Trade TCS ahead of Q1 results with Short Iron Butterfly strategy to gain advantage of Theta decay
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Below is the payoff graph of the strategy:
The shares of Tata Consultancy Services (TCS) have witnessed a short buildup in the futures segment, and the overall medium-term trend so far has been sideways to negative.'The upward momentum in the stock can be triggered due to a positive outcome from the result, as that can lead to short covering, which eventually will get the stock to its recent swing high of Rs 3,600 or beyond that,' said Jay Thakkar, Vice President & Head of Derivatives and Quant Research at ICICI Securities.In case the result is negative or below expectations, Thakkar believes that there can be additional shorts, which will add pressure on the stock.However, most of it seems to be priced in the stock in the previous fall.'Therefore, in case of muted results or guidance, the stock can trade with a sideways to negative bias wherein the support on the lower side is in the range of 3200-3250 levels,' Thakkar added.Based on the above analysis, Thakkar noted the short-term range for the July series as Rs 3,200 to Rs 3,700. Currently, the stock is placed in the middle of the range at around Rs 3,400 levels.On the upside, the Rs 3,500 strike has the highest call OI, indicating that the market participants are not expecting more upside. Therefore, only above Rs 3,500, one can expect the stock to continue its short-term uptrend.The IVs are at 23.40 levels with IVP of 79 and IVR of 42, indicating that the market move can be quite within a range.Hence, Jay Thakkar suggests deploying a Short Iron Butterfly strategy , which has a limited gain and limited loss.In case the stock doesn't react to the result, there is a high probability of theta decay , which will make the strategy favourable.Short Iron ButterflyIn a short straddle, the trader sells a call and a put at the same strike price to receive the premiums on both the short call and short put positions. We deploy this strategy when we expect the underlying to consolidate in a range before taking any further direction. Straddle selling is usually advised for expert traders and for conservative traders, it is best to buy hedges for protection, thus converting the straddle into an Iron Butterfly.Jay Thakkar noted that the total Inflow in this strategy is 90.05 points, which is the maximum gain, whereas the max loss will be of 29.95 points.The risk-reward ratio is 1:3, which is quite favourable.If the stock trades within the range of Rs 3,470 to Rs 3,290, then the strategy will be profitable and beyond that the loss is limited up to 29.95 points.(Source: ICICI Securities): Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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