Option strategy of the day | Long build up in Cipla; Bull call spread suggested for upside

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The Nifty Pharma index is strongly outperforming the frontline indices, with its ratio chart compared to Nifty reaching a 37-month high, highlighting its remarkable outperformance. According to Sudeep Shah, DVP and Head of Derivative and Technical Research at SBI Securities, "The stock of Cipla Ltd has recently taken support in the zone of 1465-1475 and resumed its northward journey."

To capture the upside momentum, Shah recommends taking a bull call spread on Cipla:

Spread Recommended:
- Cipla Spread Trade (Bull Spread - 29th August Expiry):
- Buy 1580 CE at CMP Rs 37
- Sell 1600 CE at CMP Rs 29
- Net outflow: 8 points
- Date of Initiation: 8th August
- Date of Expiry: 29th August
- Maximum Potential Risk: 8 points (Rs 5200 per pair)
- Maximum Potential Gain: 12 points (Rs 7800)
- Profitable Zone: Above 1588

Technical Setup:

Shah said that Cipla stock has rebounded from the support zone multiple times in recent periods.

The stock is trading above its short and long-term moving averages. The daily RSI has surged above the 60 mark and is in a rising mode. "This technical chart structure clearly indicates strong bullish momentum in the stock," said Shah.

Derivative Setup:

According to Shah, the current derivatives data aligns with the existing bullish chart structure. The August futures surged by nearly 2 percent in Wednesday’s trading session. The cumulative open interest of current, next, and far series has dipped by 3.54 percent, indicating an overall short-covering rally.

For the August expiry, there is significant concentration of call open interest at the 1600 strike, while substantial open interest on the put side is concentrated at the 1500 strike. "In the option chain, put writing was witnessed from the 1580 to 1480 strikes. This indicates bullish momentum in the stock. This collective data suggests a bullish sentiment in the stock. It is likely to test the level of 1620, followed by 1650 in the short term," he stated.

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