Option strategy of the day | Long build up in Hero MotoCorp post Q4 results; use Bull spread for upside

Heromoto s Q4 performance was largely in line with reported EBITDA margin of 14.3%

Hero MotoCorp Ltd scrip has given downward sloping trendline breakout on a daily scale along with robust volume post robust Q4 quarterly results. On May 9, Hero MotoCorp shares jumped over 4 percent to above Rs 4,800.

The stock is now trading above its short and long-term moving averages. According to Sudeep Shah, DVP and Head of technical and derivative research at SBI Securities, these averages are edging higher, which is a bullish sign.

Shah recommended taking a bull spread strategy on Hero MotoCorp stock to capture this momentum.

Strategy Recommended:
Hero MotoCorp Spread Trade: (Bull Spread: 30th May Expiry)
Buy 4850 CE at Rs 125
Sell 4900 CE at Rs 106
Net Outflow (Max Risk) 19 points
Maximum Potential Risk: 19 points (Rs 2850 per lot)
Maximum Potential Gain: 31 points (Rs 4650 per lot)

Technical View

Hero MotoCorp stock earlier marked a high of Rs 4,842 on February 12, and then corrected. "The correction was halted in 4160-4180 zone, which is 38.2 per cent Fibonacci retracement level of its prior upward rally (Rs 2976-4842), and it coincides with 100-day EMA level. The stock has formed a strong base near the support zone and witnessed smart rebound from that zone in the direction of the primary uptrend, " highlighted Shah.

Shah also said, "Currently, among the momentum indicators, the daily RSI has sustained above 60 for the first time after February 2024. The daily stochastic is also suggesting strong bullish momentum as fast stochastic is trading above its slow stochastic line."

Derivative Setup

On the options front, in May series, there is a notable concentration of call open interest at Rs 5000 strike, with significant additions of open interest on the put side observed at Rs 4800 strike. "On Thursday, call buying was seen across strikes from Rs 4850 to Rs 5100. Put writing was seen across Rs 4900-4400 strikes. This clearly indicates bullish momentum in stock," said Shah.

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The derivative data aligns with the prevailing bullish chart structure. "On Wednesday, Hero MotoCorp May futures gained by 2.84 percent accompanied by a substantial increase of 3.50 percent in cumulative open interest across the current, next, & far series, signalling a significant accumulation of long positions," explained Shah.

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