Market Strategy

Stock Strategy: Consider short straddle on Crompton Greaves

K.S. Badri Narayanan | Updated on January 04, 2014 Published on January 04, 2014

Crompton Greaves (Rs 124): After scoring handsome gains in the last six months, it appears that the rally in Crompton Greaves may moderate in the near-term. The stock finds immediate resistance at Rs 135 and support at Rs 122. A close below Rs 122 will take the stock lower to Rs 105, which is a very crucial level. A fall below this level will change the medium-term outlook to negative. The long-term outlook will change to positive only if the stock closes above Rs 170. In the immediate term, we expect Crompton Greaves to move in a range between Rs 105 and Rs 135.

F&O pointers: The Crompton Greaves January futures witnessed unwinding of long positions on Friday. It shed over 3.4 lakh shares along with a fall in price. Options are not very active. The stock may find it difficult to move past Rs 140.

Strategy: Investors could consider the short straddle strategy. This strategy is best suited when one expects a range-bound movement in the underlying stock. Here, traders could consider selling the Rs 125-strike call and put options. This will entail an income of Rs 41,800, as the options closed at Rs 5.5 and Rs 4.95, respectively.

As the maximum profit is the premium collected, we advise traders with high risk appetite to consider this strategy. Besides, the loss could be unlimited if Crompton Greaves swings wildly in one direction (either up or down).

A close below Rs 114.5 or above Rs 135.5, will start impacting the position adversely. In other words, a gain/loss of over 8 per cent from current levels will pinch traders. Square off the position if Crompton Greaves closes above Rs 140 or below Rs 110.

It may be noted that writing (selling) options involves higher margin commitments. Maximum profit will occur if Crompton Greaves closes around Rs 125.



( 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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