Derivatives

Why short strangle may be the ideal strategy for Lupin this week

KS Badri Narayanan | Updated on May 16, 2021

As wild swings can result in heavy losses, conservative traders can stay away

The long-term outlook will turn positive for Lupin (₹1,178.45) only if the stock closes above ₹1,354. The stock finds immediate support at ₹1,142 and the crucial one at ₹1,098. A conclusive close below the latter will change the medium outlook to negative for Lupin. We expect the stock to move in a narrow range.

F&O pointers: Lupin May futures is ruling with a premium at ₹1,182.55 as against the spot close of ₹1,178.45, signalling existence of long positions. However, open interest dropped in the last one week. From a high of 96.58 lakh shares on May 5, open interest slipped to 88.13 lakh shares, indicating profit booking at every increase in price levels. Option trading indicates a range of ₹1100-1300 for the stock.

Strategy: We advise traders to consider a short strangle on Lupin. The strategy is a very risky one, as the profit is limited while loss could be unlimited. So, this strategy is strictly for traders who can understand risks involved in selling options.

Traders could simultaneously consider selling 1100-put option and 1300-call option, which closed with a premium of ₹9.20 and ₹10.20 respectively. As the market lot of 850 shares per lot, the strategy will ensure an inflow of ₹16,490, which will be the maximum profit one can earn. The maximum profit will happen if Lupin settles between ₹1,100 and ₹1,300 on expiry. A close above ₹1,319.40 or below ₹1,080.60 will start hurting the position. We advise traders exit the position at full profit or if the loss mounts to ₹9,800.

Follow-up: Traders can hold Adani Ports futures short position with a revised stop loss of ₹747 for a mentioned target of ₹685. Those who executed bear-put spread can continue to hold.

Published on May 16, 2021

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