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
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