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After the sharp fall on Friday, the short-term outlook for Dr Reddy’s Laboratories (₹3,650) has turned negative.Immediate support is at ₹3,479 and the next is at ₹3,335. A close above ₹3,670 can mitigate the current negative outlook and a close above ₹3,895 can change the outlook to positive. We expect the stock to move in a narrow range with limited downside.
F&O pointers: Dr Reddy’s Labs futures witnessed accumulation of almost six lakh shares in open interest on Friday, indicating heavy build-up of short positions. Option trading indicates that it could face resistance at ₹4,000.
Strategy: Traders can consider a short strangle on Dr Reddy’s Labs. This can be initiated by selling ₹3,300 put and ₹4,000 call, which closed with a premium of ₹32.8 and ₹35, respectively.
With 150 being the market lot for the stock, the strategy will entail a total inflow of ₹10,170, which would be the maximum profit one can earn. For that to happen, Dr Reddy’s Labs has to settle between the strikes (that is, ₹4,000-₹3,300) at the time of expiry.
However, loss will be unlimited if the stock swings sharply in one direction. The position will start impacting the traders negatively, if the stock moves above ₹4,070 or below ₹3,230. Traders can consider exiting the position, if the loss mounts to ₹7,500.
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