Option strategy of the day| Trendline breakout in Coal India; Use bull call spread for upside

There has been a discernible accumulation of long positions from 500 to 515 Call strikes.

Shares of Coal India Ltd have given a horizontal trendline breakout on the daily scale. Currently, the stock is trading above its short and long-term moving averages.

According to Sudeep Shah, Head of Technical and Derivative Research at SBI Securities, "These averages are in a rising trajectory and in the desired sequence, suggesting the trend is strong."

To capture the upside momentum, Shah recommends a Bull Call Spread option strategy:

Trade Details:

Coal India Spread Trade (Bull Spread - 25th July Expiry)

Buy 510 CE at CMP Rs 10.8
Sell 520 CE at CMP Rs 7.10
Net Outflow (Max Risk): 3.70 points
Date of Initiation: 11th July
Date of Expiry: 25th July
Maximum Potential Risk: 3.70 points (Rs 7,770 per pair)
Maximum Potential Gain: 6.30 points (Rs 13,230)
Profitable Zone: Above 514Technical Setup:

Shah notes that on Thursday, Coal India Ltd shares gave a breakout of the horizontal trendline on the daily scale. This breakout is confirmed by a relatively higher volume. "Currently, the stock is trading above its short and long-term moving averages. These averages are in a rising trajectory and in the desired sequence, suggesting the trend is strong," he said.

Shah believes that the momentum indicators and oscillators also support the bullish chart structure. The daily RSI has surged above the 60 mark for the first time after 30 trading sessions.

Derivative Setup:

The current derivative data is in sync with the existing bullish chart structure, said Shah. A significant concentration of call open interest is evident at the 515 strike, while substantial open interest on the put side is concentrated at the 500 strike. "There has been a discernible accumulation of long positions from the 500 to 515 call strikes. Conversely, on the put side, there is noteworthy put writing observed from the 485 to 560 strikes. This clearly indicates bullish momentum in the stock," he said.

Shah emphasized that this collective data suggests a bullish sentiment in the stock. He believes that Coal India stock is likely to test the level of 530, followed by 545 in the short term.

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