Market Strategy

Stock strategy: Bet on Infy’s narrow range via short strangle

K.S. Badri Narayanan | Updated on September 29, 2012 Published on September 29, 2012



Infosys (Rs 2,534): Infosys is likely to move in a sideways direction. While the broader range for the stock is Rs 2,100-2,850, in the short-term, the range would be still narrower. It is likely to move in Rs 2,300-2,650 range despite the company’s Q2 results scheduled to be announced on October 12.

Only a break from this range will set a clear trend for the counter. A close above Rs 2,850 will change the long-term outlook positive for the stock. In that event, it can set a record high. On the other hand, a fall below Rs 2,250 will change its outlook negative.

F&O pointers: The stock witnessed short accumulation on Friday. The futures closed at a discount to the spot price (Rs 2,534.9) as well as volume weighted average price (Rs 2,552.3). Cost of carry is negative, indicating that traders are not willing to carry over their long positions, while option trading indicates a neutral view as both calls and puts accumulated open position. Market lot is 125.

Strategy: Traders can consider a short strangle on Infosys. This can be initiated by selling 2,650-strike call and 2,400-strike put. They closed at Rs 52.70 and Rs 49.75 respectively.

Short strangle strategy is best suited when one considers that the underlying stock is likely to move in a narrow range. While the maximum profit (about Rs 12,800) is the premium collected, the loss could be unlimited if Infosys moves sharply in one direction, that is either up or down beyond the strike prices.

The position will start pinching the traders if Infosys closes above Rs 2,750 or below Rs 2,300. In other words, only an eight per cent swing away from current level will hurt the position.

Besides, writing option involves high margin commitments. So this strategy is for traders who can afford to stomach high risks. Traders can consider holding the position till expiry. Maximum profit will occur if Infosys trades between the strike prices.

Follow-up: Last week, we had advised traders to consider short strangle, using Reliance Communications. The position is currently positive, given the opening price of the options. As advised, consider holding it for three more weeks.

(Note: Feedback or queries (on positions) may be sent to > by Sunday noon. Replies will be published on Monday.)

Published on September 29, 2012
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