Market Strategy

Go for short straddle in REC

K. S. Badrinarayanan | Updated on February 09, 2013 Published on February 09, 2013

Rural Electrification Corporation (Rs 242): The long-term outlook will turn positive only if REC closes above Rs 305. In the short-term, it is likely to move in a narrow range between Rs 266 and Rs 214 with a downward bias. The stock finds immediate resistance at Rs 266 and support at Rs 233.

F&O pointers: The REC February futures shed open positions along with fall in share price. This indicates profit taking. Similarly, option trading also indicates a negative bias due to the strong emergence of call writers. A couple of put options witnessed unwinding of open interests too.

Strategy: Traders can consider short-straddle on REC. This can be initiated by selling both call and put of 240 strike price. They closed at Rs 9.7 and Rs 5.8 respectively. Short straddle strategy is best suited when the underlying equity is likely to move in a narrow range. While the maximum profit is limited to the premium collected, (here about Rs 16,500 (excluding margin and brokerages), loss could be unlimited if REC swings wildly in any one of the directions i.e. either up or down. Maximum profit occurs if the underlying REC settles around Rs 250. Loss will start mounting for traders, if REC moves below Rs 224 or closes above Rs 256. In other words, only a fall of 6.6 per cent or a gain of 7.5 per cent will hurt position. Writing option involves margin commitments, so this strategy is for traders who can afford to take this risk. Hold the position for at least two weeks.

Follow-up: Last week, we advised traders to consider a short strangle strategy on HDIL, by selling 90 call and 65 put. The position is in the positive considering the opening and closing prices of HDIL option, As advised, traders can consider holding it for at least another week.

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

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Published on February 09, 2013
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