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Tuesday, 4 April 2017

RIL could cross Rs 1,400: F&O experts

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MUMBAI: The optimism surrounding the Reliance Industries BSE 3.94 % stock after it hit a nine-year high of Rs 1,380, and the sale of in-themoney (ITM) put options, is prompting analysts to recommend a bull-call spread on the counter to their clients. The strategy's risk-reward of 1:2 at Monday close is considered robust at the start of a new series. Reliance has gained 8.2% since Thursday to close at Rs 1,374.65 apiece Monday after the company revealed the response to its telecom service Jio late on Friday 

The strategy involves purchase of a 1,380 strike call option and simultaneous sale of a 1,440 strike call expiring on April 27. The strategy is expected to pan out over the next two weeks. The sale of the higher strike option substantially reduces the cost of the lower strike one. However, it also caps the profit no matter how high the stock moves. The downside is limited to the net debit. 

The 1,380 call closed at Rs 33.6 while the 1,440 call ended at 14.35. Both prices are provisional. Assuming those are the costs at Wednesday, sale of a 1,440 call reduces the price of the 1,380 call to Rs 19.25. That's the maximum a trader could lose per share (500 shares equals one lot). The breakeven after which the trader begins to profit is 1,399.25 (1,380 plus 19.25). If the stock reaches Rs 1,440, he makes a profit of Rs 40. The risk of forfeiting the premium is if RIL ends the  series below Rs 1,380.If the stock rises to Rs 1,480, the Rs 1,380 call will be Rs 80 in the money (minus the net debit) while the 1,440 call will be Rs 40 ITM. That still gives the trader a Rs 40 profit, the maximum he can earn. 


Analysts like Taparia also believe that sale of 1,400 put options on Monday indicates that sellers are “confident" that the stock would actually rally above Rs 1,400 and stay there. When price of an underlier rises and option sellers sell in the money put options on the stock it's an indication they are bullish and stand to gain if the price does not fall below that level. The put option buyer in that case sees the price of the put fall.

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