Option strategy of the day | Breakout from resistance, long buildup in BPCL; use Bull call spread for upside

BPCL has reversed from down to up after having retraced 50 percent of its previous up move

BPCL shares have technically broken through multiple swing resistance levels at Rs 625, now trading at Rs 633 on NSE on 3 May. The stock has seen significant long build-ups since the last week of April.

Jay Thakkar, Head of Derivative Research at ICICI Securities, recommends deploying a Bull Call spread strategy to capture BPCL stock's upmove.

Position: May 30 expiry
- Buy 1 lot of BPCL 640 Call Option at Rs 24.30
- Sell 1 lot of BPCL 660 Call Option at Rs 15.90

Total Outflow: 8.40 premium points

Risk reward ratio: 1:1.30

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.

According to Thakkar: "BPCL has reversed from down to up after having retraced 50 percent of its previous up move. The stock has now started to see long build ups since last week of April."

Thakkar notes that the momentum indicator MACD has provided a bullish crossover on the daily charts from the zero-reference line. This indicates the completion of downward cycle in the short term.

"Based on the above view one can initiate a Bull Call Spread on BPCL, wherein, one can buy 1 lot of out-of-the money (OTM) CE of 640 at Rs 24.30 and sell 1 lot of OTM CE of 660 strike at Rs 15.90," he advised.

"The total outflow will be 8.40 points which is the maximum risk if BPCL closes below 640 at the time of expiry. The maximum profit will be of 11.60 points if it closes at or above 660 levels. So, the risk to reward ratio is 1:1.30," added Thakkar.

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