Technical Analysis

Future Perfect: Consider long strangle on SAIL

K S BADRI NARAYANAN | Updated on January 20, 2018 Published on June 19, 2016

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The stock of Steel Authority of India (SAIL) has been stuck in the ₹30-65 range for the last six months. The short-term outlook remains range-bound. It finds immediate support at ₹39.8 and resistance at ₹47.5. A break of immediate resistance can take SAIL to ₹58.5. A conclusive close below ₹39.8 will change the outlook negative for SAIL. In such an event, SAIL can retest at ₹33.5. But the possibility of that appears rather unlikely at this juncture.

F&O pointers: The SAIL June futures shed 54,000 shares in open interest along with a fall in share price. Options suggest that SAIL could move in a range between ₹40 and ₹47.5.

Strategy: Traders can consider a long strangle on SAIL, which is the best strategy if one expects volatility in the underlying price in the short term. Here, this can be initiated by buying ₹42.5-strike put option and ₹47.5-strike call option. These options closed with a premium of ₹0.50 each. That means one has to pay ₹9,000 (as market lot is 9,000 shares/unit) to adopt the strategy.

While the maximum loss is the premium paid (that is, ₹9,000), profit is unlimited if the stock makes a quick movement in any one direction.

The position will hurt the most if the stock settles between the strike prices at the time of expiry. A close above ₹48.5 or below ₹41.5 will turn the position profitable. We advise traders to exit the position if the loss mounts to ₹5,500 or book profits if the combined option premium touches ₹2 (or ₹18,000).

Follow-up: We had advised traders to adopt a short strangle on Hindalco. Traders can consider holding it till expiry.

Published on June 19, 2016
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