The strategy comprises purchase of a Rs 4 strike call option and simultaneous sale of a Rs 5 strike call on the near month contract. This limits the profit, but also puts a lid on the cost, making it “expedient,” according to Rajesh Palviya, derivatives head, Axis Securities.
Based on November 18 closing rates, the sale of the Rs 5 strike call reduces the debit of the Rs 4 strike call to 45 paise a share (28000 shares make one contract). This is the maximum a trader could lose, but it also caps the maximum profit to 55 paise, which happens if Idea expires at Rs 5 or above. The maximum loss of 45 paise happens if Idea closes at or below Rs 4. The profit begins above Rs 4.45.
Assume Idea expires at Rs 5. The purchased Rs 4 call is in the money by 55 paise , adjusting for the debit of 45 paise. The sold ₹5 call expires at zero. But, if Idea closes at Rs 6, the profit will still be 55 paise as the purchased call will be worth Rs 1.55 and the sold ₹5 call will be worth ₹1. After paying the Rs 5 call buyer, the trader is left with 0.55 paise (1.55-1). This excludes brokerage and other relevant taxes.
“Telcos have risen of late on expectations of some relief from the government, reflected by an increase in bullish bets through rising futures contract open interest and declining call open interest,” said Amit Gupta, derivatives head at ICICI Securities.
In Idea, the near month futures open interest has increased by 31.55 per cent since November 14 (Friday). The contract price has risen 52 per cent to Rs 4.50 over the period, indicating bullish bet creation. On Monday, call sellers at Rs 4 strike bought back almost 1.5 crore shares, pushing up the option’s price to 85 paise. Simultaneously, the Rs 4 strike put witnessed OI rising 31.9 lakh shares as the contract price dipped by 45 paise, a bullish sign, as put sellers were able to pocket part of the premium received from put buyers.