After the sharp fall on Friday, the short-term outlook for Dr Reddy’s Laboratories (Rs.3,650) has turned negative.Immediate support is at Rs.3,479 and the next is at Rs.3,335.
A close above Rs.3,670 can mitigate the current negative outlook and a close above Rs.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 Rs.4,000.
Strategy:
Traders can consider a short strangle on Dr Reddy’s Labs. This can be initiated by selling Rs.3,300 put and Rs.4,000 call, which closed with a premium of Rs.32.8 and Rs.35, respectively.
With 150 being the market lot for the stock, the strategy will entail a total inflow of Rs.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, Rs.4,000-Rs.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 Rs.4,070 or below Rs.3,230. Traders can consider exiting the position, if the loss mounts to Rs.7,500.
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