Reliance Power (Rs 79.55): The outlook remains neutral for Reliance Power. After touching a low of Rs 75.2, the stock has shown some resilience. If the current recovery sustains, Reliance Power could go up to Rs 93. However, a close below Rs 75 will trigger a fresh sell-off in the stock. Trader should bear it in mind that the long-term outlook still remains negative for the stock.

F&O pointers: The counter witnessed a steady build-up in open interest along with price rise. Unwinding in 75 put signals that Rs 75 could act as a support for RPower.

Strategy: A bull call spread is a type of vertical spread. It contains two calls with the same expiration but different strikes. The strike price of the short call is higher than the strike of the long call, which means this strategy will always require an initial outlay (debit). The short call's main purpose is to help pay for the long call's upfront cost.

Here, bull-call spread can be initiated by selling 85 call and simultaneously buying 80 call. They closed with a premium of Rs 1.25 and Rs 2.95 respectively triggering a net outflow of Rs 1.65, which could be the maximum loss. This occurs if Reliance Power closes below Rs 80. A maximum profit of Rs 3.35 a contract occurs, if RPower closes above the higher strike price, which is Rs 85. Market lot is 2,000/ contract.

Cairn India (Rs 337.05): We expect the stock to move in a narrow range of Rs 320-360 in the short-term. Only a close below Rs 320 would change the medium-term outlook to negative. In that event, it can touch Rs 280. But as long as it stays above Rs 320, the long-term outlook remains neutral. A close above Rs 360 has the potential to lift Cairn India to Rs 390.

F&O pointers: The Cairn September futures has been witnessing a steady accumulation of open interest positions. Option trading presents a neutral view on the stock as both calls and puts accumulated open interest, albeit marginally.

Strategy: Consider a short straddle on Cairn India September futures. The short straddle is a neutral strategy in options trading. It involves simultaneous selling of put and call of the same underlying stock, with the same expiry date. Here, this can be initiated by selling 340 call and put which closed with a premium of Rs 5.95 and Rs 6.8 respectively.

Traders can hold on to this strategy till expiry. Only traders who can bear such high risks should set this option spread. Besides, writing (selling) options involve higher margin commitments.

Maximum profit of Rs 12.75 a contract (or Rs 12,750) for this strategy occurs if the underlying stock settles at Rs 340 on the date of expiry. At this price, both options expire worthless and the options trader gets to keep the entire initial credit taken as profit. However, loss will start hurting traders if Cairn India moves above Rs 352 or falls below Rs 328. Market lot is 1,000/ contract.

Follow-up: Last week, we advised short straddle on Tata Steel. Traders could consider holding on to it, despite severe swings.

(Note: Feedback or queries (on positions) may be sent to by Sunday noon. Replies will be published on Monday.)

(This article was published on September 8, 2012)
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