The Hindu Business Line : Short-term price reversal likely in ICICI Bank, HDFC

The strategy is structured to take advantage of short-term price swings. Note that such price swings can run contrary to the primary trend. It is, therefore, advisable to trade the positions with protective stops. Importantly, the recommendations are valid for only two trading sessions from the date of initiation. If profits are not taken or the position is not stopped, the contracts have to be closed at the horizon.

ICICI Bank: Sell February futures after the stock trades below Rs 375.50 in the spot market. The downside price target is Rs 368. Place the spot-market-stop-loss at Rs 380.50 or at the day's high at the time the position is initiated, whichever is higher. The position has to be traded with trailing stops to control the upside risk. The margin on the futures position is approximately 17 per cent of the contract value. The minimum order size is 1,400 units.

Traders can alternatively construct bear call spread, as the call implied volatility is high. It will be best to construct the position with short at-the-money calls and long out-of-the-money calls as such a position will optimise the volatility capture. The spread can be initiated with one short February 370 calls and one long February 390 calls. The spread will fetch 10 points credit. The position can be closed for 6 points if the stock reaches the downside target within 2 days. Note that the position would lose 4 points if the stock trades at Rs 390 at the horizon. The risk-return trade-off is, hence, not very attractive.

HDFC: Buy February futures after the stock moves above Rs 789.50 in the spot market. The upside price target is Rs 808.90. Initiate the position with spot-market-stop-loss at Rs 784 or at the day's low at the time the position is initiated, whichever is lower. The position has to be traded with trailing stops to control the downside risk. The margin on the futures position is approximately 16 per cent of the contract value. The minimum order size is 600 units. No alternative strategy is available because options on the stock are not actively traded.

(The opinion expressed in this column is based on technical analysis. There is risk of loss in trading.)

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