Stock Strategy: Pair strategy to beat Budget swings

K. S. Badrinarayanan | Updated on February 26, 2011

With the Budget just around the corner, traders can consider pair strategy using Reliance Industries and Suzlon. If the Budget brings in cheer, Nifty is expected to reach 5,463 and even go to 5,681. On the other hand, if the Budget is neutral or negative for the markets, then Nifty is likely to touch 4,960 and 4,786.

Pair strategy: As Suzlon is a high beta stock, any positive momentum in the Nifty could lift the stock; it finds a crucial support at Rs 43.5 and an initial resistance at Rs 52 and then at Rs 56. If the Nifty were to fall below 5,000, then Reliance has to lead the decline. Reliance Industries finds a crucial resistance at Rs 1,055 and a major support at Rs 888.

F&O pointers: Reliance Industries futures witnessed unwinding of long positions on Friday, indicating that traders did not want to take a risk ahead of the Budget. Accumulation of open interest in calls also indicates a negative bias for Reliance. Suzlon futures added fresh longs on Friday.

How to construct: Consider buying Suzlon 47.5 call, which ended at Rs 2.75 on Friday and Reliance 960 put that closed at Rs 32. The total outgo in this strategy is likely to be Rs 19,000 (Rs 11,000 for Suzlon and Rs 8,000 for Reliance Industries). If Reliance or Suzlon touches expected targets, then the combined position would yield at least Rs 24,000.

Key risks: If the stocks remain at current levels (due to time decaying) or moves in the opposite direction (premium and time decaying), then traders will lose their premium.

Duration: Hold this strategy at least for two weeks.

Jet Airways (Rs 421): The long-term outlook remains negative for Jet Airways as long as it stays below Rs 673. The immediate-term outlook also turned negative despite a sharp pull back on Friday. The stock finds a crucial resistance at Rs 526 and an immediate one at Rs 467. A close below Rs 392 could weaken the stock to Rs 334. It seems the stock is heading towards that level.

F&O pointers: The Jet Airways March futures closed at a discount and witnessed unwinding of long positions on Friday. The counter, however, gained over six per cent. This indicates the recovery is purely a technical pull back or short covering only. Options are not active in Jet Airways. Market lot is 500 shares per contract.

Strategy: Consider going short on Jet Airways futures with a tight stop-loss at Rs 467 (spot price on a closing day basis) for an initial target of Rs 392. If Jet opens on a negative note, shift the stop-loss to Rs 421.

NOTE: Traders with little appetite for risk can stay away from both the strategies, as the overall market is set to witness high volatility.

Follow-up: Last week, we had advised traders to consider short on United Phosphorus and Cipla and also advised to sell 320 call. All these positions achieved expected profit targets.

Feedback or queries (on positions) may be sent to f&o@thehindu.co.in by Sunday noon. Replies will be published on Monday.

Published on February 26, 2011

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