Technical Analysis

Consider short strangle on ICICI Bank, long on Suzlon

K. S. Badri Narayanan | Updated on October 08, 2011 Published on October 08, 2011

ICICI Bank (Rs 825.7): Despite a smart recovery on Friday, the medium-term outlook for ICICI Bank remains negative.

The stock faces stiff resistance at Rs 876. A close above that level would take the stock towards Rs 958.

On the other hand, if weak trend sustains, then the stock could reach Rs 734.

The next halt could be at Rs 632, which is major support zone.

A close below that could change the outlook for ICICI Bank to bearish. It appears the stock is heading towards this support level.

F&O pointers: The ICICI Bank futures saw a marginal accumulation of long positions on Friday and closed with minor premium only over the spot closing price.

Option trading suggests narrow movement as out-of-the money put and call options saw emergence of option writers.

Strategy: Traders could consider short strangle on ICICI Bank. This can be initiated by selling 850 call and 750 put. They closed at Rs 21 and Rs 10.5 respectively.

This would result in a net premium collection of about Rs 8,000/contract. (Market lot of ICICI Bank is 250).

Short strangle strategy is best suited when one considers that the underlying equity is likely to move in a narrow range till expiry.

While the maximum profit is the premium collected, loss could be unlimited if ICICI Bank breaches 850 or closes below Rs 750.

Maximum profit occurs if ICICI Bank closes between these strikes at the time of expiry.

Writing options involve higher margin commitments. So this strategy is best suited for traders, who have the wherewithal to withstand the swings.

Alternatively, traders with penchant of risk could consider going short on ICICI Bank futures with a stop loss at Rs 876, for an initial target of Rs 734.

They could even consider rolling it over, if it closes below Rs 734 emphatically for a target of Rs 632. In that event, they should shift the stop loss to Rs 734.

Suzlon (Rs 36.4): The immediate outlook turned positive for Suzlon Energy. After ruling near its all-time low level of Rs 34, the stock bounced back on Friday.

It appears the stock is likely to sustain the positive trend.

While the immediate resistance appears at Rs 42, a close above would take Suzlon towards Rs 52, though Rs 48 could act as a minor resistance zone.

Only a close below Rs 34 would trigger a fresh sell-off.

Having said this, the long-term outlook still remains negative for the stock. The outlook would change to positive only if Suzlon closes above Rs 98 conclusively.

F&O pointers: Despite sharp gains on Friday, the Suzlon futures witnessed unwinding of long positions, as traders booked profits.

Option trading also indicates that it could hover around Rs 35, as both put and call options of that strike saw heavy accumulation of open interest positions.

Strategy: Consider going long on Suzlon futures for an initial target of Rs 43 with a stop loss at Rs 34. Market lot is 8,000.

Feedback or queries (on positions) may be sent to >f&, > by Sunday noon. Replies will be published on Monday.

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