Option strategy of the day |Bearish breakdown in Tata motors; use bear spread to gain from falling stock

Tata motors derivative data aligns with the prevailing bearish chart structure.

Tata Motors Ltd scrip has given rising channel breakdown backed by strong volumes. Along with this breakdown, the stock has slipped below its 20 and 50-day EMA level. The momentum indicators and oscillators are also supporting the overall bearish chart structure.

On May 16 at noon, Tata Motors shares jumped over 1.54 percent to above Rs 932.

According to Sudeep Shah, DVP and Head of technical and derivative research at SBI Securities, derivative data aligns with the prevailing bearish chart structure.

Shah recommended taking a Bear Spread to gain from the falling share price.

Strategy Recommended:
Buy 940 PE (put option) at Rs 24;
Sell 930 PE at Rs 20;
Net Outflow: Rs 4 per unit
Maximum Potential Risk: Rs 4 per unit - Rs 5700 per pair
Maximum Potential Gain: Rs 6 per unit - Rs 8550 per pair
Profitable Zone: Below Rs 936.
Margin Required: Approximately Rs 70,000.

Technical View

After Q4 earnings, the stock of Tata Motors Ltd has witnessed sharp correction. "On daily scale, it has given rising channel breakdown backed by strong volumes. Along with this breakdown, the stock has slipped below its 20 and 50-day EMA level. The momentum indicators and oscillators are also supporting the overall bearish chart structure," said Shah.

Derivative Setup

The derivative data aligns with the prevailing bearish chart structure. "On Wednesday, the May future has dipped by 1.47 per cent and cumulative open interest of current, next and far series has surged by nearly 5 per cent. This indicates overall short build up," said Shah.

On the options front, Shah noted that in May series there is a notable concentration of call open interest at the 950 strike, with significant additions of open interest on the put side was observed at the 900 strike. On the Call options front, all strikes from 930 to 980 have witnessed call writing. While, on the put side, from 930 to 880 strike have either witnessed put buying or put short covering.

"This collective data indicates bearish momentum in stock. The stock is likely to test the level of 895, followed by 880 in short-term. Hence, we recommend Bear Spread to capitalize this southward journey," he said.

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