Option strategy of the day | ITC gains buying momentum in May series, use 'covered call' for gains

At 11:17 hrs IST, the Sensex was up 307.26 points or 0.42 percent at 74,045.71, and the Nifty was up 86.10 points or 0.38 percent at 22,454.10.

ITC Ltd shares have seen increased buying interest in the May series, with the cumulative open interest in futures rising 20 percent from the previous month. In options, the buying interest has picked up at Rs 430/ 440/ 450 call strikes, while a support base is gradually forming in Rs 425-430 range.

Meanwhile, put writers have become active, with the put-call ratio on ITC stock for the May series inching up to 0.52 from 0.34.

Avani Bhatt, Senior Vice president- Derivative research at JM financial recommended taking  a covered call strategy on ITC stock to capture this momentum.

Covered Call strategy on ITC stock for May series recommended by Bhatt:

Buy May Futures at Rs 428-430Sell May 435 CE  at Rs 8-9

Target Profit Rs 11,500

Stop loss: Below 420 (Spot level)

A covered call is a two-part strategy in which one goes long in stocks  and calls are sold as a hedge. 

Technical outlook

"Post a block deal in February, ITC bottomed out from the Rs 395-400 area, rallied to Rs 437, and has been consolidating within a narrow range of 420-432 for the past five weeks. Derivative parameters suggest a likely breakout on the upside," said Bhatt.

Also read: Sudden surge in FinNifty put options raise alarms, premiums spike up to 20x in a minute 

"One can anticipate a break out about congestion zone of 430-432 and expect the stock to rally up to 445-450 area in a short time," said Bhatt.

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