Market Strategy

Consider short strangle on Jaiprakash Associates

K.S. Badri Narayanan | Updated on September 14, 2013

Jaiprakash Associates (Rs 39.5): The long-term outlook for Jaiprakash Associates remains negative till it stays below Rs 74.5. The stock is currently trading at a crucial level. It finds immediate resistance at Rs 49 and support at Rs 33 and the next critical support at Rs 28. In the near-term, Jaiprakash Associates is likely to move in a narrow range with a downward bias.

Jaiprakash Associates’ September futures shed 10 lakh shares in open interest on Friday despite a marginal gain in the stock price. In the last 10 trading sessions, open interest declined by over one crore shares. Option trading indicates a range of Rs 35-45 for the stock, as maximum number of open interest positions are in that range.

Strategy: Consider short strangle on Jaiprakash Associates using 45 call and 30 put that have closed at Re 1 and Rs 0.40 respectively. The market lot is 4,000 units/contract. This will entail a maximum profit of Rs 5,600.

Short strangle strategy is best suited when one expects range-bound movement in the underlying stock. As the maximum profit is the premium collected, we advise traders with high risk appetite to consider this strategy. Besides, the loss could be unlimited if Jaiprakash Associates swings wildly in one direction (either up or down). A close below Rs 28.5 or above Rs 46.5 will start impacting the position adversely.

In other words, only a gain of over 16 per cent from current levels or a decline of over 31 per cent will pinch traders. Also, writing option involves higher margin commitments. Maximum profit occurs if Jaiprakash Associates closes in the aforementioned range. Hold this position till expiry. Traders could exit if the loss hits Rs 4,500 in the position.

Alternatively, traders could consider shorting Jaiprakash Associate futures with a stop-loss at Rs 44 initially. If it closes below Rs 38.35, then the stop-loss can be shifted and held for a target of Rs 30. Again, risk averse traders could stay away from this strategy. The stop-loss mentioned is on underlying price and on a closing day basis.



( 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 14, 2013

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