Financial Daily from THE HINDU group of publications
Thursday, Jan 22, 2004
Financial Daily from THE HINDU group of publications Thursday, Jan 22, 2004 |
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Markets
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Derivatives Markets Columns - On the hedge Tata Motors: Outlook negative, buy January 450 puts B. Venkatesh
THE following strategies are based on Wednesday's trading in the spot and the derivatives segments on the NSE: Tata Motors: The stock closed at Rs 458 in the spot market. The outlook on the stock appears negative. The near-term downside price target is Rs 432. Consider buying the January 450 puts, as they are cheaper in terms of implied volatility. The option was available for 8.5 points on Wednesday. The position is exposed to high time decay as the contract expires in just seven days. The long puts will be profitable even if the stock reaches the downside price target on option expiration. The reason is that the option would be then 18 points in-the-money. The position will suffer maximum losses if the stock trades near the current level in the next two to three days and stays below Rs 450 on option expiration. The minimum market order is 3,300. The open interest position as a percentage of the market-wide limit is just over 60 per cent. The company is set to announce its quarterly financial performance on January 22. Satyam Computer: The stock closed at Rs 315 in the spot market. The outlook could turn negative if the stock declines below 305. In the event, the stock could first find support at Rs 295 and then at Rs 264. Consider shorting February futures if the stock declines below Rs 305. Initiate the position with trailing buy stops to protect the downside. Otherwise, the high leverage effect (1,200 units per contract) would lead to heavy losses on the short futures position. Hedging the short futures position with calls may lead to sub-optimal payoff because options are trading rich. This will expose the hedged position to high vega and theta risk. The margin on the short futures position will be approximately 30 per cent of the contract value. The open interest position as a percentage of the market-wide limit is above 75 per cent. The company is set to announce its quarterly financial performance on January 22.
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