Tata Steel Bull Spread Strategy Analyzed

Nandish Shah, a technical analyst at HDFC Securities, recommends a “bull spread” strategy for Tata Steel (TATA STEEL) using options contracts. This strategy aims to profit if the stock price goes up, but with limited risk. Let’s break down how it works and what it means for investors.

Key Points

• Buy a call option for Tata Steel at ₹4.5 (expiry 24 Feb).
• Simultaneously sell a call option at ₹3 (expiry 24 Feb).
• Trade in a lot size of 5500 shares.
• Initial investment is ₹1.5 per strategy, totaling ₹8250.
• Maximum profit is ₹19,250 if the price hits ₹200.
• Risk-reward ratio is 1:2.33 – potential gains are twice the risk.

Understanding the Strategy

A bull spread is a trading strategy used when you think a stock’s price will rise, but you want to limit your potential losses. This specific strategy involves buying a lower-priced call option and selling a higher-priced call option on the same stock. This creates a profit zone if the price increases but caps the potential gains.

The Numbers & Potential Profit

To execute this, you’d buy one call option for Tata Steel with a strike price of ₹195 expiring on February 24th for a cost of ₹4.5 per share. Simultaneously, you’d sell one call option with a strike price of ₹200 expiring on February 24th for a cost of ₹3 per share. A lot size of 5500 shares is used, making the total investment ₹1.5 per strategy which equals ₹8250.

Breakeven and Risk

The breakeven point for this strategy is ₹196.5. This is the price at which the strategy becomes neutral, neither profitable nor losing. The risk reward ratio is 1:2.33, showing that for every ₹1.5 you risk, you could potentially gain up to ₹2.33. The approximate margin required for this strategy is ₹36,500.

Why This Strategy?

The analyst believes Tata Steel’s stock price is rising based on several factors. Futures data shows increasing investor interest (Open Interest). The stock has broken through key price levels on weekly and monthly charts, forming “bullish higher top higher bottom” patterns. Additionally, put options are being sold at lower strike prices, indicating a belief that the stock won’t fall significantly.

Disclaimer

The information presented is based on the analysis of Nandish Shah and HDFC Securities and should not be considered financial advice.