Why a bullish call spread on BHEL may pay off

Bharat Heavy Electricals Limited (BHEL) stock (₹ 65.60) reigns at a crucial level and the near term outlook has turned positive. The stock finds immediate resistance at 71 and a close above will trigger a further rally in the stock, which could take it towards ₹ 78. A close above this level will make the medium term outlook positive. On the other hand, BHEL finds immediate support at 58, and further weakness could drag the stock to ₹ 50. We expect the stock to move in a narrow range with a positive bias.

F&O pointers: The meter has seen a build-up of open interest positions as well as a rise in prices over the past few days. From around one crore of shares, open positions jumped to around 11.52 crore of shares as the price rose from 58 to 65, signaling a bullish nuance. Option trading indicates that the stock could move between 60 and 70.

Strategy: Traders might consider a bullish buying spread using calls at 65 and ₹ 70. Traders are expected to simultaneously buy 65-call and sell 70-call which closed with a premium of ₹ 5.55 and ₹ 3.55 respectively. Since the market lot is 10,500 shares, it will cost 21,000. The maximum loss would be the premium paid (i.e. 21,000) and this will happen if BHEL closes at 65 or below on expiration.

On the other hand, a profit of 31,500 is possible if the stock goes above 70. We advise traders to exit if the loss is 12,500.

Traders who want to take risks and have enough cash to meet their margin obligations may consider going long in BHEL futures to a target of 70 with a stop loss at 58 initially. If the stock opens on a positive note, the stop loss can be moved to 63.75, then to 66.75. Risk-reluctant traders might stay away from this strategy as the market is very high.

To follow: Those who hold Infosys ₹ 1760-call can continue to hold. Traders can book profits on NTPC recommended two weeks ago.

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

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