Financial Daily from THE HINDU group of publications
Tuesday, Jan 20, 2004
Financial Daily from THE HINDU group of publications Tuesday, Jan 20, 2004 |
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Markets
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Derivatives Markets Columns - On the hedge ACC: Outlook positive, buy Jan 260 calls B. Venkatesh
THE following strategies are based on Monday's trading in the spot and the derivatives segment on the NSE: ACC: The stock closed at Rs 255 in the spot market. The outlook appears positive. The near-term price target is Rs 275. Consider buying the January 260 calls, as they are cheaper in terms of implied volatility. Note that the outlook could turn negative if the stock cuts Rs 240 on the downside. In the event, the January 260 calls will tend towards zero. The positions' primary risk is the high theta effect. The implication is that the position will lose value due to time decay if the stock's upside speed is slow. The maximum loss on the long calls is the premium paid. The long call position appears a better strategy than initiating long futures with a sell stop at Rs 240. Such a strategy could be sub-optimal if the stock triggers the sell stop and then bounces back. Moreover, the margin requirement on the futures position is very high. The minimum market order is 1,500. The company is set to announce its quarterly financial performance on January 23. HCL Tech: The stock closed at Rs 321 in the spot market. The outlook could turn negative if the stock declines below Rs 290. In the event, short the February futures on the stock. Initiate the position with dynamic sell stops. Otherwise, the position will incur heavy losses because of high leverage effect (1,300 units per contract). If the stock cuts Rs 290 on the downside, it could find support at Rs 257 and then at Rs 228. Note that the February contract is currently trading at a 3-point term premium. This is the price the trader has to pay for extending the time horizon now. The margin on the long futures is approximately 25 per cent of the contract value. The open interest position is about a quarter of the total market-wide limit. Traders should note that the company is set to announce its quarterly financial performance and interim dividend on January 29.
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