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History suggests Infosys will see violent gyrations in the next five or six sessions, “sandwiching” the quarterly results. Since it has a big weight in the Nifty, Infy's movements may have a big effect on the index. Infy's trend may also give advance warning about trends in other IT stocks, which declare results later on.
A trader looking to play Infy must be prepared to absorb violent moves. The results session itself could see a move of five per cent or more. Given leverage, that could mean a gain or loss of 30-75 per cent on margined positions.
Results are due on Friday. Infy is range trading in a tight range. In the past 10 sessions, it has hit a high of Rs 3,055 and a low of Rs 2,991 - roughly a two per cent range. There is no clear trend. In the past month, it hit a high of Rs 3,188 (the 52-week high) and a low of Rs 2,980. That's a seven per cent range. Going by the track record, it could move Rs 200-300 on Friday or Monday, with a breakout in either direction.
What clues can be gleaned about direction? The Q2 is expected to be good. The rupee fell sharply while US growth picked up. Most analysts expect Infy to deliver good results and to increase guidance for the financial year. If expectations are met, there is a good chance of a new 52-week high. If those expectations are not met, the stock could tank.
Other IT majors like HCL Tech and TCS have already risen to new 52-week highs. This means sentiment is upbeat. The correlations between HCL Tech, TCS and Infy have become weaker in the last 18 months when TCS and HCL Tech have outperformed Infy consistently. However, the IT industry does have good correlation so the HCL Tech and TCS trends could indicate Infy is headed up.
The safest way to play the stock is to wait for the results and only enter once the post-result trend is established. If you decide to enter earlier, keep a stop loss either at Rs 2,900, or at Rs 3,100, depending on whether you are long or short. Be prepared for that stop loss to be exceeded because the stock may move with a big gap. But if the stop is hit or exceeded, exit. Hedging a futures position by taking an option in the opposite direction would also be possible but expensive.
Another method is a strangle such as a long 2,800p (107) and long 3,200c (140) combination. This costs about 250. “Normal” breakevens are 2,550 and 3,450, which might not be hit. However, the trader is looking for is a big move in either direction when the combined premiums exceed the cost of purchase.
The winning option could instantly double in premium on a big breakout and a nimble trader may be able to cash out for a quick 20-30 per cent profit. The advantage of a strangle is that the combined position won't lose much even if the stock doesn't develop a trend post-result.
The author is a technical and equity analyst
