Option strategy of the day | Breakout in M&M stock from consolidation; use Bull Call Spread to capture upside

The ratio chart of Nifty Auto compared to Nifty is also at its highest level, indicating sustained outperformance

Mahindra and Mahindra (M&M) Ltd shares have seen a breakout from a 13-day consolidation phase on a daily scale, a development confirmed by substantial trading volume. Furthermore, the stock has formed a sizable bullish candle on the breakout bar, which enhances the strength of the breakout.

Sudeep Shah, DVP and head of derivative and technical research at SBI Securities, recommends deploying a Bull Call spread strategy to capture the M&M stock's upmove while maintaining a limited risk-reward ratio

Position: Buy 2200 Call at Rs. 75
Sell 2240 Call at Rs. 60

Max Risk: Outflow of 15 points, i.e., Rs. 5250 per lot in case the stock closes below 2200 on expiry.

Target Profit: 25 points, i.e., Rs. 8750 per lot if the stock closes above 2240 spot levels.

The bull call spread is a type of options trading strategy that involves two call options. This type of strategy is used when the trader expects a moderate rise in the price of an underlying asset. The bull call strategy is executed by buying call options at a specific strike or exercise price while also selling the same number of calls of the same asset at a higher strike price.

Technical View

Shah noted that on Tuesday, the Nifty Auto index significantly outperformed frontline indices, reaching a fresh all-time high. Additionally, it has broken out of a 13-day consolidation phase on a daily scale. The ratio chart of Nifty Auto compared to Nifty is also at its highest level, indicating sustained outperformance.

"Among the constituents of Nifty Auto, M&M has broken out of a 13-day consolidation phase on a daily scale. The daily and weekly RSI are in the bullish zone according to RSI range shift rules. Furthermore, the daily MACD remains bullish, trading above its zero line and signal line. With the stock trading at a 52-week high, all momentum indicators and oscillators support the overall bullish chart structure," said Shah

 Derivative Setup

The derivatives data corroborates the prevailing bullish chart structure. "On Wednesday, M&M May futures surged by 4.34 percent, accompanied by a substantial increase of 1.69 percent in open interest, indicating a significant accumulation of long positions. In the May series, there is notable call open interest concentration at the 2200 strike, with significant additions of open interest observed on the put side at the 2100-2140 strikes," explained Shah.

"This collective data suggests robust bullish sentiment among market participants, with a favourable outlook for further upward price movement," he added.

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