Market Strategy

Consider short straddle strategy on IFCI

K. S. Badri Narayanan | Updated on June 30, 2012 Published on June 30, 2012

IFCI (Rs 40.25): Despite a strong show last week, the long-term outlook remains negative for IFCI. The stock finds an immediate support at Rs 33.5 and resistance at Rs 47. A close above the resistance can lift the stock towards Rs 66, though in between, Rs 54 could act as a minor resistance zone. On the other hand, a close below the support could weaken the stock to Rs 29.

F&O pointers: IFCI futures witnessed accumulation of long positions on Friday; it added 41.52 lakh shares. Option trading indicates neutral view as both calls and puts witnessed accumulation of open interests.

Strategy: Consider going short straddle on IFCI using 40-strike. Shift the stop-loss to Rs 33 if IFCI moves below that level. Market lot of IFCI is 8,000.

Short straddle strategy is best suited when one expects the underlying stock to move in a narrow range. Maximum profit in this strategy is the premium collected, while the loss could be unlimited. Besides, writing option involves higher margin commitments.

Traders can consider holding the position for two weeks. Maximum profit will occur if IFCI hovers around Rs 40. Since the market lot is 8,000 units for a contract, the maximum profit could be around Rs 30,000, based on Friday's close. The call and put closed at loss will start pinching the investors, if IFCI moves above Rs 43 or falls below Rs 1.65 and Rs 2.15 respectively.

As IFCI is a high beta stock, current momentum in the broader market could lift the stock sharply. So this strategy is for traders who can withstand wild swings.

Sobha Developers (Rs 339.85): The long-term outlook remains positive for Sobha Developers. The stock finds support at Rs 326 and resistance at Rs 370. A close above the resistance will trigger fresh buying in the stock which could take Sobha Developers to Rs 413-415. On the other hand, if it fails to hold the support level, it could decline to Rs 290. We expect the stock to touch its resistance in the immediate-term.

F&O pointers: Despite gains on Friday, it witnessed unwinding of long positions. None of the options witnessed any activity.

Strategy: Consider going long on Sobha Developers. Stop-loss can be placed at Rs 326 for an initial target of Rs 370. If it sustains current level, shift the stop loss to Rs 334.

Follow-up: Last week we advised short straddle on Infosys and short strangle on ONGC for June series. While the former resulted in a minor loss, the latter closed with gains.

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

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