Analysis: Bhavin Desai’s Bull Spread on ITC

Bhavin Desai of Motilal Oswal Securities was on CNBC saying that one may buy ITC 350 Call and advises shorting 360 Call. This is a 350/360 long call spread on ITC. Let’s see how the trade works.

The greeks

ITC Bull Spread Greeks

The 360 call has a θ of -145.36 and it the model premium is 3.04. This means that the time decay will make the option worthless in a couple of days. Not bad since you are an option seller.

The 350 call is already ITM (the stock closed at 352.70) and the last traded price, Rs. 6.3 is less than the model price of Rs. 7.49. Not a bad deal.

Payoff diagram at expiry

ITC Bull Spread P&L

ITC Bull Spread Breakevens

 
 
ITC needs to be above Rs. 354.35 at expiry for this trade to break-even. Max loss is the premium paid upfront (Rs. 4350)

The right trade for the wrong reasons?

The transcript on moneycontrol says:

ITC has had some amount of shorts right from the beginning of this expiry and since then it has not done anything and once again since yesterday’s trade we have been seeing some amount of long additions. So, a call spread or rather a bull call spread is something that can be advised.

We are not really sure what that means. The reason why you would put a bull spread on is if you are moderately bullish about the stock and want to mitigate the cost of buying the lower strike by selling a higher strike.

Reference

Buy ITC 350 Call, short 360 Call: Bhavin Desai

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