A bull call spread could be the right strategy to play a rising Bank Nifty

MUMBAI: The Bank Nifty could rise by around 2 per cent in the immediate term with the RBI having revised its forecast for consumer price inflation downward in the first and second half of FY18 from earlier estimates.

Derivatives experts like Amit Gupta of ICICI Direct and Chandan Taparia of Motilal Oswal Securities suggest a bull call spread on Bank Nifty to benefit from this probable rise.

The bull call spread is done when you’re bullish on a moderate move in an underlying stock or index.

It consists of buying a call option at a lower strike and selling a call option of a higher strike to reduce the cost of initiating the strategy.

Both call options have the same expiry.

You buy a call option when you’re bullish, and a put option when you’re bearish.

At Wednesday’s closing prices of index call options, the strategy has a risk-reward of 1.6:1 which means the gain is higher than the loss you will incur if the strategy pays out.

The trader buys a 23,600 call option and simultaneously sells a 24,100 call, both expiring on June 29.

Based on Wed closing prices, the strategy’s cost is Rs 192 a share, also the maximum loss faced, and the maximum profit is Rs 308. While the maximum loss is limited to the initial debit (Rs 192), profit is limited to Rs 308 by the sale of the higher strike option, no matter how high the index exceeds the higher strike price (24,100) by.

The maximum loss happens if Bank Nifty remains below 23,600 while maximum profit will be with index expiring at 24,100. Above that, profit is capped at Rs 308.

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For e.g., if the index expires at 24,100, the buyer of that call forfeits his premium. However, if the index expires at 24,500, the price of the purchased call is Rs 708 (24,500-23,600-192).

However, since you sold a 24,100 call, you have to pay the buyer Rs 400. This caps the profit at Rs 308.

The resistance for Bank Nifty is 23,837 based on options closing price Wednesday. The immediate support is at 23,278.