Please share your analysis on March expiry Tata Steel 147CE for long position

Muthu M

Tata Steel (₹155.3):  Before coming to the call option, we would like to take a look at the price movement of the underlying stock of Tata Steel as this decides the fate of the options.

The scrip began its latest uptrend in November last year after it took support at ₹115, where the 200-day moving average coincided. While Tata Steel’s price has been appreciating since then, it faced a resistance at ₹147 in February this year. The stock fell off this hurdle twice last month.

That said, last week, Tata Steel broke out of ₹147 with good volume. The chances of the extension of the rally are high. Before the March contracts expire, we expect the stock to touch ₹170 once.

Hence, the premium of 147-strike call (147CE) is likely to go up. This option closed at ₹11.4 on the special trading session on Saturday. Assuming that the stock rallies to ₹170 in the next two weeks, the premium can rise to ₹22.

Hence, you can consider buying 147-strike call on Tata Steel.

Nevertheless, there is a chance for the stock price to see a drop in price to ₹150 from the current level before rallying to ₹170. In such a case, the premium of 147CE might dip to the price band of ₹8-9. So, you may wait and buy the option when the price dips to ₹9 and exit at ₹20. Stop-loss can be at ₹5.

Even if the option price does not increase to ₹20-22 band when the underlying stock price hits ₹170, exit the option trade at the prevailing price. This could be because of a drop in buying interest which can lead to a decline in volatility. A drop in volatility can weigh on the option prices and is not ideal for option buyers.

On the other hand, if the option premium rises to ₹20-22 band even before the stock price reaches ₹170, you can keep stop-loss at ₹15 and hold the option. Exit at the prevailing price when the stock hits ₹170.

(Send your queries to derivatives@thehindu.co.in)

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