Benefit from sideways movement in Arvind

Arvind (₹148): After witnessing a sharp rally in the last eight months, the stock appears to be heading for a consolidation mode. The long-term outlook will remain positive for Arvind as long as it stays above ₹133. If it sustains above this level, the stock has the potential to record a new high of around ₹195. However, in the near term, the stock is likely to move within a narrow band of ₹130 and ₹160, with a negative bias.

F&O pointers: Derivative trading also indicates a fatigue in Arvind contracts. Its February futures added just 96,000 shares in open interest positions.

Activity in the option segment also moderated sharply. Option trading suggests a range of ₹140- 150 for the stock.

Strategy: Consider a short strangle on Arvind. As we expect a narrow movement for the stock, this strategy is best suited to capture maximum benefit.

Traders could consider simultaneously selling the Arvind 160 call and the 130 put, which closed at a premium of ₹1.95 and ₹0.80, respectively.

This will entail an initial income of ₹11,000 as the market lot is 4,000 per contract.

Maximum profit a trader could earn from this strategy is the initial inflow, which is ₹11,000. This strategy is for traders who can bear the risk, as loss will be unlimited.

For maximum profit, Arvind has to settle between ₹130 and ₹160 at the time of expiry.

However, if the stock swings wildly in any one direction, that is either up or down, then this strategy will result in a huge loss.

In other words, any close below ₹127.25 or above ₹163.25 will start pinching traders. It is better to hold on to the strategy till expiry, as traders can capture the full potential of time value. We advise traders to exit this strategy if the loss touches ₹2,500.

Traders willing to take risk can consider an alternative strategy, too. They can consider writing 155 call option, which closed at ₹3.4 on Friday. This is a very risky strategy, as any close above ₹158.4 will affect the position.

Maximum profit is the premium collected, which works out to ₹13,600.

For that to happen, Arvind either has to stay or fall from the current levels. Traders can consider exiting the strategy if the stock closes above ₹153 or the call option touches ₹4.5.