Technical Analysis

Consider short strangle on JP Associates

K.S. Badri Narayanan | Updated on October 15, 2011 Published on October 15, 2011


Tata Steel (Rs 438): The outlook remains week for Tata Steel. Only a close above Rs 498 would change the medium-term outlook positive for the stock. The stock finds an immediate support at Rs 385. A close below that would trigger a fresh sell-off for Tata Steel. In that event, it could even decline to Rs 345.

F&O pointers: The Tata Steel October futures witnessed a fresh accumulation of short positions. Option trading indicates negative bias as calls accumulated open interest positions. On the other hand, puts shed open interest positions, indicating the reluctance of put writers. The Tata Steel 400 and 380 calls also shed open positions marginally. Though trading volumes remained low for these options, a little cue available suggests that Tata Steel could face strong support around this level.

Strategy: Traders could consider going short on Tata Steel with a stop-loss at Rs 450 for an initial target of Rs 385. Stop-loss could progressively be adjusted so as to protect profits.

Traders could also consider writing 440 Tata Steel calls. It closed with a premium of Rs 9.95. While the maximum profit is the premium collected (approximately Rs 5,000 as market lot is 500 units), the loss could be unlimited if Tata Steel moves up swiftly.

Writing options involve higher margin commitments. So this strategy is best suited for traders who are willing to take a risk.

Jaiprakash Associates: The outlook remains neutral for JP Associates in the short-term. The stock could move in the Rs 85-65 range. A conclusive close above Rs 85 has the potential to lift the stock towards Rs 102 however, a drop below Rs 65 would weaken the stock to Rs 54.

F&O pointers: JP Associates saw a marginal accumulation of short positions. Option trading indicates a neutral view as both call and put added open positions. However, heavy unwinding of open interest in Rs 75 put and strong accumulation in Rs 75 call suggests that Rs 75 would acts a strong resistance for JP Associates.

Strategy: Traders could consider short strangle on JP Associates. This can be initiated by selling Rs 75 call and Rs 65 put. They closed at Rs 2.25 and Rs 0.55 respectively. This would result in a net premium collection of about Rs 11,000 a contract. (Market lot of JP Associates is 4,000).

Short strangle strategy is best suited when one considers that the underlying equity is likely to move in a narrow range till expiry. While the maximum profit is the premium collected, loss could be unlimited if JP Associates breaches Rs 75 or closes below Rs 65. Maximum profit occurs if JP Associates closes between these strikes at the time of expiry.

Writing options involve higher margin commitments. So this strategy is best suited for traders, who have the wherewithal to withstand the swings.

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

Published on October 15, 2011

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