Rupee may continue up move towards 76.4-77, deploy unconventional ‘Bull Put Spread’

Profit can be booked in this strategy if the currency pair trades above 76.85 anytime during the week.

After the recent mild correction, the United States Dollar/Indian Rupee gained strength over the week and closed with the weekly gain of approximately 49 paise at 76.05 per USD.

Active participation of bulls have been witnessed in the currency pair from the lower-end of the trading range as bears could not extend the fall and took the back seat.

Technically, for the last few days we have been highlighting that the currency pair is establishing a foundation for a big move and it could be seen in the coming days.

Rounding formation on the chart is shaping up and the pattern is likely to get matured once the close above 76.40 takes place on the chart.

Short term moving averages ribbon is opening up in the positive direction again after the phase of convergence suggesting that momentum on an upside is building up and chances of breakout are quite high.

Last week, during the phase of retracement prices breached the 50 EMA support level but negative crossover of short term and long term moving averages couldn’t take place. Recent upward slope of short term moving averages suggesting that the correction for the currency pair is now over and the original uptrend is likely to begin in the coming days.

USD/INR daily

In an upcoming week, support level is emerging at 75.50 per US dollar, whereas on an upside bulls can extend the rally till 76.30 to 76.40 levels which could be profit booking points for the weekly traders.

The fresh leg of the rally can be expected once the 76.40 level will be taken out on the closing basis and in that case level of 77 can also be expected gradually.

Intraday charts are trading with bullish bias where hourly chart has started trading above 20 period moving average after mild decline and momentum indicators are trading in a bullish zone. Bullish band walk has also initiated in 15 min time frame.

FIIs data

Positive triggers from foreign institutional investors for INR seems to be taking a back seat and net outflow of more than Rs 1,731 crore has been witnessed during the week.

The Indian Rupee hit the recent low of 76.24 against dollar on June 12 when heavy outflow of more than Rs 1,300 crore was seen. Data is likely to foster positive sentiments for the USD and depreciation of the INR could continue.

Dollar index analysis

For the last few days, the US Dollar was underperforming against the basket of six major currencies of the world but the trend seems to be changing as some positive candlestick pattern has emerged on the chart at oversold zone.

Currently trading at 97.32, the pullback till 20 DMA (98.06) and 200 EMA (98.45) can be expected. Pullback in the index is likely to infuse positive sentiments in USD against INR as well and higher levels can be expected in the currency pair.

Trading strategy

Considering the overall structure it is quite evident that expected breakout might take place in the currency pair and the level of 76.40 can be expected in an upcoming week, level of 77 can also be expected over the next few weeks.

Traders can trade the setup by deploying unconventional ‘Bull Put Spread’ where the ATM Put option can be sold and OTM Put option can be bought simultaneously. To reduce risk further, deep OTM Call option of 77 can be also be sold in the ratio of 1:2.

Sell USD/INR 76 PE @ 0.2900
Buy USD/INR 75.50 PE @ 0.0700
Sell USD/INR 77 CE @ 0.0225 (2lots)

Maximum profit 0.265 (subject to theta decay of CE)

Long positions in the 75.50 put option will cap the negative return if the view goes wrong and maximum profit can be availed by the traders if the currency pair trades in the range of 76 to 77 per dollar.

Profit can be booked in the strategy if the currency pair trades above 76.85 anytime during the week.

Note: Option premium mentioned resembles the closing price as on June 12 for June 19 contract.

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