Use long strangle on HDFC Bank to anchor Budget-day volatility

K. S. Badri Narayanan | Updated on: Jan 29, 2022

Though the long-term outlook remains positive for the stock of HDFC Bank (₹1,463.25), the short-term trend has turned negative. The stock finds immediate support at ₹1,415 and the crucial one at ₹1,355. A close below ₹1,304 will the alter the long-term positive outlook. On the other hand, a conclusive close above ₹1,605 will reconfirm the bullish trend and that can lift the stock to ₹1,725.

F&O Pointers: The HDFC Bank futures closed at ₹1,466.45 as against the spot price of ₹1,463.25. Amid steady fall in underlying price from ₹1,575 to current levels, HDFC Bank futures saw accumulation of open interest positions. In fact, it was one of the counters that saw a rollover of over 95 per cent in open positions from January to February, signalling positive bias. Trading in option indicates a possible range of ₹1,400-₹1,600.

Event: The Union Budget will be announced on February 1 (Tuesday) and the market will be volatile. As the thrust and impact will always be on banking, these stocks will swing more on Budget Day viz-a-viz other stocks.

Strategy: We advise traders to consider long strangle on HDFC Bank options by simultaneously buying ₹1520-strike call and ₹1,400-strike put. These options closed at ₹23.30 and ₹18.55. As the market lot is 550 shares, the strategy will cost traders ₹23,017.50, which will be the maximum loss one can suffer. Maximum loss will happen if HDFC Bank is stuck between ₹1,520 and ₹1,400.

On the other hand, profit potentials are high if HDFC Bank swings sharply in either direction. A close above ₹1,561.85 or below ₹1,358.15 (about 7 per cent swing on either side), will make the strategy profitable. We advise traders to hold the position for a maximum of four days with tight trailing stop loss. Exit the position if loss mounts to ₹15,000.

Follow-up: Stop loss would have triggered in Tata Communications.

Note: The recommendations are based on technical analysis and F&O positions. There is a risk of loss in trading.

Published on January 29, 2022
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