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A bull call spread is a strategy where one buys a Call option and sells a higher strike call option. The net premium outflow reduces to the extent of sold options premium and yet the risk reduces as you have less to lose.

One of the key benefits of trading options is that instead of a straight-line Profit & Loss curve that Futures offer, options can be customized to fit the reward and risk of a trader.

Over millions of options strategy combinations can be achieved from the options chain and one of them is vertical spread. The vertical spread family can consist of multiple strategies, but the most popular ones are Bull Call Spreads & Bear Put Spreads.

At the same time, the trade-off is that a bull call spread offers a limited upside versus a simple long call. How much risk is one willing to take and how much reward one expects varies from trader to trader but in this article, we’ll learn that being an opportunist when should one prefer a bull call spread over a long call. Similarly, the concept could be applied for a Bear Put Spread versus a Long put.

A key input for choosing an options strategy revolves around time. If the time frame for a forecast is extremely short term i.e. 3-4 days then in most cases Long call will be a preferred strategy but, the moment the forecast is for a long time period then getting compensated for the time with a vertical spread is a good idea.

Vertical spread can improve the pay-off in terms of the reward to risk when the time frame is more positional (generally more than 4 days) and the strategy can also be carried till expiry.

Momentum

Consider a market that is oscillating within a few hundred points, it becomes a challenging task to identify stocks that may witness a directional move, in these cases, a lot of Theta is lost in expectations of breakouts which lacks due to the overall market structure.

In a market where momentum is lacking, vertical spreads can be a better bet than buying a single option.

Expiry Placement

Expiry placement or days to expiry is an important input when deciding on an options strategy and where are you placed in the expiry affects the decision. From mid expiry when the options theta starts to decay faster, it is generally a better idea to resort to vertical spread over single options contract.

Most importantly, in the expiry week when options are decaying very fast, it might always be a good idea to resort to a vertical spread for any trades being carried for more than a day.

Risk Aversion

Many investors look forward to options to build their portfolio and to make returns from medium-term moves. Since deploying a vertical spread is far cheaper than trading futures, it naturally restricts the risk.

A vertical spread with one OTM as buying and a few OTMs as sell strike typically offers a 3:1 reward to risk. It means that if you succeed you make 3 times more profit than the risk you take and for strategies with a medium-term approach, this helps in reducing risk yet providing a handsome profit potential.

Strategic Forecasts

In many cases, traders do forecast probable targets of underlying equity and trades for them. Vertical spreads are a good way to trade if you are confident that the target will act as a resistance. If your forecast suggests that the underlying equity may not move above those levels, then in those cases you may not want to pay a high premium that a single option brings to the table. Instead, selling the strike of the target reduces your premium outflow and optimizes your trade to customize to your forecast.

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Credit Suisse has sharply lowered its real GDP growth forecast for this fiscal year to around 8.5-9 percent, citing economic disruptions in the country due to the raging second wave that is likely to shave 100-150 bps growth off the economy.

The Swiss brokerage has also warned that it will delay the economy from reaching a potential growth rate by an additional two-three years beyond 2022-23.

The consensus forecast for FY22 growth is between 10 and 11 percent by most analysts, including international raters like S&P, Fitch, and Moody's, and so is their domestic counterparts, with the lowest among them being nine percent by Brickwork Ratings.

Similarly, the consensus potential annual growth rate is 6.5 percent for many years from 2022-23, which many had predicted after the first wave and the sharper-than-expected recovery the economy had logged in last year.

Analysts were also expecting a rapid turnaround for the economy this fiscal following at least an 8 percent contraction in 2020-21 after being ravaged by the pandemic-induced nationwide lockdown last year.

Given the impact of the raging second wave, Credit Suisse expects a GDP impact of 100-150 basis points, even though considers the second wave is much more intense than the first in terms of daily cases and deaths, yet the economic impact is lower.

The country recorded coronavirus infections of over 4.12 lakh in the last 24 hours.

"We may revise downwards the FY22 real GDP growth forecast by 100-150 bps from our earlier forecast of 7 percent over 2019-20. Yet, our forecast is meaningfully higher than the consensus forecast, as it was before the second wave.

"We now expect 2021-22 real GDP to be 5 percent more than 2019-20 (when it stood at a 4 percent)," Neelkanth Mishra, co-head of equity strategy for the Asia Pacific and India equity strategist at Credit Suisse, told PTI in an interaction.

He expects that economic activity restrictions this time should last a few weeks and not months as in the case of last year, and are also less intense than last year, and more localized.

On the long-term impact of the second wave on growth, Mishra feels the economy may not reach the pre-pandemic projected levels for at least two-three years after 2022-23.

A year before the pandemic scuppered every plan, the government had set its eyes on an ambitious USD 5-trillion GDP target by FY25, becoming the fourth largest after the US, China, and Japan and the third-largest by 2029-30. On growth normalization, Mishra said it would depend on how soon the peak of the infection, how long the second wave lasts, and the intensity of activity restrictions by governments.

As of now, it looks like the case and death numbers should start to ease by mid-May as our current expectation is that lockdowns are likely to be localized and not very intense and will mostly be short-lived, he said.

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Policy measures announced by the Reserve Bank of India (RBI) on Wednesday will be a shot in the arm for the economy as well as companies in the Micro, Medium, and Small Enterprises (MSMEs), financial, and healthcare space.

RBI Governor Shaktikanta Das announced a set of fiscal measures to tide over the second wave of COVID-19 cases.

The market reversed losses and closed with handsome gains, despite a rise in COVID cases across the country. RBI’s relief measures came well in time when the second wave of COVID-19 is gripping the country.

Experts spoke to are of the view that stocks from small finance banks (SFBs), housing finance banks (HFCs), medical equipment manufacturers, healthcare, banks, NBFCs, and hospital sectors are likely to benefit the most from the measures announced.

Das announced the second tranche of buying of government securities (G-Secs) under the Government Securities Acquisition Programme (G-SAP) 1.0 to be conducted on May 20, 2021.

“The announcement of the second tranche of bond buying to the tune of Rs 350 billion is likely to further soften bond yields. Overall, the RBI measures certainly bode well for banks and NBFCs,”

On-tap liquidity of Rs 50,000 crore at repo rate is being opened till March 31, 2022. This will bode well for the health infrastructure space.

Das opened an on-tap liquidity window of Rs 50,000 crore with a tenor of up to three years at a repo rate.

“The inclusion of Micro Finance Institutions (MFIs), with an asset base of up to Rs 500 crore in SFBs’ lending radar with new funds will help the weaker sections of the industry to cope up with COVID resurgence,” Mohit Nigam, Head, PMS, Hem Securities, told 

“These measures will somehow provide a cushion for the financial system, which lends to small hands, and, hence, restrict any severe impact to the system. SFBs, HFBs, medical equipment manufacturers, healthcare, and hospitals are some of the sectors which shall benefit the most out of today's relief measures,” he said.

The restructuring resolution for borrowers for up to Rs 25 crore received a thumbs up.

The RBI announced fresh restructuring resolutions for individuals, small businesses, and MSME borrowers who have an aggregate exposure of up to Rs 25 crore.

“RBI has largely addressed the need of small borrowers, individuals as well as businesses, and MSMEs that have been among the worst affected in the second resurgence of

COVID,” Naveen Kulkarni, Chief Investment Officer, Axis Securities, Besides liquidity measures, easing lending to the above strata by extension of restructuring resolutions, and boosting medical infrastructure through PSL recognition will help bring in relief in the financial ecosystem,” he said.

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The Second Wave of COVID-19 and allied lockdown-like restrictions have impacted employment across the country. According to the Naukri JobSpeak Index, there was a 15 percent dip in hiring activity sequentially for April 2021.

The report, however, said that the current impact on the job market is less severe than what was seen in April 2020.

Among sectors, the report said that retail saw a sequential decline of 33 percent in April 2021 due to restricted operating hours or closure owing to lockdowns in many parts of the country.

Sectors such as hospitality and travel (-36 percent), banking/finance (-26 percent) and teaching/education (-24 percent) remained highly impacted in hiring activity in April 2021.

Said Pawan Goyal, Chief Business Officer, Naukri: "The disruption caused by the Second Wave of COVID-19 has impacted hiring activity. However, the current impact on the job market is less severe than what we saw in April 2020 where the Naukri JobSpeak index declined by 51 percent sequentially."

Sectors like pharmaceuticals/biotech (decline of 9 percent) and medical/healthcare (decline of 10 percent) were less impacted by the restrictions imposed.

City-wise decline

The jobs market across metro and non-metro cities saw a downfall, barring Kolkata that remained flat.

The aggressive surge of cases in Maharashtra directly impacted hiring trends in Mumbai, which saw a sequential decline of 20 percent in April 2021.

While Delhi/National Capital Region (NCR) (-18 percent) also remained impacted sequentially, Bangalore (-10 percent), Chennai (-10 percent), and Hyderabad (-4 percent) were less impacted in April 2021.

The Naukri JobSpeak is a monthly Index that calculates and records hiring activity based on the job listings on the Naukri.com website month-on-month (m-o-m).

The job speaks index includes employment that might be for replacement hiring. July 2008 is taken as the base with an index value of 1,000 and the subsequent monthly index is compared with the data for July 2008.

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Open-cell panels are used in manufacturing television screens and are imported from China. The plan is to increase the import duty gradually to 10-12 percent over the next three years, The customs duty currently is 5 percent.

In September 2019, after requests from television makers, the Central Board of Indirect Taxes and Customs (CBIC) announced that there would not be any customs duty on open-cell panels, provided manufacturers develop domestic manufacturing capacities in a year’s time.

TV manufacturers have been unable to set up local manufacturing capacities for panels so far. The Coronavirus outbreak and subsequent lockdown also hampered their plans.

“It will be a gradual increase every year. The idea is to nudge TV brands to manufacture these components locally. They have been given time since 2019 to build local capacities," said an official.

This will be the third time in a row in 2021 that the prices of TV sets will go up. Considering the increase in panel prices, TV prices went up in January and April.

 had reported earlier about the rise in prices of television sets by 10-30 percent from April 1 as all the Chinese panel manufacturers hiked their rates.

"We had requested the government to have zero duty for open-cell panels but their mandate is that the ‘make-in-India’ initiative must get a fillip. This sentiment is valid but there should also be financial incentives provided," said the vice president-India at a global white goods firm.

Over and above the customs duty, there is the Goods and Services Tax (GST). TV sets up to 32 inches are levied 18 percent GST while those above 32 inches attract the maximum of 28 percent.

Prices of TV sets most volatile

Since the Coronavirus outbreak, prices have seen an increase almost every quarter. Initially, the price rise was on account of a manufacturing shutdown in China, but it continued even after the demand-supply situation stabilized.

All TV makers in India import open-cell panels from markets like China. Despite requests from manufacturers to extend a zero-customs-duty regime, the government decided to impose a 5 percent customs duty.

Large television brands in India include Samsung, LG, Sony, Thomson, Kodak, Vu, Mi, and OnePlus.

When the COVID-19 outbreak was first reported in Wuhan, China, in the last week of December 2019, TV makers were the most worried. Since China supplies panels which are the key components to manufacture televisions, there were fears of raw material shortage.

Their worst fears came true in January 2020, when production came to a standstill across manufacturing hubs in China. This led to an acute shortage of components like panels, leading to a price increase of 10 percent in February 2020 itself.

“The last two years (2020 and 2021) have been the worst for the TV industry in India. There should be temporary relief at least till the COVID-19 situation normalizes," said Akhilesh Tripathy, a Mumbai-based electronics dealer Vipul Electronics.

The industry has sought either an immediate slashing of GST rate or removal of duties on open-cell panels for the next two years.

As the year progressed, India also imposed a lockdown from March 25, halting production activity across the country. On the one hand, there was a component shortage, while, on the other, there was a scarcity of TV sets as well.

Amidst manufacturing slowly crawling back to normal from June onwards, a July 30 notification by the Directorate General of Foreign Trade (DGFT) placed the import of color television sets of all sizes in the restricted category. High-end TV sets that are 80 inches and above are typically imported from other markets.

During the same time, anti-China sentiments stayed strong with the India-China clash in Galway Valley leading to the death of 20 Indian soldiers. Components and finished goods from China were under thorough scrutiny since then, leading to production delays in India. Another shocker came in September in the form of rising in TV panel prices, ahead of the Diwali sales season. This led to an almost 25 percent price increase.

This was quickly followed by the re-imposition of the 5 percent customs duty on open cells from October 1 onwards. Meanwhile, the rise in panel prices continued and prices of TV sets also continued moving northward.

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 Reliance Industries (RIL) share price fell more than 2 percent in the early trade on May 3 even after the oil-to-telecom major on April 30 reported a consolidated net profit of Rs 13,227 crore for the quarter ended March 2021 (Q4FY21), up 108.4 percent year-on-year amid significant growth in Jio and recovery in retail segments.

Consolidated revenue from operations stood at Rs 1,54,896 crore, up 11 percent YoY, while the sequential increase in topline was at 24.9 percent.

The oil-to-chemical (O2C) business revenue grew by 20.6 percent sequentially to Rs 1,01,080 crore.

Jio Platforms recorded a 47.5 percent year-on-year (half a percent QoQ) growth in consolidated profit at Rs 3,508 crore and Reliance Retail's net profit for the quarter was Rs 2,247 crore, up 45 percent YoY and 23 percent QoQ.

The company also announced a dividend of Rs 7 per share.

Seven of the top-10 most-valued companies together added a whopping Rs 1,62,774.49 crore in market valuation last week, with major contributions coming in from Reliance Industries Ltd and Bajaj Finance.

Last week, the 30-share BSE benchmark gained 903.91 points or 1.88 percent.

While Reliance Industries, Infosys, Hindustan Unilever Limited, ICICI Bank, Kotak Mahindra Bank, Bajaj Finance, and State Bank of India emerged as gainers, Tata Consultancy Services, HDFC Bank, and HDFC took losses in their market capitalization (m-cap).

The valuation of RIL jumped Rs 57,086.67 crore to reach Rs 12,64,369.99 crore.

Bajaj Finance''s market capitalisation zoomed Rs 47,526.08 crore to Rs 3,28,639.08 crore.

ICICI Bank added Rs 21,033.34 crore taking its valuation to Rs 4,15,348.35 crore and State Bank of India witnessed a rally of Rs 15,171.83 crore to reach the market capitalization of Rs 3,15,440.39 crore.

The market capitalization of Hindustan Unilever gained Rs 10,761.02 crore to Rs 5,53,053.02 crore and that of Infosys went higher by Rs 8,559.71 crore to Rs 5,76,867.96 crore.

Kotak Mahindra Bank added Rs 2,635.84 crore to Rs 3,46,543.78 crore in its valuation.

In contrast, the valuation of Tata Consultancy Services declined by Rs 26,411.23 crore to Rs 11,23,919.77 crore.

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HDFC''s valuation dipped Rs 13,917.44 crore to Rs 4,36,582.10 crore and that of HDFC Bank eroded by Rs 821.01 crore to Rs 7,78,850.97 crore.

The top-10 most-valued companies'' list had Reliance Industries at the lead followed by Tata Consultancy Services, HDFC Bank, Infosys, Hindustan Unilever Limited, HDFC, ICICI Bank, Kotak Mahindra Bank, Bajaj Finance Limited, and State Bank of India.