F&O Strategy: Buy put option on Bharat Forge

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The stock of Bharat Forge (₹706.4) has been charting a sideways trend since the beginning of the year i.e., it has been fluctuating in the price band of ₹615 and ₹750. As it stands, the price action hints that the sideways range will stay valid in the short-term, at least in the next two or three weeks. That means, currently trading at ₹706, the stock is hovering around the upper boundary of the range and so, the price could drop from here and the scrip will most likely retest the lower boundary of the range which is ₹615.

We expect that the stock will at least fall by three-fourth of the total vertical distance of the band before the end of this expiry. That is, before the expiration of the August series, the price of Bharat forge could drop to ₹640-650 region. This also means the volatility can go up in the coming weeks.

Therefore, it can be ideal to execute a strategy that can capitalise well on the increase in volatility as well as the downside movement.

Strategy: Considering the above factors, we suggest traders to buy a put option on Bharat Forge. Opt for strike that is at-the-money so that when the stock price falls, the option also gains from the intrinsic value as it will quickly become in-the-money option.

So, consider buying ₹700-strike put option (700-PE) on Bharat Forge which closed on Friday with a premium of ₹20.9. Since the lot size of the stock’s derivatives contract is 1,000 shares, buying 700-PE can cost you ₹20,900 per lot. We expect the premium to shoot up to ₹40 by the time the price falls to ₹650. Therefore, liquidate this put when the premium rises to ₹40. On the other hand, exit if the option premium drops to ₹10.

Note: The recommendations are based on technical analysis and F&O positions. There is a risk of loss in trading.

Published on August 06, 2022