Option data suggesting the stock might trade in sideways zone in the coming trading sessions as fresh writing has been witnessed in At The Money (ATM) options
Strategy set-up: Delta neutral and theta depreciating short straddle in SBI
The recent rally in the market is likely to take a pause, and we could see a sideways move in the coming sessions.
Many stocks, where bulls have shown massive buying interest, are now likely to go sideways. We have picked State Bank of India (SBI) from the pack, as we are now heading towards expiry week, the delta neutral and theta depreciating strategy needs to be adopted.
Traders can opt for 'Short Straddle' and short At The Money (ATM) call as well as Put option. Generally, at near the expiration, all In The Money (ITM) options trade almost at their intrinsic value. At that time, stop loss should be at break even points to cap the losses.
What option data suggests
Option data suggests the stock might trade in the sideways zone in the coming trading sessions as fresh writing has been witnessed in At The Money (ATM) options. Close to 1,44,000 short contracts have been added in Rs 330 Put options, while the same strike price call option has witnessed open interest addition of 6,78,000 contracts.
The stock is likely to trade in a tight range as cumulative open in Rs 320 PE has summed upto approximately 40 lakh contracts. On the call side the nearest hurdle is placed at Rs 340 where cumulative open interest holds around 80 lakh contracts on short side.
After a sharp rally, the stock has shown bearish divergence in the overbought zone. The counter is trading far above its short term moving averages and the current structure suggests that the bulls and bears might try to maintain their equilibrium.
The weekly RSI is trading near important resistance zone and suggests that the rally might abated at current levels and the stock could go sideways. The immediate support level for the stock is placed at Rs 320, and on higher side Rs 338, is likely to act as an important resistance.
Strategy: Short Straddle (28th November 2019 contract)
Considering the expiry week and current trading setup, we have adopted quite aggressive theta depreciating strategy in a form of 'Short Straddle' where traders can go short in ATM call and put option and expect to gain the most of the premium amount as the stock is likely to close near Rs 330 at the time of expiration. Due to monthly expiry week, the risk can be minimized by placing a stop loss at breakeven points as the premiums would be trading almost at intrinsic value for ITM options.Sell Rs 330 Call option at Rs 5.65
Sell Rs 330 Put option at Rs 6.50Call delta and theta 0.49 and -0.57
Put delta and theta -0.51 and -0.60Maximum profit - Rs 12.15
Upper breakeven - Rs 342.15
Lower breakeven - Rs 317.85
Stop loss can be placed at the breakeven points.
(The author is Head of Derivatives at Rudra Shares & Stock Brokers Ltd)Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.LIVE NOW... Video series on How to Double Your Monthly Income... where Rahul Shah, Ex-Swiss Investment Banker and one of India's leading experts on wealth building, reveals his secret strategies for the first time ever. Register here to watch it for FREE.