Technical Analysis

Short strangle on Tech Mahindra

KS Badri Narayanan | Updated on March 02, 2014 Published on March 02, 2014

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Tech Mahindra (₹1,870): The medium and long-term outlook will remain positive for Tech Mahindra. Only a close below ₹1,550 will negate the current bullish trend. After a sharp run-up, we expect the stock to pause before pursuing a clear direction.

In the short term, the stock is likely to move in a narrow range. It finds immediate support at ₹1,720, and a breach of this level could drag it to ₹1,660. However, on the upside, the stock has the potential to touch ₹2,250.

F&O pointers: The Tech Mahindra March futures added 7.18 lakh shares or 23.3 per cent in open interest on Friday. Option trading indicates that ₹1,900 could act as a resistance, as open interest position is concentrated around ₹1,900 call options.

Strategy: Traders could consider a short strangle on Tech Mahindra. This can be done by selling ₹1,700 put and ₹1,950 call, which closed with premiums of ₹6 and ₹25.95, respectively.

A short strangle strategy is best suited when one expects a range-bound movement in the underlying stock. Maximum profit in this strategy is the premium collected, which works out to about ₹8,000, as the market lot is 250 units per contract.

For maximum profit to occur, Tech Mahindra should settle between ₹1,950 and ₹1,700 at the time of expiry.

Loss could, however, be unlimited if Tech Mahindra swings wildly in either direction. A close below ₹1,668 or above ₹1,982 will make the position negative. Traders with high risk appetite can consider this strategy and hold it for at least two weeks. We advise traders to exit the strategy if the combined option premium rises to ₹42, which will mean a loss of about ₹2,500.

Follow-up: Last week, we had recommended a strategy on ICICI Bank using February and March options. Traders can continue to hold March options as suggested.

Published on March 02, 2014
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