Market Strategy

Stock strategy - Swing a strangle on NTPC

K.S. Badri Narayanan | Updated on November 24, 2012 Published on November 24, 2012

NTPC (Rs 159.5): The NTPC stock has been moving in a narrow range between Rs 155 and Rs 175 during the last three months and set for a wild swing. Last week it showed a sign of weakness. NTPC finds strong support at Rs 154 and resistance at Rs 173. A close below Rs 154 will trigger a fresh sell-off that could weaken the stock towards Rs 138. A close above the resistance has the potential to lift the stock towards Rs 189.



F&O pointers: NTPC witnessed a rollover of 23 per cent. Options are not very active. A little cue available indicates a neutral view on NTPC as both put and call added open interest in December series.



Strategy: Consider strangle on NTPC using December options. This can be initiated by buying 150 December put and 170 December call. They closed at Rs 1.25 and Rs 1.70 respectively.



In a strangle option strategy, traders buy an out-of-the-money (OTM) call option and an OTM put option with the same date of expiry. This strategy becomes profitable only when there is a large movement in the underlying stock. While profit is unlimited, as the price swings, the loss could be limited to the premium paid, if it remains in aforesaid range. In that case, the maximum loss works out Rs 6,000 if NTPC settles between Rs 150 and 170. Traders are advised to consider this strategy for at least three weeks.



Follow-up: Last week, we advised bear call spread on Ashok Leyland. The stock moved on expected lines. Those who did not book profits can continue to hold this strategy till expiry.









(Note: Feedback or queries (on positions) may be sent to >blfuturesoptions@gmail.com by Sunday noon. Replies will be published on Monday.)



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