Strategy setup – Delta-based “Bull Call Spread”
The market has reclaimed lost ground in the past two trading sessions after a mild correction and many stocks which were in strong uptrend have gone through a phase of consolidation, ready for the next leg of the rally.
We have selected Reliance Industries from the pack. After hitting the fresh all-time high, stock has formed a base and appearing to be ready for fresh up move again. Hence, we would recommend the delta appreciating based “Bull Call Spread” in the counter.
As we have appropriate time left for the expiry, it will be prudent to go for Delta Based strategy to capture the up move.
Option Chain Analysis
The initial signal of an up move has been witnessed in the option chain, as Call option of 1,580 strike price has lost 236,000 contracts in open interest which suggest that bears are on the back foot. On the other hand, bulls have shown confidence and fresh writing of 71,500 contracts has been witnessed in 1580 strike price Put option.
The last concern for the bulls is now at 1,600 level, where maximum outstanding Open Interest (OI) is placed on the Call side and traders can expect sharp move in the counter once the level is taken out on higher side.
Stock seems to be ready for the rally till 1,640 level, which is a probable target as per option chain. 1,640 CE holds approximately 9 lakh contracts on short side and likely to be an appropriate profit booking point for the bulls.
Technical and Market Structure
The overall technical structure is quite bullish after hitting fresh all-time high and the stock has consolidated at near its 20-Day Moving average. Now, the sign of revival is appearing again and stock is falling in the category of reversal after retracement.
After the convergence, the short term moving averages are again opening up and moving upwards. RSI is bouncing back from the important support levels and trading in a bullish zone.
Apart from this, 38.2 percent retracement move is also respected in the counter as per Fibonacci theory. Traders can expect the fresh all-time highs in the counter in days to come and project the immediate target of Rs 1,640.
Apart from the technical structure, the overall sentiments are also bullish in the stock. We have witnessed many broking houses have put the stock in “outperforming” category and raised their price targets.
Looking at the overall structure, we believe traders can opt for “Bull Call Spread” where In the Money call option can be bought and to hedge positions Out Of the Money call option can be sold. As delta of OTM CE is almost half in comparison to ITM CE, the appreciation in ITM option premium will be almost double.
BUY 1580 CE AT 35 (DELTA – 0.53)
SELL 1640 CE 12.45 (DELTA – 0.25)
MAXIMUM PROFIT – 37.45
MAXIMUM LOSS – 22.55
The author is CFA at Rudra Shares & Stock Brokers
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