F&O Strategy: Execute short strangle on Axis Bank

The stock of Axis Bank (₹730.75) gained last week and moved above a resistance at ₹700 and the price action indicates further rally from here. However, looking at a broader level, it can be observed that the scrip has been stuck in the range of ₹640-800 since early 2021 and has been struggling to establish a trend in either direction.

So, it is less likely that the rally will take the price above ₹800. Likewise, if the stock falls from here, the support at ₹640 is expected to restrict the downfall. Overall, we forecast the stock to remain within the above-mentioned range at least until August expiry.

Strategy: Given our above expectations, we would recommend options strategy that would be direction-neutral and the potential to gain from the time decay since the scrip will most likely stay within the range of ₹640-800.

Traders can execute short strangle using options on Axis Bank. The boundaries of the range can be considered to select the strike prices. That is, sell 800-strike call option and simultaneously sell 640-strike put option.

Since only limited time is left in July expiry, we recommend you opt for August expiry options.

The premium of 800-strike call and 640-strike put option of August expiry closed at ₹5.95 and ₹3.20, respectively. Selling these options simultaneously will result in an inflow of ₹10,980 – lot size of 1,200 multiplied by total premium received which is ₹9.15 (₹5.95 plus ₹3.20).

The upper break-even point will be ₹809.15, whereas the lower break-even point will be ₹630.85. So, the strategy will be at loss only if the stock closes above ₹809.15 or below ₹630.85 on expiry — on August 25.

We suggest holding this strategy until expiry. But if the stock sees a daily close above ₹810 or a daily close below ₹630 before August 25, exit the positions.

Note: The recommendations are based on technical analysis and F&O positions. There is a risk of loss in trading.

Published on

July 23, 2022

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