The power of implied volatility in Long Straddle and Long Strangle

The Long Straddle and Long Strangle option strategy will be used when trader suspect that the underlying price will go in either direction because of any major event (such as result announcement, major policy announcements etc). Long Straddle is buying of both Call & Put options which are at same strike price and same expiry month. Whereas Long Strangle is buying of Call & Put options with different strike price both same expiry month. 

Whenever there are any major events with uncertain results, there is a high possibility that the implied volatility(IV) of the underlying stock will go up. Let’s an example of INFY which has announced the result today. Till last Friday (last working day) the IV of INFY was trading at more than 50 for all in the money and out of the money options. Today INFY has announced better results, which helped the stock to go up by more than 3%. Though the stock went up the in the money and the out of money call option didn’t went up. The value of the call option went down instead of going up. Why is that?

It is because of implied volatility! Today the IV went down all the way to around 25%, because of the uncertain (last quarter result) is no longer exist. Soon after uncertain becomes fact, the stock tend to lose it is IV. Because IV goes down, it will also drag Option price. The Call option can catch up those losing option price, only if the rise in price compensate. Same the Put option can catch up losing option price if price goes down to compensate. In case of INFY, the stock went up, but not as mush as it required to compensate the lose of IV.

INFY april series option chain, losing it is value because of losing Implied Volatility (IV)

INFY april series option chain, losing it is value because of losing Implied Volatility (IV) @nseindia.com

So the conclusion is, never ever go with Long straddle or Long Strangle unless otherwise you think the uncertainty will push the underlying price far away to help offset the IV. If you think, the price will not more far away to offset, the Short straddle or Short Strangle is the best way to deal with IV.

Buy cipla

Cipla is one of the stock which didn’t participate in the recent rally. Of course almost all the stocks from CNX Pharma index didn’t participate in the rally.  In the last three days Cipla has went up from 381.5 to 404 levels which is almost 6 percentage jump.

The three days rally has formed Three White Soldiers pattern in the Candlestick chart. The stock is showing rising positive momentum in the RSI & MACD charts. The stock is trading well above the 10 & 20 days moving averages.

Cipla is showing Three White Soldiers pattern in four months candlestick chart

Cipla is showing Three White Soldiers pattern in four months candlestick chart

 

Reliance breaks out of trading range

Over the last one month Reliance Industries Limited (NSE:RELIANCE, BOM:500325) has been trading in a range of 800 to 820 in the last one month. As part of recent rallies, the stock has breaks out on the upper side.

Currently the stock is trading well above the 10 (809.60) & 20 (811.90) days moving averages. The Relative Strength indicator is currently @ 51 and in an uptrend. The MACD is also showing trending above the level zero. One can go long with Reliance with target of 870-930 by keeping the 800 level as stop-loss.

Reliance Industries Limited breaking out of range bound in the daily chart

Reliance Industries Limited breaking out of range bound in the daily chart

On Thursday the stock has closed at 822.25 up by 15.25 points or 1.89% with the volume of 23,25,283 shares in NSE.

Buy Tata Motors with target of 405 and above

For more than a month the Tata Motors Limited was trading in a range bound between 360 – 380 levels. The stock has managed to close above the upper channel of the range bound followed by last 4 days of positive close. Currently the stock is trading at 386.10.

The last three days price activity is also supported by volume. During the last three days, the stock has reasonable volumes compare to the range bound duration. The MACD momentum indicator is showing raising trend in the daily chart. Currently the divergence is trading at 2.03. Over the last three days tata motors has added 18,32,000 shares in the Open interest. During which the stock went up from 369.70 to 386.10. The raise in the price and the open interest can be seen as long buildup in the stock.

Tatamotors breaksout of range bound

Tatamotors breaksout of range bound

In the near term the stock will find support around 380 levels which is the upper channel of the range bound. The stock may find resistance around it is 52 weeks high of 405 levels. One can go long by looking at the target of 405. If it manage to close above 405 then it may go even higher levels .

Buy Canara Bank – target of 295 with stop loss of 248

Buy Canara Bank for a target of 295 with stop loss of 248.
It forms short-term uptrend since its August 2013 lows by rising peaks and troughs on daily charts. The recent uptrend has accompanied by above average volume, which is also a positive signal. A slower pace of corrective declines highlights the short-term positive structure.

Canara Bank takes support at 248 in Candlestick chart.

Canara Bank takes support at 248 in Candlestick chart.

The share price high of 294 on Dec 2013 is seen taking support at its uptrend line & connecting the swing low of Aug 2013 & November 2013. Since  October 2013, 50 day moving average is acting as a support line. Each short-term momentum since November 2013 has earned about 45-50 points. So we can expect this short-term momentum can earn another 45-50 points.