Consider short strangle on Ranbaxy

Ranbaxy Laboratories (Rs 406.4): Despite a sharp fall recently, the immediate outlook for the stock is neutral. It is likely to move in a range between Rs 380 and Rs 480. It finds immediate support at Rs 404, which is very close to the current price. The next support is at Rs 378, which is a very crucial level for Ranbaxy. A close below Rs 378 will change the medium-term outlook to negative and can drag the stock lower to Rs 330. The stock finds immediate resistance at Rs 452. A close above this level will trigger a fresh rally and the stock can record new highs.

F&O pointers: The Ranbaxy futures added fresh short positions on Friday. Option trading indicates that the stock could hover in Rs 420-440 range. Heavy concentration of open interest at Rs 440-call indicates that Ranbaxy may find it difficult to breach this level in the near term.

Strategy: As the stock can move in a narrow range in the near term, investors can consider short strangle strategy on Ranbaxy. This strategy can be initiated by selling the Rs 440-call and Rs 380-put options. This will lead to an initial inflow of Rs 9,000, as the options closed around Rs 4.5. Market lot is Rs 1,000.

As the maximum profit is the premium collected, we advise traders with high-risk appetite to consider this strategy. Besides, the loss could be unlimited if Ranbaxy swings wildly in one direction. Maximum profit occurs if Ranbaxy settles between the strike prices.

A close below Rs 370 or above Rs 450 will start impacting the position adversely. Square-off the positions if the loss mounts to Rs 3,500. It may be noted that writing (selling) options involves higher margin commitments.

Follow-up: Last week, we had advised a short strangle on YES Bank. Traders could consider holding the position as mentioned last week, as the stock moved on expected lines.



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

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