F&O Radar | Deploy Debit Spread in Ipca Labs to play potential upward rally

Ipca Laboratories' stock price was trading within a range during April and May, encountering resistance around the Rs 1,360 level.

Following the same, the stock started moving in a downward direction on its daily chart. Since then, the stock has been making lower highs and lower lows and has now taken support at Rs 1,075 level and bounced back.

It has shown a double bottom-like formation on the daily chart, which is an indication of a potential trend reversal.

Additionally, the stock has also broken above its trendline.

“The stock has recently given a breakout above EMA 20 on a daily basis with good volumes. Most of the other technical indicators like RSI, MACD & ADX are signaling a buy,” said Madu Bansal, Founder of The Finberg.

On top of it, the pharma sector looks attractive and ready to ride the momentum. Other pharma stocks from the index have also gone up by more than 5-10% in the last few days, added Bansal.

Given the potential of an up-move, Madhu Bansal suggests deploying a debit spread in Ipca Labs to gain from the northward movement.

Debit Spread

This strategy includes buying a call option of ITM or ATM strike prices and selling the ones that are OTM strike prices. The larger the spread width between the long call and the short call, the more premium will be paid, and the maximum potential profit will be higher.



(Prices as of July 4)

Below is the payoff graph of the strategy:

ETMarkets.com

(Source: The Finberg)

Exiting the strategy
One can exit this position by selling the bought call and buying the sold call and the profit is made if the spread is sold more than it was purchased. Anybody who will be trading these strategies for the first time can look for booking profits on the first target itself.

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