F&O Strategy: Buy put options on L&T Infotech

Akhil Nallamuthu |BL Research Bureau | Updated on: Apr 23, 2022

The stock is likely to fall to ₹4,400, the nearest support, within a couple of months

The stock of L&T Infotech (₹5,093.85) is on a downtrend since the beginning of 2022. The resistance at ₹7,575 blocked the rally and consequently, the stock turned southwards and is now in a short-term downtrend. Last week, it breached a key support at ₹5,500 opening the door for further weakness. The stock is likely to fall to ₹4,400, the nearest support, within a couple of months. But one should be prepared for a possible corrective rally to ₹5,500 before depreciating further.

Substantiating the bearish outlook, the cumulative open interest (OI) of L&T Infotech futures on the NSE shot up to 17.5 lakh contracts on Friday i.e., April 22 compared to 6.4 lakh contracts on December 31, 2021. Price drop along with increasing OI indicates short build-up. Also, the Put-Call ratio (PCR) of April and May expiry, at 0.33 and 0.37 respectively, shows significant call option writing. This means participants are not expecting rally anytime soon. Considering these factors, below are the trade recommendations.

Options strategy: Consider buying one lot of April expiry 5000-strike put option, which closed at ₹77.65 (lot size=150 shares) on Friday. Buy one more lot when price drop to ₹50. Thus, the average price will be around ₹63 and so, the outflow will be ₹19,050. Liquidate both the lots when you see a profit of ₹35,000 or exit when loss mounts to ₹12,500. If both scenarios do not occur before expiry, roll over to May series with same trike options at the prevailing price.

Futures strategy: Short May futures (₹5,104.1) and buy one lot of April expiry 5600 call option (₹13.4) as a hedge. Short second lot of futures on a rally to ₹5,550 and then buy one more April 5600 call option. Thus, the overall position will be two lots of futures short with average price of approximately ₹5,325 with two lots of April 5600 call as hedge. We suggest you buy call option before shorting futures so that the futures’ margin requirement will be lower. Exit if the net profit increases to ₹40,000 or exit if loss goes up to ₹15,000. If either of these does not happen on expiry, roll over the call options to May expiry.

Irrespective of the profit/loss, exit all your positions if stock falls to ₹4,400.

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

Published on April 23, 2022
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