Technical Analysis

Short strangle on United Spirits

KS Badri Narayanan | Updated on March 30, 2014 Published on March 30, 2014

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The long-term outlook for United Spirits (₹2,651.6), the latest entrant to the Nifty-50 stocks, will remain bullish as long as it stays above ₹2,108. The stock finds immediate resistance at ₹2,719.

Beyond this level, it faces key resistance at ₹2,816. A close above this level will trigger fresh momentum in the stock. However, in the short-term the stock could face pressure. The stock finds immediate support at ₹2,535, failing which it could plunge to ₹2,316.

F&O pointers: The United Spirits futures shed 1.12 lakh shares in open interest on Friday, despite the start of a new series. In options, activity was centred only around a few strikes. Accumulation of open interests in ₹2600-2700 strikes indicates that the stock may move within this band.

Strategy: We advise traders to consider a short strangle strategy on United Spirits. It can be employed by selling ₹2,500-put and ₹2,800-call, which closed with a premium of ₹52 and ₹68.30 respectively.

As the market lot is 125 units per contract, maximum profit works out to approximately ₹15,100. For that to happen, United Spirits should settle between the strike prices, at the time of expiry. 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 United Spirits swings wildly in either directions i.e. up or down. A close above ₹2,920 or below ₹2,380 will start impacting the position . In other words, a move of over 10 per cent in the stock will pinch traders. Also, writing option involves higher margin commitments.

Hold this position for at least two weeks. Traders can exit if the loss mounts to ₹5,000. Traders with high risk appetite can even hold their positions, till the loss mounts to ₹7,500.

Follow-up: Last week, we advocated a strategy using March and April options on Axis Bank. We advise traders to exit from Axis Bank position.

Published on March 30, 2014
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