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I have bought Dr Lal Path Labs January futures contract at ₹2,310. What’s the outlook for the stock? Can I hold the futures or exit? – Mahesh Kolluri
The stock of Dr Lal Path Labs (₹2,200.15), which was moving in the narrow range of ₹2,265-2,310 through last week, slipped below the lower boundary on Monday as it closed at ₹2,200.15.
Notably, the support at ₹2,265 is key because the stock has rallied on the back of this support thrice in the last three months. Now that this support is invalidated, the outlook, at least for the short-term, has turned negative for the stock.
From the current levels, the nearest support can be seen at ₹2,060.
Subsequent support is at ₹1,965. For the stock to turn bullish, it should surpass ₹2,400. Until then, the rallies are likely to be met with a fresh set of sellers leading to the resumption of the downtrend.
Considering the above factors, we would recommend exiting your longs. Yes, there is a chance that the stock could see a corrective rally from here and that gives a chance to minimise the loss. However, such an up move and the level to which it can go is uncertain. Therefore, liquidating the longs now is a better choice.
That said, you can consider initiating fresh short positions from the current level – short Dr Lal Path Labs futures (January series) at the current level of ₹2,154. You can short more if the price rises to ₹2,200. Place stop-loss at ₹2,250. Exit the shorts when the contract declines to ₹2,030.
As an alternative to the above, you can buy a put option. That is, buy a 2200- or 2150-strike put option (January expiry) based on the capital you wish to allocate for this trade, preferably only a fraction of your total capital, and the liquidity of these options. Target and stop-loss can be based on the price of the underlying. Book profits in puts when the stock price falls to ₹2,060; on the other hand, exit the option if the price surges above ₹2,250.
The trade-off between two strikes mentioned above is that the 2200-strike will become in-the-money (ITM) sooner if the stock depreciates from the current level and being a round number, it is likely to see higher trader participation. Another thing you should monitor is the time decay. As you might be aware, the longer the time the stock takes to decline the higher will be the time decay which can eat into the premium that you paid.
Send your queries to derivatives@thehindu.co.in
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