Financial Daily from THE HINDU group of publications
Wednesday, Jan 21, 2004
Financial Daily from THE HINDU group of publications Wednesday, Jan 21, 2004 |
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Markets
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Derivatives Markets Columns - On the hedge Tata Tea: Outlook negative, short January futures B. Venkatesh
THE following strategies are based on Tuesday's trading in the spot and the derivatives segments on the NSE: Tata Tea: The stock closed at Rs 370 in the spot market. The outlook on the stock appears negative. The downside price target is Rs 335. Consider shorting the January futures. Initiate the short futures position with buy stop at Rs 374. The position has to be traded with dynamic buy stops. Otherwise, the position will be exposed to heavy losses because of the high leverage (1,100 units per contract). Note that the short futures position cannot be cost-effectively hedged with calls. Initiating a long put position instead of short futures is not a suitable alternative because the put options are not actively traded. The January contract can be shifted to the next month after the term premium declines to about 5 points. Currently, the term premium is 9 points. The margin on the short futures position is approximately 20 per cent. The open interest position as a percentage of the market-wide limit is nearly 70 per cent. L&T: The stock closed at Rs 520 in the spot market. The downside price acceleration will be faster after the stock declines below Rs 505. In the event, the stock could find support at Rs 443. Consider shorting the January futures if the stock cuts below Rs 505. Initiate the position with dynamic buy stops, as the position cannot be hedged with horizon-matching calls. The position can be rolled over to the next month when the term premium declines from the current level of 8 points. The margin on the short futures position is approximately 30 per cent of the contract value. The open interest position as a percentage of the market-wide limit is less 10 per cent. The company is set to announce its quarterly performance on January 30.
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