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Outlook positive on Oriental Bank, HCL Tech

B. Venkatesh

THE following strategies are based on Tuesday's trading in the derivatives segment on the NSE:

Equity options

Oriental Bank: The outlook on this stock is positive. The upside price target is Rs 280. The downside risk level is Rs 202. Consider buying the November futures on the stock. The long futures position will be exposed to 29-point risk based on the downside price projection. This risk cannot be hedged with horizon-matching puts, as the farther-month options are not traded yet. The position can, however, be hedged with near-month 220 puts. This will lower the risk in the initial phase of the trading horizon. Note that the October puts will be a drag on profits during the trading horizon if the stock trades above Rs 215 in the week leading to the expiry of the option contract.

If the stock rises to Rs 280 before near-month puts expire, the long November futures, long October 220 puts will generate 44 points per unit (1,200 units per contract). If the stock declines to Rs 202, the position will lose 10 points per unit. Instead, if the stock rises to Rs 280 at the horizon, the long futures position will generate 48 points per unit, but will lose 29 points per unit if the stock declines to Rs 202. The margin requirement on futures is approximately 19 per cent of the contract value. The trading horizon is 19 days.

HCL Tech: The outlook on this stock is positive. The upside price target is Rs 232. The downside risk level is Rs 177. Note that the price projections are near symmetrical to the current spot price, which is due to the high volatility that is typical of tech stocks.

Consider buying the November futures on the stock. The position will be subject to 26-point risk. This risk cannot be hedged with puts, because the near-month and farther-month option contracts are not actively traded. The position may be initiated with appropriate stop-loss limits.

If the stock rises to Rs 232 at the horizon, the November long futures will generate 29 points per unit (1,300 units per contract). If the stock declines to Rs 177, the position will lose 26 points per unit. The margin requirement on the futures contract is approximately 20 per cent of the contract value. The trading horizon is 10 days.

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