F&O analysts suggest put ratio spread on RIL

Mumbai: Expecting a gradual decline in volatility and price stability around Rs 1,750-1,800 on RIL, some analysts are advising their rich clients to initiate a put ratio spread on the stock’s options to play for 5-7 per cent more downside. The strategy is to buy a 1,900 in-the-money put, while selling two 1,700 out-of-the-money puts to reduce the outflow. All options expire on November 26. The RIL share closed down 8.7 per cent at Rs 1,876 after posting better-than-expected Q2 numbers Saturday. The RIL 1,900 put closed at Rs 103 a share (505 shares make a lot) while the 1,700 put closed at Rs 30. Using these rates, the sale of two OTM puts fetches the client Rs 60, which cuts her outflow to Rs 43. This is the maximum a client would lose if RIL trades consistently above Rs 1,900. The maximum downside loss could be unlimited if RIL trades below Rs 1,543, 18 per cent lower from Monday’s closing, an unlikely event. There are two breakeven points — 1,857, the upper breakeven point, after which profit begins and runs through 1,700 and the lower breakeven point of 1,543, below which unlimited losses begin, as an extra 1,700 put was sold.“We anticipate stabilisation around 1,750-1,850 levels and expect the strategy to pay off, given relatively faster time decay and declining volatility of the two OTM puts,” said Navneet Daga, lead derivatives analyst, institutional equities, Yes Securities. Rohit Srivastava, independent technical analyst, terms the strategy “favourable” if the 40-week exponential moving average of 1,840 gives way, opening downside till 1,770 level.

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