Short strangle on L&T

KS Badri Narayan | Updated on March 09, 2014 Published on March 09, 2014


Larsen & Toubro (₹1,197): After a sharp rally, the stock of L&T now hovers at a critical level. L&T faces immediate resistance at ₹1,220 and support at ₹1,150. The long-term outlook will turn positive only if it breaches ₹1,305.

In such a scenario, the stock can touch ₹1,474. Till such time the stock is expected to move in a sideways range between ₹950 and ₹1,250.

A close below ₹985 will change the long-term outlook to negative.

F&O pointers: The L&T March futures added 72,000 shares or 0.9 per cent in open interests on Friday despite the stock surging over 5 per cent. Options trading indicates ₹1,140 as crucial level on the down side and ₹1,260 on the upside.

Strategy: Traders could consider a short strangle on Larsen & Toubro. This can be done by selling ₹1,260 call and ₹1,100 put, which ended on Friday with premiums of ₹13.8 and ₹5.1, respectively. A short strangle strategy is best suited when one expects range-bound movements in the underlying.

Maximum profit in this strategy is the premium collected, which works out to about ₹9,450, as the market lot is 500 units per contract.

For maximum profit, Larsen & Toubro should settle between ₹1,100 and ₹1,260 at the time of expiry. However, if the stock swings wildly either up or down, the loss would be unlimited.

A close above ₹1,280 or below ₹1,080 will render the position negative. Traders with high risk appetite can consider this strategy and hold it for at least two weeks.

We advise traders to exit the strategy if the combined options premium rises to ₹28, which will mean a loss of about ₹5,000.

Follow-up: Last week, we had recommended a short strangle on Tech Mahindra. Traders can continue to hold March options as suggested.

We also advise traders to book profit from ICICI Bank options, which we had recommended a couple of weeks back.

Send your queries to >blfuturesoptions@gmail.com

Published on March 09, 2014
This article is closed for comments.
Please Email the Editor