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Traders’ high risk appetite could initiate a short strangle on Kotak Bank, which hit a record high of Rs 1,730 a share before closing at Rs 1,708 Monday.
The short strangle here involves sale of a call and put roughly equidistant from the CMP of Rs 1,708.
The trader sells a put at 1,660 and a call at 1,740, receiving Rs 30 a share (400 shares equal one contract).
All options expire on December 26.
Placing a stop-loss in case the premium rises to Rs 36 a share is a must, advise F-O traders.
The lower breakeven point (LBEP), below which the trader could face potentially high losses is 1,630 and the UBEP is 1,770.
The maximum gain of Rs 30 happens if the Kotak Bank stock expires anywhere between 1,660 and 1,740.
Each point below or above these levels reduces the profit until the LBEP or UBEP is hit.
With just six days to expiry, a trader aims to pocket the premium if the Kotak stock remains flat to range-bound because of time decay (theta), which eats into an option’s price aggressively toward expiry if it remains relatively flat, said Bhavin Mehta, derivatives and technical expert at Dolat Capital.
“It’s reasonable to expect that Kotak Bank would likely trade within the range of the strangle and one could make decent gains by writing the same,” said Rajesh Palviya , derivatives head, Axis Securities.
Traders must make note that writing options involves placing a margin equal to a futures lot with the exchange’s clearing corporation.
Also, placing a stop loss at Rs 36 a share would limit losses to Rs 6.
The 1,660 near-month option’s level is a strong support for the Kotak stock which has the maximum OI of above eight lakh shares, making a sharp decline below this level is unlikely.
Resistances are at 1,700, 1,740 and 1,800 levels.
