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Consider short straddle on Tata Steel

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Tata Steel (Rs 361.4): The outlook remains weak for Tata Steel. If the current trend sustains, the stock could slip to Rs 330 initially and even to Rs 295 on persistent selling. The stock finds resistances at Rs 395 and Rs 445. We expect the stock to move in Rs 330-390 range in the short term.

F&O pointers: Tata Steel September futures witnessed accumulation of fresh short positions on Friday. Option trading also indicates a negative bias as calls added to open interests. The Tata Steel 400 put shed open position, signalling a possible crucial level.

Strategy: Traders can consider short straddle on Tata Steel. This can be constructed by selling 360 call and put, which closed at Rs 17 and Rs 13.9 respectively. Market lot is 500.

The short straddle is a risky strategy a trader uses when he or she believes that a stock's price will not move up or down significantly. In this strategy, the trader receives a net credit of Rs 30.9 because he/she is selling the contract.

If the stock settles at around Rs 360 both the call and the put will expire worthless and the investor can retain the net credit (Rs 30.9), which is the maximum profit. Loss will start pinching traders if Tata Steel closes either above Rs 390 or below Rs 330. That is, loss will start mounting if Tata Steel breaks this range. As the maximum loss is unlimited, this strategy is for traders who are ready to bear wild swings and high risk.

— K.S. Badri Narayanan

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

(This article was published in the Business Line print edition dated September 2, 2012)
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