The outlook for Cairn India (Rs.145.2) will remain negative as long as the stock trades below Rs.188. The stock finds immediate support at Rs.125 and resistance at Rs.158. We expect the stock to move within a narrow range in the short term, with bouts of volatility.
F&O pointers:
Despite a sharp surge in share price, the Cairn September futures witnessed unwinding of long positions on Friday. Option trading indicates support at Rs.140 and resistance at Rs.150-160.
Strategy:
Consider a short strangle on Cairn India. This involves the simultaneous selling of a slightly out-of-the money put and call. This can be initiated by selling 130 put and 165 call, which closed at a premium of Rs.4 and Rs.1.95 respectively.
Maximum profit will occur when the underlying stock closes between the strike prices of the options sold on the expiration date. At this price, both options expire worthless and the options trader gets to keep the entire initial credit. Maximum profit works out to Rs.5,950 in this strategy.
The loss, however, could be unlimited if the stock moves sharply in either direction. Only risk-takers should consider this strategy.
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