The largest private bank in India, ICICI Bank (IBN) drank from the same well that many of the banks in the United States did and as a result the stock has taken a very hard hit since the start of this year, falling from over $72 in January to its current $17. ICICI has also fallen with the rest of the Indian market, which dropped 45% over the same time period and on account of recent rumors questioning the financial strength of the bank. While management has strongly denied these rumors, it remains to be seen if they are pure speculation or have some substance to them.
The Reserve Bank of India (RBI) has stepped up to provide enough cash to ICICI during the recent run on the bank just like it did a few years ago when ICICI experienced a run in 2003. Letting ICICI fail would be the equivalent of letting Bank of America fail in the United States. Following the 2003 run, ICICI went on to post spectacular gains. The difference between 2003 and now is that back then the bank had one of the greatest bull market winds on its back with the BSE Sensex quadrupling in value over the next five years.
Whether ICICI rebounds from these levels (current P/E is 12.91) or continues to fall further, the moves on either side are likely to be sharp and hence my plan to strangle ICICI with out of money options and a slight bullish bias. I am going to purchase the following set of options for ICICI both in the SINLetter model portfolio and my personal portfolio. The closing price of the day will be used as the purchase price for the model portfolio.
