Consider short strangle on RCom

K.S. Badri Narayanan | Updated on September 22, 2012 Published on September 22, 2012


Reliance Communications (Rs 62): Despite remaining resilient in the last few days, the long-term outlook remains negative for Reliance Communications. The stock finds an immediate support at Rs 57. A close below that has the potential to weaken the stock towards Rs 48. RCom finds immediate resistance at Rs 64 and the next one at Rs 73.5. We expect the stock to remain in a narrow range in the short-term before charting a clear direction.

F&O pointers: Reliance Communications futures witnessed a rollover of about 22 per cent in open interest. Despite gaining, RCom futures, both current and next month, closed lower than the spot price.

Though the discount is very marginal, the fact remains that not many traders are willing to carry over their positions. It also signals that the gains were mainly on account of short-covering. Option trading also points a neutral view as both calls and puts accumulated open interest.

Strategy: Traders could consider short strangle on Reliance Communications using October series. This can be initiated by selling 75 call and 55 put. They closed at Rs 1.5 and Rs 1.85 respectively. While at this point of time the 75 call did not see much trading activity, we expect trading interest set to gain in the ensuing weeks.

Adopting short strangle strategy is best suited when one expects the underlying stock to move in a narrow range. Maximum profit is the premium collected, which works to Rs 12,000 approximately. On the other hand, loss could be unlimited if RCom moves out of the aforesaid range. Besides, writing option involves higher margin commitments. This strategy is suggested only for traders who can withstand wild swings and can hold it for at least three weeks. Since RCom is a high beta stock, swings will also be on the higher side.

Loss will start mounting if RCom closes above Rs 79 or below Rs 51. Market lot is 4,000 units a contract.

Follow-up: Last week, we had advised short-term traders to adopt short strangle (using 95 put and 105 call) on Apollo Tyres. Hold this till expiry. Similarly, as advised, long-term traders could also remain invested on Apollo Tyres with a stop-loss as mentioned.

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

Published on September 22, 2012
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