HDFC Securities analyst Nandish Shah has proposed a 'Bull Spread' derivative strategy for the Nifty index and Shriram Finance, citing technical indicators such as short covering and long build-ups. This approach involves specific call option combinations to manage risk-reward profiles ahead of July expiries.
What Happened
Nandish Shah, an analyst at HDFC Securities, has suggested 'Bull Spread' strategies for the Nifty index and Shriram Finance shares for their respective July expiries. A Bull Spread is a derivative strategy used when an investor expects a moderate rise in price. It involves buying a call option at a lower strike price and simultaneously selling a call option at a higher strike price. This structure limits both the maximum potential profit and the maximum potential loss for the trader.
The Nifty Strategy Details
For the Nifty index, the strategy targets the July 14 expiry. It involves buying the 24200 Call option and selling the 24500 Call option. The maximum profit is calculated at ₹11,440 if the Nifty reaches or exceeds 24500 by the expiry date. The maximum risk or loss is limited to ₹8,060 if the index settles at or below 24200. The breakeven point for this trade is 24324. The estimated margin required to initiate this position is approximately ₹31,500.
Technical Rationale for Nifty
The analyst's outlook is based on observed market data. The report points to 'short covering' in Nifty futures, which happens when traders who previously sold the index buy it back to close their positions, often leading to a price rise. The index is currently trading above its 5-day and 20-day Exponential Moving Averages (EMAs), which are tools used to identify short-term trends. Additionally, significant 'put writing'—an indicator of bullish sentiment—has been seen at the 24000-24200 levels.
Shriram Finance Outlook
For Shriram Finance, the strategy is planned for the July 28 expiry. It involves purchasing the 1080 Call option and selling the 1100 Call option. This trade setup offers a maximum profit of ₹10,313 if the stock hits ₹1,100, with a maximum loss capped at ₹6,187 if it remains at or below ₹1,080. The breakeven level is ₹1,087.5, and the margin requirement is around ₹31,000.
Market Indicators for Shriram Finance
The recommendation is based on a 'long build-up' in Shriram Finance futures, meaning both the stock price and the total number of open contracts are rising, suggesting new bullish positions are being formed. The stock has recently moved above a downward-sloping trendline, and momentum indicators like the Relative Strength Index (RSI) are trending upward, reflecting positive momentum in the short term.
What Investors Should Track
Derivative strategies are highly sensitive to market volatility and the underlying asset's price movement. Investors should note that these strategies are designed for specific short-term timeframes and may not perform as expected if market conditions change rapidly. The profitability of such spreads depends on the price staying within the projected range until expiry. Monitoring the Nifty's support levels and the stock's trendline sustainability remains essential for those following such technical setups.