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Last Updated : Feb 16, 2020 08:38 AM IST | Source: Moneycontrol.com

'Initiate unconventional covered Put Strategy in Bajaj Finance as it trades in overbought zone'

The exaggeration of bulls has placed the stock in a highly overbought zone and trading quite far from its short term moving averages

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Chhitij Jain

Strategy Setup - (Theta and Vega depreciating based)

February has given sleepless nights to traders and volatility has trapped both bulls as well as bears. Though bulls have reclaimed the lost ground completely where, several high beta counters have reacted quite dramatically.

Close

The overreaction of bulls was quite apparent in these stocks and the chances are bright that we could go through the phase of demand supply adjustment in the form of profit booking.

We have picked Bajaj Finance from the pack; the stock is trading in a highly overbought zone and price pattern suggesting that profit booking would not be ruled out in coming days.

Theta and Vega depreciating based unconventional “covered put” can be formed at this stage to take advantage of expected fall in price as well as gaining the option premium. The strategy would involve the short positions in futures along with short positions in OTM put option.

Let’s listen to option chain

Fresh open interest addition in 4,900 and 5,000 call option suggesting that bulls are not comfortable at these levels and current ongoing up move is likely to abated for time being.

Immediately facing call option of 4,800 strike price holds the highest cumulative open interest of 1,92,250 indicating that stock is facing resistance at the current level and mild profit booking can be expected in coming days.

On the other hand, the reluctance of put writers is clearly visible as unwinding has been witnessed in all the subsequent strike prices suggesting that mild profit booking scenario would not ruled out. Bulls need to adopt a cautious stance at current levels and trade with negative bias for the next few days.

Technical setup

The exaggeration of bulls has placed the stock in a highly overbought zone and trading quite far from its short term moving averages. The demand and supply is likely to maintain the equilibrium after such sharp up move and correction can be seen in the coming days.

Candles with small real body suggest that bulls seem to be tired and reluctant to take the rally forward. The steam is likely to cool off and retracement in price is expected till 4,550 and 4,500.

Trading strategy: Unconventional covered put in Bajaj Finance

Considering the overall scenario and market setup, we believe traders can opt for “covered put” to take advantage of expected correction. The short positions in futures can be initiated at current levels and to hedge the positions 4 lots of 4,500 put option can be sold.

Profit can be booked in the range of 4,520-4,500, the selling setup would negate if 4,900 trades in higher side and hence the stop loss can be placed at 4,900 to maintain the risk reward.

SELL BAJAJ FINANCE FUT @ 4,791.40
SELL 4 LOTS OF 4500 PE @14
PROFIT BOOKING RANGE 4,520-4,500
STOPLOSS 4,900
MAXIMUM PROFIT 347.40 POINTS

EXPECTED LOSS RANGE IF SL TRIGGERES 52.6 – 65 POINT

Note: F&O prices based on the closing basis of February 14, 2020

(The author is CFA at Rudra Shares & Stock Brokers)

Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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First Published on Feb 16, 2020 08:38 am
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