Long straddle on Ashok Leyland

 

After a sharp nose-dive in mid-July this year, the stock of Ashok Leyland (₹129.2) found support at around ₹105 and bounced back. It changed direction subsequently and has been in a short term uptrend since then. While trending up, the stock breached a key resistance at ₹120 and its 50-day moving average. However, it encountered a significant medium-term resistance at ₹130 in early August and tests this hurdle now.

The stock could continue to witness volatility in the near term as the August month expiry is on the cards. It can either break above this resistance or reverse down sharply. In this situation, there is a possibility of the stock witnessing a swing between ₹5 and ₹10. Therefore, a long straddle option strategy would be ideal at this juncture. It is also known as buy straddle or just ‘straddle’ and is a neutral strategy. In the long straddle options strategy, the profit is unlimited and risk is limited.

This strategy involves the simultaneous buying of a put and a call option of the same underlying stock, same strike price and same expiry date. Hence, one needs to buy same put and call option of August expiry in Ashok Leyland. With the stock testing a key resistance at ₹130, the option strategy can be implemented on this strike price.

Traders can buy a call option of ₹130 that closed at a premium of ₹2.25 and buy put option of the same strike price that closed at ₹2.5. With the market lot of the underlying stock at 4,000; net outflow would be about ₹19,000 plus brokerage, which is also his maximum loss. Even so, traders should follow strict stop-loss in this strategy and exit the option if the loss mounts to ₹10,000. A strong rally beyond ₹135 or slump below ₹125, can deliver good returns.

(Note: The recommendations are based on technical analysis. There is a risk of loss in trading.)

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