Shall I buy futures of HDFC bank till June expiry or vanilla call option?

Sanjeev Sharma

The stock of HDFC Bank (₹1,353.8) has been trading in a range for the past two months i.e., since mid-April it has largely been oscillating within the price band of ₹1,300-1,400. Only if the stock moves out of this band, we can assume the next leg of trend with a good amount of certainty.

So, taking directional bets at this juncture may not be favourable. That means, buying futures or vanilla call options might not be the apt strategy.

One can either adopt a range-trading strategy or execute market neutral strategies which are short on volatility i.e., bet on the sideways trend to continue for some time and sell options to capture the time decay until the eventual break occurs.

We recommend you execute short strangle on HDFC Bank options. Since only little value is left in June expiry, you can consider selling the July series. That is, sell 1420-strike call option and 1280-strike put option simultaneously. These options closed with a premium of ₹16.8 and ₹13.6 on Friday. Therefore, this strategy can give you an inflow of ₹16,720 (lot size=550 shares). Hold these positions until the stock trades within ₹1,300 and ₹1,400.

Yet, if the stock breaks out of ₹1,400, liquidate 1420-strike call short and hold 1280-put short position till expiry. Close the put if the stock makes a U-turn to fall below ₹1,300 before it expires.

Alternatively, if it falls below ₹1,300, exit 1280-put short and hold 1420-call short position till expiry. Liquidate the position if the scrip recovers and rallies above ₹1,400 before expiry.

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