Stock strategy: IDFC to move in a narrow range

A close below the support level at Rs 123 could weaken IDFC substantially towards Rs 100-98 levels.

IDFC (Rs 137.15): After witnessing a sharp fall from November 2010, the stock has been showing some strength since February.

It now finds a strong support at Rs 123 and the immediate resistance at Rs 146. A conclusive close above the resistance has the potential to lift the stock towards Rs 158 initially and then even to Rs 176.

A close below support level, however, could weaken the stock substantially towards Rs 100-98 levels.

F&O pointers: The IDFC May futures closed at Rs 137.15 and the June futures at Rs 138 against the spot close of Rs 137.10. It saw a modest rollover of 16 per cent to the June series.

Option trading indicates a positive bias, as 130 and 140 June puts witnessed heavy accumulation of open interest, indicating a strong emergence of put writers.

Calls also saw an accumulation of open interest which is quite normal given that the coming week being the settlement week for May contracts.

Strategy: Consider going long on IDFC June futures with a tight stop-loss at Rs 130 (spot price on a closing day basis) for an initial target of Rs 146. Market lot of IDFC is 2,000.

Alternately, traders can consider a bull-call spread.

This is can be initiated by buying lower-strike call (here 130 May call) and writing the higher-strike call (140 May call).

The respective calls closed on Friday at Rs 7.35 and Rs 1.2, making the total outgo at about Rs 6 per contract. Shorting the out-of-the-money call reduces the cost of establishing the strategy but at the same time forgoes the chance of making a large profit in the event that the underlying stock price skyrockets.

One can therefore have only a limited profit or loss from this strategy.

While a maximum profit can be Rs 4 per contract (difference between the strike price, Rs 10 and the net amount paid, Rs 6).

In this strategy, the maximum gain is achieved when the stock price moves above the higher strike price (Rs 140 here).

The bull call spread strategy will result in a loss if the stock price declines at expiration.

Maximum loss cannot be more than the initial debit taken (here Rs 6 per contract) to enter the spread position.

Follow-up: Last week, we had advised traders to consider short on HDFC with a stop-loss at Rs 725 for a target of Rs 586. The stock showed some resilience but did not touch the stop-loss.

Traders can consider holding the position with a tight stop-loss. We had also suggested a HDFC 660-call writing strategy.

The strategy presented profit opportunities last week but closed the week on a neutral note.

Traders can continue holding on to the position. We had also advised traders to construct short on Videocon Industries. It has achieved our initial target.

Feedback or queries (on positions) may be sent to > f&o@thehindu.co.in, >blfuturesoptions@gmail.com by Sunday noon. Replies will be published on Monday.

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