 option on expectation that the stock will not rise above ₹ 290 in the time frame of the strategy. Thus, while a gain would accrue on the ₹ 275 call , the sold ₹ 290 calls would expire worthless.
Rounding off Friday’s closing price, the client would have to shell out ₹ 7/share for the ₹ 275 strike. However, since she sells two ₹ 290-strike calls for ₹ 4, the cost of the purchased option is just ₹ 3/share.
The maximum profit is ₹ 15, while losses begin (since two options have been sold) after ₹ 305. However, SBI, which closed flat at ₹ 275 on Friday is expected to face stiff re- sistance around ₹ 288-289 (its 52week high) in the current series. For simplicity, all prices exclude brokerage and taxes.
The breakeven for the ₹ 275 call is ₹ 278 (`3 option cost) . If the stock ends at ₹ 288 at expiry, you make a little more than three times amount invested (`3). If the stock ends below ₹ 275 at expiry, all the calls end out of the money and your loss is a debit of ₹ 3.
The brokers’ confidence of the 1:3 risk-reward gains currency because closer to expiry, options lose value due to time decay, or theta.
AT THE CENTRESTAGE
“Here we are banking on the robust Q3 result lifting the stock by a moderate 4-5% over the next week or so, while theta simultaneously eroding value of the ₹ 290 calls,” said Sanjiv Bhasin, EVP, markets and corporate affairs, IIFL.
SK Joshi, head of wealth management at Khambatta Securities agrees.
Incidentally, the SBI derivatives counter witnessed a 20% spurt in open interest or traders’ outstanding positions to 51,644 contracts on Friday post Q3 results. This was the highest among all underlying stocks on NSE.