The Hindu Business Line : Tata Steel outlook positive, buy January futures

Tata Steel: The outlook on this stock is positive. The immediate upside target is Rs 480, but the stock can move to Rs 540 if the momentum continues. Consider buying the January futures contract. Initiate the position with buy stop at Rs 420.

At the current level, the position will be exposed to 25-point risk. This risk can be hedged with the near-month 430 puts. The option is currently available for 8.5 points. The option will be a good hedge if the stock declines first and then move towards the upside price target. Such a movement will reasonably preserve the option's theta-gamma trade-off. Note that initiating a long call position on the stock may be costly because the options are trading rich. This will expose the option to high vega and volatility risk.

The position can be switched to the next month contract during mid-January. The strategy should be to reduce the rollover cost, which is essentially the term premium on the futures contracts. The margin requirement is approximately 30 per cent of the contract value.

BHEL: The outlook on this stock is positive. The upside price target is Rs 572. Consider buying the February futures on the stock. Initiate the position with buy stop at Rs 492. This will expose the position to 24-point risk. This risk is high, but cannot be hedged away. The reason is that options on the stock are not very active, and hence, trade at high implied-volatility.

Initiating the long futures position with puts will, therefore lead to sub-optimal payoffs.

Note that the February contract trades at a 15-point discount to the near-month contract. This provides an opportunity for traders to extend the time horizon without incurring the rollover cost. The margin requirement is less than 20 per cent of the contract value.

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