F&O Trading: Adopt Bull Spread strategy on GAIL for the August expiry

Buy GAIL 130 Call option and simultaneously Sell 135 Call of the 26-October expiry, recommends Nandish Shah, Sr. derivatives & technical research analyst of HDFC Securities.

Derivative Strategy

BULL SPREAD Strategy on GAIL

Buy GAIL (26-Oct Expiry) 130 CALL at Rs 2.95 & simultaneously sell 135 CALL at Rs 1.35

Lot Size: 9150

Cost of the strategy: Rs 1.60 (Rs 14,640 per strategy)

Maximum profit: Rs 31,110; If GAIL closes at or above Rs 135 on 26-Oct expiry.

Breakeven Point: Rs 131.6

Risk Reward Ratio: 1:2.12

Approx margin required: Rs 41,600

Rationale:

• Long build up is seen in the GAIL Futures on Thursday where Open Interest rose by 6 per cent (Prov) with it rising by 4.70 per cent.
   
• The stock price has broken out on the daily and weekly chart to close at five year high.
   
• The stock price has broken out from the bullish inverse head and shoulder pattern on the weekly chart.
   
• Oscillators like RSI(11) and MFI(10) are slopping upwards and placed above 60 on the daily chart, indicting strength in the stock.

Note: It is advisable to book profit in the strategy when ROI exceeds 20%.

Disclaimer: Nandish Shah is Sr. Derivatives & Technical Research Analyst at HDFC Securities. He doesn't hold any position in the stock. Views are personal.