Escorts Kubota is forming a head and shoulder pattern. Can I buy a put option?
Muthukumar
Escorts Kubota (₹3,205.2): The stock has been trading in a range between ₹3,000 and ₹3,450 for the last three months.
The stock is showing signs of forming a head and shoulder (H&S) pattern, but it’s not yet confirmed.
Instead of buying a put option, you could consider a short strangle options strategy if you are comfortable with the margin obligations. Since the stock continues to move in a sideways trend, executing short strangle can be beneficial.
Implement this strategy by simultaneously selling 3450-call and 3000-strike put options. These options closed at ₹37.10 and ₹26.05 respectively on Friday. So, selling one lot each can result in you receiving ₹63.15 as premium.
Hold both these options until expiry. But here is the exit plan should the stock move out of the range. If it breaks out of the resistance at ₹3,450, exit the short position on 3450-call and continue to hold 3000-put short until expiry.
If the stock slips below the support at ₹3,000, it will confirm the H&S pattern. According to this, a break of ₹3,000 can lead to a fall to ₹2,550. So, if the share price slips below ₹3,000, exit short strangle — liquidate both 3450-call and 3000-put short position.
After exiting the shorts, you can consider buying either 3000- or 2900-strike put options. Decide between these two strikes based on the option premium and your risk appetite. Exit this when the option price doubles.
Consider December expiry puts if the breach of the support at ₹3,000 happens in the first half of this month. In case the stock breaks the support in the second half of December, we advise to go for January puts so that you can avoid time decay to a large extent.
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