I am holding HDFC Bank July expiry 1700-call option bought at ₹76. Please give suggestions to minimise the loss – Sundaram

HDFC Bank (₹1,660): The stock, since the beginning of 2023, has largely been moving in a sideways trend. It is oscillating between the support at ₹1,575 and the resistance at ₹1,700. So, technically, the stock is not trending in the short-term. This is important to note because options trades are generally short-term ones.

Several attempts by the stock of HDFC bank to break out of the resistance at ₹1,700 have resulted in failure. This does not mean that the stock will never move past this level. But from a trading perspective, especially when long side positions are considered, this may not be the apt time. Also, the put call ratio of July expiry options on HDFC Bank currently stands at around 0.50. This means, participants have sold twice the number of call options compared with put options, indicating a cap on the upside. So, only a decisive breakout can significantly improve the odds of a rally.

Considering the above and that you are holding a call option, the timing of trade does not seem to bode well with the prevailing price action. We are giving you two alternatives to approach this trade. You can pick either of the two based on your risk appetite.

One, exit the 1700-strike call option now. It is trading at around ₹20. Essentially you are booking a loss. We are recommending this because the stock is not trending and consequently, holding a long position in an option is not the right strategy because of the time decay. After exiting, you may buy a call option after the stock surpasses the barrier at ₹1,700. We suggest waiting for a daily close above ₹1,700. You can buy a put option if the stock, instead of rallying past ₹1,700, slips below the support at ₹1,575. A breach of ₹1,575 can lead to a potential decline to ₹1,500 or even to ₹1,430 in the short run.

Two, if you can accept the possible scenario where the premium might drop to zero from the current level of ₹20, you can take a risk by holding the call option and wait to see if the stock rebounds and goes above ₹1,700 before the end of the July expiry.

Certainly, the latter alternative carries higher risk, and our preference would be to exit the trade now and protect the remaining premium of ₹20.

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