I executed a 1700-strike long straddle in United Breweries last week. I bought call for ₹45 and put for ₹33. When shall I exit this trade?
Siddharth Cheran
United Breweries (₹1,738.5): The stock of United Breweries Ltd (UBL) was moving in a narrow range of ₹1,680-1,725 since the beginning of March.
But in the last two trading sessions, the stock rallied and ended the week above ₹1,725. This means, the likelihood of the rally extending is high.
The nearest resistance for UBL is at ₹1,785. A breakout of this can lead to a quick upswing to ₹1,850 and then possibly to ₹1,900.
So, you can retain this trade. Exit when the stock hits ₹1,785. At this price level, the 1700-call and 1700-put option price would be at around ₹90 and ₹6 respectively. Here, the sum of ₹96 is greater than your cost of ₹78 (₹45 plus ₹33), a potential profit of ₹18 for one lot of straddle.
After you exit the trade, if the scrip breaks out of ₹1,785, consider buying vanilla call options as the breakout can lead to a swift rally. Exit this call at the prevailing price when the stock reaches ₹1,850.
That said, if the stock falls from the current level, there is a strong support between ₹1,680 and ₹1,660. A break below ₹1,660 can result in the price declining quickly to ₹1,600.
So, if a downswing occurs, hold the position. Exit the trade when UBL’s share price drops to ₹1,600. On such a drop, the price of call and put will be approximately ₹3 and ₹95 respectively. Here as well, the total premium of ₹98 (₹95 plus ₹3) will be greater than your cost of ₹78, a potential profit of ₹20 per lot.
However, if neither the rally to ₹1,785 nor the decline to ₹1,600 happens by the end of this week, consider exiting the trade irrespective of what the options prices are. As you are long on options, time decay will hurt your trade, leading to a loss if the stock consolidates.
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