An­a­lysts Pitch for Low-risk, High-re­ward Bets on RIL

Could be ini­ti­ated if stock cor­rects to around 1,150 this week; it could earn a trader 3.5-4 times re­turns from the March se­ries op­tions

The Economic Times - - Smart - Ram Sah­gal & De­vangi Gandhi

Mum­bai | ET In­tel­li­gence Group: Reliance In­dus­tries, which rose its high­est in eight years on Wed­nes­day, could be a good can­di­date for a bull call spread, ac­cord­ing to de­riv­a­tives an­a­lysts, who claim that such a strat­egy could en­able a trader to earn 3.5-4 times re­turns dur­ing the March se­ries.

They add that the strat­egy could be ini­ti­ated if the stock cor­rects by 2.53% to around ₹ 1,150 apiece this week.

The bull call spread is done when mod­er­ate move­ment is ex­pected on a stock over a time frame. RIL closed up al­most 11% at ₹ 1,207.50 — the most it has risen since May 2009. An­a­lysts at­trib­uted the price jump to its tele­com ven­ture Jio be­com­ing oper­a­tionally prof­itable ear­lier than the Street an­tic­i­pated. How­ever, some amount of profit book­ing since then — the stock closed down 2% on Thurs­day at ₹ 1,182.75 — along with huge sell­ing of 1,200 strike call op­tions in­di­cate it could cor­rect to ₹ 1,150-1,160 in the short term. This is when the bull call spread can be ini­ti­ated, ac­cord­ing to He­mant Na­hata of IIFL and Av­inash Nile, AVP (de­riv­a­tives anal­y­sis) Prithvi Broking.

ETIG com­pi­la­tion shows that af­terWed­nes­day’s move, Reliance has bro­ken the chan­nel it had been mov­ing in for more than two years. This im-

spread is done when mod­er­ate move­ment is ex­pected on a stock over a time frame

book­ing in RIL and huge sell­ing of strike call op­tions in­di­cate it could cor­rect to

in the short term

plies a strong sup­port at ₹ 1,140-1,150, out­lined by the up­per trend­line of the chan­nel as well as ear­lier highs the stock touched in 2009 and 2014. On the up­side, ₹ 1,200-1,267 could of­fer strong re­sis­tance.

Nile says upon cor­rec­tion to ₹ 1,150, a client could buy a ₹ 1,160 strike call op­tion and sell two ₹ 1,260 call op­tions ex­pir­ing on March 30. Prices of th­ese op­tions will change once the stock cor­rects. But it can be il­lus­trated with Thurs­day’s closing rates.

The ₹ 1,160-op­tion closed at ₹ 52, while the ₹ 1,260-op­tion closed at slightly above ₹ 15. Since the client sells two ₹ 1,260 calls, she cuts the out­lay for the strat­egy to ₹ 22 (`52 mi­nus ₹ 30 re­ceived from sale of calls). Her profit breakeven is ₹ 1,182. Max­i­mum profit of ₹ 78 ac­crues if RIL closes at ₹ 1,260. That’s a risk re­ward of 1:3.5.

If the stock closes at ₹ 1260, the buyer of the two call op­tions at that level for­feits the pre­mium. If RIL closes be­low ₹ 1,160, the max­i­mum the client loses is `22. How­ever, the client’s breakeven above which she faces losses, as she sold an ex­tra ₹ 1,260 call, is ₹ 1,338.

But de­riv­a­tives an­a­lysts like Amit Gupta of ICICI Di­rect, while ex­pect­ing the stock to hit ₹ 1,260 once in the March se­ries, feel a 15% rise (from ₹ 1,160) is “tough” though not al­to­gether im­pos­si­ble.

That leaves chances of clients earn­ing 3.5-4 times re­turn fairly strong, said Na­hata.

Some profit 1,200- 1,150-1,160

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