Dark cloud cover after mild pullback suggests weakness in Bajaj Auto, traders can go for covered Put

January 20
00:29 2020

Chhitij Jain

Strategy setup – Covered Put

Bulls continued having an upper hand in the previous week and Nifty50 registered fresh all-time highs. But the overall structure suggests that some breather is expected and we could go through mild correction in coming days.

Some stocks which have weak technical structure have offered bull back in last few days and now trading near the resistance level.

We have identified Bajaj Auto from the pack. Traders can form a ‘covered put’ strategy in the counter to gain theta from Put option and can take advantage of the expected fall in form of selling future.

Option chain analysis

Resistance at higher level is clearly visible as per option chain as the immediate facing call option of 3,150 strike price has added fresh open interest addition of 11,500 contracts and cumulative open interest has added to 53,250 contracts.

On the other hand, dry volumes in Put options indicates the low confidence of Put writers and any particular strong base is missing in the counter. 3,100 Put option holds maximum cumulative open interest of 45,500 contracts but change every minute in open interest addition reflecting the reluctance of bulls.

Data suggests that negative bias should be maintained while forming the trading strategy.

Technical structure

After a sharp pullback, the stock has formed a ‘dark cloud cover’ candlestick pattern and the prices are trading below major medium term moving averages.

The stock has also taken resistance of 20-Day Moving average and higher top and higher bottom cycle has been disturbed.

There is a range shift in RSI from bullish to sideways zone in intraday chart suggesting that the stock is likely to resume the downtrend again. Rs 3,151 is emerging as a strong supply zone for the stock and decline till Rs 3,010 is expected in the days to come.

Strategy – Covered Put (30th January, 2020 Contract)

Looking at the overall market structure and option data, traders can form ‘covered Put’ strategy where short positions in the futures can be initiated with the short positions in out of the money put options.

Trader can go short in the futures at Rs 3,129.05 and put option of strike price Rs 3,000 can be sell at 14.75.

Profit in the strategy can be booked in Rs 3,020-3,000 zone and stop loss of Rs 3,170 need to be placed.

Sell Future at – Rs 3,129.05
Sell 3000 PE at – Rs 14.75
Maximum Profit – Rs 143.8
Breakeven points – Rs 3,143.8

Stop loss – Rs 3,170

Note: Option prices mentioned are based on the closing basis of January 17, 2020.

(The author is Head of Derivatives in Rudra Shares and Stock Brokers.)

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