The Hindu Business Line : HPCL: Outlook positive, buy Oct futures

HPCL: The outlook on this stock is positive. The upside price target is Rs 390. The downside risk level is Rs 350. The price projections are subject to event risk. This is the risk of a possible decision on the divestment in the company.

Consider buying the October futures on the stock. The position will be subject to 10-point risk. This risk cannot be cost-effectively hedged with long puts. The position has to be, hence, initiated with strict stop-loss limits.

If the stock rises to Rs 390 at the horizon, the long October futures will generate 30-points per unit (1,300 units per contract). If the stock declines to Rs 350, the position will lose 10 points per unit. The trading horizon is 9 days.

HDFC: The outlook on this stock is negative. Note that the open interest position as a percentage of the market-wide limit is less than 5 per cent. This suggests that traders are unwilling to carry large overnight positions in the derivatives market.

The downside price target is Rs 460. The upside risk level is Rs 525, which is close to the current market price. Consider shorting the October futures on the stock. At the current level, the position is subject to just 5-point risk. This risk need not be hedged. In any case, options on HDFC are not liquid. The position has to be, however, initiated with stop-buy limits if the stock crosses Rs 525.

If the stock declines to Rs 460, the short October futures will generate 60-points per unit (600 units per contract). If the stock rises to Rs 525, the position will lose 5 points per unit. The trading horizon is 17 days.

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