Infosys: Risk-averse opt for a bull call spread strategy

MUMBAI: The Infy stock ended up 4.4% at Rs 2,508.10 on Monday following the news of Narayana Murthy’s return. Those tempted by Monday’s price movement, but lacking the nerve to purchase the stock outright, played a limited risk-reward options strategy called a bull call spread. Here’s how the strategy works. A trader buys a 2,600 strike price (price at which the underlier can be purchased) June Infy options contract by paying a premium of Rs 43.4. He simultaneously sells a 2,700 strike June Infy option and receives a premium of Rs 20.55.

His net outgo is Rs 22.85 (43.4-20.55). If Infy rallies above 2,622.85 (2,600 + 22.85) by June-end, he makes a profit. But the profit will be capped at Rs 77.15, irrespective of whether Infy closes at or above 2,700.

Similarly, the loss will be no higher than 22.85, the trader’s net outflow, if Infy closes below 2600, said Chetan Jain, derivatives analyst, Anand Rathi Financial Services. For example, if the stock closes this month at Rs 2750, the profit will be 77.15 (150 gain on 2,600 call minus 50 to be paid to buyer of 2,700 call minus 22.85). The advantage of the strategy is that the maximum gain and loss are known in advance.