Consider short strangle on Asian Paints

KS Badri Narayanan | Updated on August 10, 2020 Published on August 10, 2020

Despite a strong rally on Friday, the outlook on Asian Paints remains neutral. The stock finds an immediate resistance at Rs 1,867 and support at Rs 1,705. A close above the resistance will change the outlook to positive for the stock and may trigger a fresh rally in it. In that event, the stock has the potential to reach Rs 2,276. A close below Rs 1,705 will alter the short-term outlook to negative and could weaken it to Rs 1,500.

F&O pointers: Despite a sharp gain on Friday, Asian Paints August futures witnessed a sharp drop in open positions. Even on a weekly basis, when the contract has been on an uptrend, open interest has declined, signalling that traders are not willing to carry over their positions. However, August futures at Rs 1,808.30 is ruling at a premium against the spot price of Rs 1,806.25, indicating existence of long positions. Option trading points to a range of Rs 1,600-1900.

Strategy: We advise traders to consider a short strangle on Asian Paints. This can be done by selling 1600-strike put and 2,000-strike call. These options closed with a premium of Rs 5.55 and Rs 4.70 respectively. As the market lot is 300 shares per contract, this strategy will ensure an inflow of Rs 3,075, which would be the maximum profit one can earn. For that to happen the stock has to settle between Rs 1,600-2,000 during the expiry.

However, loss could be unlimited if the stock swings wildly either up or down. So, this strategy is for traders who can understand risk, withstand wild swings and meet margin obligations.

A close above Rs 2,010.25 or below Rs1,589.75 will hurt the strategy.

We advise traders to hold it till expiry.

Follow-up: Hold Tata Motors call option.

(Note: The recommendations are based on technical analysis and F&O positions. There is a risk of loss in trading.)

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Published on August 10, 2020
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