Market Strategy

Stock Strategy: Short strangle on Reliance Ind may pay

K.S. Badri Narayanan | Updated on May 12, 2012 Published on May 12, 2012



Short strangle on Reliance Ind may pay

Reliance Industries: The outlook remains negative for Reliance Industries. Immediate resistance appears at Rs 735 and the support at Rs 686. A close below the support could push the stock towards Rs 589. Key resistances are at Rs 825 and Rs 941.

F&O pointers: Reliance Industries witnessed unwinding of close to 4 lakh shares in open interest positions on Friday. This indicates that traders are not willing to carry over their positions. Option trading also indicates negative bias, as puts shed open interest positions.

Strategy: Traders can consider a short strangle on Reliance Industries. This can be initiated by selling 680 put and 720 call. The options closed at Rs 10.85 and Rs 7.45 respectively.

Short strangle strategy is best suited when one expects the underlying equity to move in a narrow range.

While the maximum profit is the premium collected (roughly about Rs 4,500), the loss could be unlimited if Reliance Industries breaches past the Rs 680-720 band. Maximum profit occurs if the underlying of the stock remains between these strikes.

But note that writing (selling) options involve higher margin commitments. So this strategy is best suited for traders, who can bear that risk. Consider this strategy for two weeks.

Bata India: The long-term outlook remains positive for Bata India as long as it stays above Rs 675. However, the stock could face some pressure going forward in the immediate-term. It faces resistance at Rs 863 and support at Rs 816.

A close below Rs 816 could drag Bata India to Rs 765. If the stock sustains above Rs 775, it has the potential to reach new heights. In that event, Bata can touch Rs 1,025, its next resistance level according to Fibonacci projections.

F&O pointers: The Bata India futures shed open interest despite scoring handsome gains on Friday, signalling negative bias. Options are not active.

Strategy: Consider shorting Bata India with a tight stop-loss at Rs 863 (spot price on a closing day basis) for an initial target of Rs 765. If the stock moves below Rs 816, shift the stop-loss to that level.

Key risks: Bata is a high beta stock and will fluctuate wildly. So this strategy is for traders who can afford to stomach that risk.

Follow-up: Last week, we had advised shorting of Educomp Solutions and ITC futures.

As expected Educomp Solutions displayed weak trend. Traders could hold the counter with a revised stop-loss of Rs 175 for the target of Rs 147.

ITC achieved the recommended target of Rs 224 during the intra-week dealings. We had also recommended writing of 180 call on Educomp Solutions and 240 call on ITC. Both the positions are currently in-the-money. Traders can consider holding it for one more week for maximum profits.

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

Published on May 12, 2012
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