The Hindu Business Line : Hold HLL, Reliance puts

HLL: If you had bought the December 160 puts on December 3 as recommended, your position would be down Re 0.80 per option for a total loss of Rs 800 for one market lot (each contract comprises of 1,000 options). Should you hold the position or cut losses?

When this column recommended HLL puts then, it stated that the upside projection for the stock was Rs 181, and downside projection was Rs 159. Apparently, buying interest pushed the stock up to Rs 180, causing losses for the long puts. The revised projection levels are Rs 185 on the upside, and Rs 166 on the downside. Since the target trading-horizon is only 10 days, it is a moot point whether the stock can drift down to Rs 166. The next higher downside projection level is Rs 172.

With the stock having more or less run its upside levels in the short-term, it pays to hold the long puts at least to minimise the losses. If the stock rises to Rs 185, the puts will carry no value. If the stock declines to Rs 172, you will lose Rs 250 on your initial investment of Rs 1,000. If the stock declines to Rs 166, you will gain Rs 910 per market lot. Note that the payoff is based on the current implied volatility, which is higher than the forecast volatility.

Reliance Industries: The December 260 puts on this stock was recommended on November 21. If you had bought the puts then, your position would be down Rs 2,940 per market lot, which is 600 options.

The price projection for the stock given at the time of the recommendation was Rs 281 on the upside, and Rs 258 on the downside. Strong buying interest has pushed the stock well beyond the upside projection level. The revised projections are Rs 298 on the upside, and Rs 269 on the downside. Note that the upside projection is quite near the current levels. This suggests that you can cut losses if you hold your long puts for sometime.

If the stock rises to Rs 298, you are bound to lose your entire investment of Rs 3,300 per market lot. If the stock declines to Rs 269, you will lose Rs 1,320 per market lot. This payoff is better than cutting losses now. The target trading-horizon is 10 days.

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