Market Strategy

Construct short strangle on resistance-prone Tata Motors

K.S. Badri Narayanan | Updated on November 03, 2012 Published on November 03, 2012

Tata Motors (Rs 270): Despite the sharp surge in recent times, the outlook remains neutral to negative for Tata Motors in the short-term. The stock faces strong resistance at current levels. Immediate resistance appears at Rs 289 and support at Rs 258. It appears the stock is heading towards support level. In the medium-term the stock is likely to move in the range of Rs 210-290. A close above Rs 294 will change the long-term outlook positive. In that event, Tata Motors will achieve a new peak.

F&O pointers: The Tata Motors futures witnessed unwinding of long positions on Friday. This indicates that traders are not willing to carry over the position after the recent rally. Option trading indicates a positive bias, as puts added open interest positions.

Strategy: Traders could consider short strangle on Tata Motors using 280 call and 260 put. This strategy works best when one expects the underlying stock to move in a narrow range. Maximum profit is the premium collected, which works nearly to Rs 9,700. On the other hand, loss could be unlimited if Tata Motors moves out of the aforesaid range. Besides, writing option involves higher margin commitments.

This strategy is suggested only for traders who can withstand wild swings and can hold it till expiry. Loss will escalate if Tata Motors dips below Rs 240 or moves above Rs 290. Market lot is 1,000 units a contract.

Follow-up: Last week, we advised shorting Pantaloon Retail. Though the stock moved initially on expected lines, it closed sharply higher.

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

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