The strategy would enable the traders to take advantage of expected up-move with limited risk.
Strategy setup (event based):
The overwhelming response to Ujjivan Small Finance Bank's initial public offering (IPO) has boosted the confidence among investors on the street. The IPO is expected to list with handsome gains as its price was at reasonable valuation and its holding company 'Ujjivan Financial Services' is likely to hit the right note under current circumstances.
The rally from current levels is not likely to be ruled out and traders can expect the decent gains in coming days. Hence, we would be likely to go with 'Covered Call' in Ujjivan Financial Services where traders can take advantage of price action with theta depreciation.
What option data suggests:
There is a decent Put writing in the counter as Rs 340 Put options have witnessed fresh build-up of short positions of 41,600 contracts and total cumulative open interest has reached to 2,19,200 contracts. Apart from this, the subsequent lower strike prices are also suggesting the decent support at lower levels and the downside seems to be limited.
On call side, there is no major change in open interest in immediate higher strike price and the immediate hurdle for the bulls is appearing at Rs 380 levels where the fresh open interest addition is at around 53,000 contracts. Though the ATM call option of Rs 350 strike price holds more than 4.85 lakh contracts on short side, but the overall structure suggests that once the stock starts inching higher, the short covering in this call option is likely to result in a sharp up-move.
Stock is trading with positive technical structure and outperformed the market in the last few sessions. Weekly RSI has given initial signal of breakout after a long time. The medium term and short term moving averages that were trading flat for the last few weeks have now started trading with positive curve and are going through the phase of bullish crossover.
The momentum indicators on daily as well as on intraday charts are trading in the bullish zone, suggesting that upside momentum is likely to continue in the coming days. The immediate support level is placed at Rs 330 and traders can expect the target of Rs 385 in current series. The falling trend line could act as a resistance in Rs 385 and Rs 390 levels and it would be an appropriate level for the traders to book profit.
Looking at the overall scenario, where the fundamental triggers are favouring bulls and the technical setup is also positive, we would prefer to opt for the traditional 'Covered call'. The strategy would enable the traders to take advantage of the expected up-move with limited risk.
The strategy includes the best of both the worlds, where the bullish price action can be captured by initiating long positions in futures and delta depreciation can also be gained by selling OTM call option.Buy Futures 1 Lot at Rs 353.75
Sell 390 CE 1 Lot at 5.50 - Delta & Theta (0.22 and -0.34)
Preferable profit booking zone - Rs 385 - 390Stop loss: Rs 330
Maximum loss: 18.25 points
Maximum profit: 41.75 points
Note: F&O prices as on December 6 closing basis.
(The author is Head of Derivatives at Rudra Shares & Stock Brokers Ltd.)Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.