Options strategy for traders bullish on RIL stock

Mumbai: Reliance Industries could witness 5-6 per cent upside movement from Thursday’s close of Rs 1,993 as the stock has bounced back twice in the recent past from Rs 1,830-1,850 level. Traders and analysts say that this has now become a strong technical support and they are advising rich investors to ride this anticipated upside through a combination of call options. These options are instruments that derive their value from an underlying stock or index and the buyers benefit when an underlier rises. The strategy involves buying one call option contract (250 shares) at Rs 2,000 level or strike. It also involves selling two call option contracts — one at Rs 2,100 and the other at Rs 2,200. All options expire on January 28.The idea behind the sale of two calls is the expectation of "moderate" upside and reduction in the cost of the purchased Rs 2,000 call option, explains Chandan Taparia, derivatives analyst at Motilal Oswal Financial Services. The client can hold the options through expiry, that is till January 28, or square off prior to that if RIL rises to Rs 2,100 or slightly higher. Here's how one gains if RIL rises to the anticipated level of Rs 2,100-2,120, using Thursday closing rates. The purchased call at Rs 2,000 strike costs Rs 89 a share, the sold Rs 2,100 call fetches the client Rs 51 and the sold Rs 2,200 call fetches her Rs 27. So she receives Rs 78, which helps her cut the cost price of the Rs 2,000 call to just Rs 11 a share. This is the maximum she loses if RIL expires or remains below Rs 2,000 by January 28. The maximum gain is Rs 89 and happens at Rs 2,100 and Rs 2,200. 79982053Since each contract is 250 shares, the purchase of the Rs 2,000 call option would cost Rs 22,250. The sale of the Rs 2,100 call would fetch the client Rs 12,750, that is 250xRs 51. The sale of the Rs 2,200 call would result in an inflow of Rs 6,750. So, the client would spend Rs 22,250 in buying the Rs 2,000 call and receive Rs 19,500. Her expense in this deal would only be Rs 2,750.Now for e.g., if RIL closes at Rs 2,100 upon expiry, the purchased Rs 2,000 call is worth Rs 100. The sold Rs 2,100 and Rs 2,200 calls expire worthless. The client nets Rs 89 adjusting for the cost of the Rs 2,000 call, i.e. Rs 11. An unlimited loss starts only if RIL closes above Rs 2,289 since an extra call has been sold at Rs 2,200. However, analysts like Rohit Srivastava of IndiaCharts expect moderate upside for RIL through Rs 2,100-Rs 2,120. "For now, RIL can move up by 5-6 per cent," said Srivastava. "The client is safe until RIL hits Rs 2,200. Every point above that cuts her profit through Rs 2,289, the upper breakeven point beyond which unlimited loss happens."RIL hit a record high of Rs 2,369.35 on September 16. The stock corrected to Rs 1,835 on November 3, after which it bounced back to Rs 2,085 before correcting again to Rs 1,855 on December 21. From there it has risen again to Rs 1,992.95 on December 24.

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