Option strategy of the day| Bull call spread post Escorts Kubota breakout

Escorts has started to form higher tops and higher bottoms indicating trend reversal from down to up.

Escorts Kubota Ltd shares have broken out of falling channel pattern after retracing more than 38.2 percent of its previous up move. The stock is seeing a good build-up in 3,000 PE and 3,100 CE options, indicating a range of 3,000-3,100 in the near term.

Jay Thakkar, Vice President and Head of Derivatives and Quant Research, suggests a  bull call spread to capture the bullish momentum.

Position: A bull call spread is recommended wherein one can buy 1 lot of 3000 CE and sell 1 lot of 3100 CE at 92.15 and 50.75, respectively, hence the total cost will be 41.40, which is the maximum loss, whereas maximum gain will be 58.60, so the risk to reward is 1:1.41

Bull Call Spread Strategy recommended by Thakkar

Buy 1 lot of 3000 CE @ Rs 92.15

Sell 1 lot of 3100 CE  @Rs 0.75

Risk to reward: 1:1.41

Technical View

"The stock has started to form higher tops and higher bottoms, indicating trend reversal from down to up. The momentum indicator MACD has also turned bullish on the daily charts with a positive divergence, whereas the leading indicators on the weekly charts have provided a bullish crossover," he said.

Technically, the stock has started a fresh leg up. On the lower side, the crucial support is at 2,900. The short to medium term trend will remain  positive as long as the level is held on a closing basis, Thakkar said.

Derivative view

From the derivatives point of view, Thakkar said the stock has seen good buildup in 3000 PE and 3100 CE options.

"The PCR is also at 0.40, which is on the oversold side, hence a bounce back in this series can be ruled out. As far as futures data is concerned, we have seen good long addition since the start of the April series. Overall, the auto sector is also in an uptrend which is supportive for the stock."

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