Market Strategy

Stock Strategy: Narrow lane ahead for Tata Motors DVR

K.S. Badri Narayanan | Updated on October 06, 2012 Published on October 06, 2012



Tata Motors DVR (Rs 171.3): While the long-term outlook remains positive for Tata Motors DVR as long as it stays above Rs 142, in the short-term the stock could face some resistance. It is likely to move in a range of Rs 160-182.

Only a break from this level will set a clear direction for the stock. If it sustains Rs 142, then Tata Motors DVR has the potential to record a new high.

F&O pointers: Derivative trading presents a positive bias for the counter. The Tata Motor DVR October futures added 1.7 lakh shares on Friday.

Options are not that active. A little cue available indicates bullishness, as calls witnessed unwinding of position. Market lot is 2000.

Strategy: Traders can consider short-strangle using Tata Motors DVR. This can be initiated by selling 160 put and 180 call. They closed at Rs 2 and Rs 3.20 respectively.

When one expects the underlying stock to move in a narrow range, short strangle is one of the best strategies to be adopted.

While the maximum profit (about Rs 10,400) is the premium collected due to time decay, the loss could be unlimited if Tata Motors DVR drives away smartly in one of the directions - either up or down.

The position will hurt traders if Tata Motor DVR closes above Rs 186 or below Rs 154.

Simply put, only a nine per cent swing away (in single direction) from the current level will hit the position.

Besides, writing option involves high margin commitments. So this strategy is for traders who can take high risks. Traders can consider holding the position till expiry.

Maximum profit will occur if Tata Motors DVR settles between the strike prices.

Follow-up: Last week, we had advised traders to consider short-strangle in Infosys. The position is currently negative given the opening price of the options. As advised, traders can consider holding it for two more weeks.

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

Published on October 06, 2012
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