bharti airtel: F&O strategy to bet on Airtel for those who want to risk it

Rich traders with a risk appetite could initiate a bull call ladder spread on the options of Bharti Airtel, which has hit fresh highs after the Supreme Court AGR hearing Friday. The SC ordered the telcos to pay up the dues to the department of telecommunications (DoT). Bharti Airtel has raised the funds to meet the liability.

The strategy comprises purchasing a call option at 560 strike, selling one 590 and 600 strikes each. All options expire on February 28. The sale of the out of the money (OTM) calls reduces the upfront cost of the 560 call but adds an element of risk if the stock expires sharply above Rs 620 in the current series, which analysts consider unlikely. Also, if Bharti trades below or at Rs 566.7, the loss is limited to the upfront premium paid.

Using Friday’s closing prices, the 560 call costs Rs 16.7 a share (1,851 shares equal one contract), the 590 ( Rs 6) and the 600 call Rs 4.

The sale of the two OTM calls fetches the trader Rs 10, which cuts the cost of the purchased 560 call to Rs 6.7. That’s the maximum loss if Bharti falls below the lower breakeven point (LBEP) of Rs 566.7 after which profit begins. The maximum profit is Rs 23.3 and happens if Bharti expires or trades at Rs 590-600. Each point above Rs 600 reduces the profit until Rs 623.3 after which unlimited losses begin since an extra call has been sold at the Rs 600 strike. To avoid this, a buyback stop loss could be placed at above Rs 630.

If Bharti expires at 600, the purchased 560 call is Rs 40 in the money and the sold 590 call is Rs 10 ITM while the 600 sold call expires worthless. After adjusting for debit the 560 call is in the money (ITM) by Rs 33.3 while the sold 590 call is 10 ITM. After paying out the call purchaser, the trader is left with Rs 23.3 (ex-brokerage and taxes).

If, however, Bharti expires the series at Rs 650, the 560 call adjusted for debit is ITM by Rs 83.3. The sold 590 call is worth Rs 60 and the sold 600 call worth Rs 50. Together the payout to the call buyers is Rs 110 a share, leaving the trader with a loss of Rs 26.7 (110-83.3).

At the UBEP of Rs 623.3, the 560 call is 56.6 ITM. The sold 590 is Rs 33.3 and the sold 600 call is 23.3 ITM, resulting in a payout to them of Rs 56.6, leaving the trader with zero gains.

“The options play in leading telcos makes sense as stocks like Bharti have run up and also during the second half of expiry OTM options tend to see more rapid fall in implied volatility, increasing the chances of gain,” said Amit Gupta, derivatives head of ICICI Direct, who suggests the call ladder.

Rajesh Palviya, derivatives head of Axis Securities, also said the strategy was “sound” and risk limited.