F&O Radar: Use the bull call spread in UPL to pick up potential upside

The stock of UPL Ltd, formerly United Phosphorus, has been in a downtrend since its June 2021 peak. It found support around the 520 level, from where it started moving upwards but appeared to be consolidating from June 2022 onwards.

The stock is trading around the 560 level in the range of 520 to 580. The price action on the chart suggests that prices are tightening somewhat.

“UPL Rs. Trading at 560.60, forming a symmetrical triangle pattern on the daily timeframe. The stock is on the verge of breaking out of this pattern,” said Hardik Matalia, derivatives analyst at Choice Broking.

The stock is positioned above all its short-term exponential moving averages (10-day and 20-day EMA) as well as medium-term EMA (50-day EMA).

This position indicates strength in its upward movement.

“The Relative Strength Index (RSI) is at 54.22 with a positive crossover, indicating increasing buying momentum. If the UPL sustains above the 575 level, it is likely to reach Rs. 600 and Rs. May move towards targets above 615,” Matalia added.

Matalia also noted that options data shows the highest concentration of put open interest at the 550 and 530 strike prices, suggesting that this level could act as immediate support. Conversely, the highest call open interest is located at the 570 and 580 strikes, indicating potential resistance at these levels.

“A critical breakout above this resistance zone could lead to short covering, further accelerating the stock’s upward momentum,” he said.

Given this placement of the stock, the analyst suggests deploying a bull call spread in UPL to benefit from its potential upside:

Bull call spread

A bull call spread is an options trading strategy that consists of two call options. It is generally used when the trader expects a moderate increase in the price of the underlying asset.
The strategy involves buying one call option at a lower strike price and selling another call option at a higher strike price, both options having the same expiration date. The goal is to profit from increases in the price of the underlying asset, while simultaneously limiting both potential gains and potential losses.

(Prices till August 19)

Below is the payoff graph of the strategy:

(Source: Choice Broking)

(disclaimer: Recommendations, suggestions, opinions and views given by experts are their own. (These do not represent the views of The Economic Times)