Option strategy of the day | Higher tops higher bottoms pattern in HCL tech; Use Bull spread strategy for upside

Currently, HCL Tech is trading above its short- and long-term moving averages

The Nifty IT sector has been strongly outperforming frontline indices over the last few trading sessions. HCL Technologies formed a Bullish Hammer candlestick pattern on June 4 and has been marking a sequence of higher tops and higher bottoms.

According to Sudeep Shah, DVP and Head of Technical and Derivative Research at SBI Securities, "The ratio chart of Nifty IT is at a 10-week high, indicating strong outperformance. Additionally, HCL Technologies is currently trading above its short- and long-term moving averages."

Shah recommends a Bull Call Spread to capture the upside potential in HCL Technologies.

Spread Recommended: HCL Tech Spread Trade: (Bull Spread - 25th July Expiry)

Buy 1,500 CE (call option) at CMP (price) Rs 41
Sell 1,520 CE at CMP Rs 33
Net Outflow (Max Risk): 8 points
Date of Initiation: 4 July
Date of Expiry: 25 July
Maximum Potential Risk: 8 points (Rs 2,800 per pair)
Maximum Potential Gain: 12 points (Rs 4,200)Profit Zone: Above Rs 1,508 spot price

Technical View:

Shah said that HCL Technologies stock's tops and bottoms are on a rising trajectory and in the desired sequence, suggesting a strong trend. "The momentum indicators and oscillators are also supporting the overall bullish chart structure. The daily RSI is in a super bullish zone, as per RSI range shift rules, for the last 18 trading sessions," he said.

Derivative Setup:

According to Shah, the current derivative data aligns with the existing bullish chart structure. A significant concentration of call open interest is evident at the Rs 1,600-strike, while substantial open interest on the put side is concentrated at the Rs 1,440-strike. "On the option chain, there has been a discernible accumulation of long positions from Rs 1,480 to Rs 1,520 call strikes. Conversely, on the put side, there is noteworthy put writing observed from Rs 1,520 to Rs 1,440 strikes. This clearly indicates bullish momentum in the stock," added Shah.

The stock has a bullish sentiment, and is likely to test the level of Rs 1,580, followed by Rs 1,620 in the short term, said Shah.

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