Option strategy of the day | Tata Motors gives breakout; use bull call spread for upside

At 11:20 am on July 25, the stock is trading at Rs 1080 up 5%.

Tata Motors Ltd shares have given a downward sloping trendline breakout on the daily scale, confirmed by robust volume. The stock has strongly outperformed frontline indices and marked a fresh all-time high on Thursday.

"The stock is trading at an all-time high level, and all moving averages and momentum-based indicators suggest strong bullish momentum. The daily RSI is at a 90-day high and is on a rising trajectory," said Sudeep Shah, DVP and Head of Derivative Research at SBI Securities.

To capture the upside momentum, Shah recommends a bull call spread strategy:

Spread Recommended: TATAMOTORS Spread Trade (Bull Spread - 29th August Expiry)

Buy 1070 CE at CMP Rs 41
Sell 1080 CE at CMP Rs 37
Net Outflow (Max Risk): 4 points
Date of Initiation: 25th July
Date of Expiry: 29th August
Maximum Potential Risk: 4 points (Rs 2200 per pair)
Maximum Potential Gain: 6 points (Rs 3300)
Profitable Zone: Above 1074

Technical chart of Tata Motors ltd

Derivative Setup

Shah highlights that the current derivative data aligns with the existing bullish chart structure. For the August expiry, a significant concentration of call open interest is evident at the 1100 strike, while substantial open interest on the put side is concentrated at the 1000 strike. "Option chain analysis shows that 1120 to 1040 CE strikes have witnessed call writing, while on the put side, 1120 to 1030 strikes have witnessed put buying. This clearly indicates bullish momentum in the stock," added Shah.

"This collective data suggests a bullish sentiment in the stock. It is likely to test the level of 1100, followed by 1130 in the short term," noted Shah.

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