Technical Analysis

A bear-call spread on Tata Steel

KS BADRI NARAYANAN | Updated on October 12, 2014 Published on October 12, 2014


Tata Steel (₹448) is likely to test its immediate support at ₹393. A close below ₹393 will change the outlook to negative. In such a scenario, the stock could trend lower to ₹343 or even ₹301 levels.

F&O pointers: The counter witnessed heavy accumulation of short positions on Friday. Tata Steel October futures added close to 9.5 lakh shares. Option trading, though, indicates that ₹480 will be difficult to breach.

Strategy: Traders could consider a bear-call spread on Tata Steel. This can be initiated by selling ₹440 call and simultaneously buying ₹490 call. They closed at ₹19.10 and ₹2.45 respectively. The strategy will entail an initial inflow of ₹16,650, which could be the maximum profit one can earn. For that to happen, Tata Steel has to settle at or below ₹440 at the time of expiry.

If Tata Steel settles at Rs 456, the position will result in neutral, which means neither loss nor gain.

On the other hand, a close above ₹490 will result in losses. The maximum loss in the strategy could be about ₹33,500.

We advise only traders with a high risk appetite to consider this strategy. Traders can exit the position if the loss mounts to ₹10,000.

Alternatively, traders could also consider writing ₹480 call, which will result in an inflow of ₹4,850. While the maximum profit potential is the premium received, loss could be unlimited if Tata Steel moves above ₹485.

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