Option strategy of the day| Reversal breakout in Ultratech Cement signals upside

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.

Ultratech Cements' shares have has given a reversal breakout after trading within a falling channel. On May 17, Ultratech Cement's shares jumped over 1.16 percent to above Rs 9,822.

The stock had been trading within a falling channel and recently it has reversed from the lower end of the falling channel

Jay Thakkar, Head Derivatives and Quant Research at ICICI Securities, recommends taking a bull call spread strategy on Ultratech Cement stock to capture this momentum.

"One can initiate a bull call spread by buying a 9800 CE at Rs 137 and selling a 10200 CE at Rs 37. The total outflow will be 100 points, which is the maximum loss, while the maximum profit will be 300 points. Thus, the risk to reward ratio is 1:3," he said.

Strategy Recommended:
Ultratech Cement Spread Trade: (Bull Call Spread: 30th May Expiry)
Buy 9800 CE at Rs 137
Sell 10200 CE at Rs 37,
Total Outflow (Max Risk): 100 points
Maximum Potential Gain: 300 points

Risk reward ratio: 1:3

Technical View

"Recently, the stock has reversed from the lower end of the falling channel. Today, it has moved beyond its 20 DMA and 40 DMA levels, making 9600 an immediate support level technically. On the upside, 10100/10200 is the immediate resistance, representing the upper end of the falling channel. Therefore, the short-term range for the rest of the May expiry is 9600-10200," highlighted Thakkar.

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Shah also said, "There is a positive divergence on the daily MACD which is also a short term positive for the stock, hence it is likely to inch towards the upper end of the falling channel."

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