Financial Daily from THE HINDU group of publications
Tuesday, Mar 09, 2004
Columns - On the hedge
GAIL: Outlook positive, buy March futures
THE following strategies are based on Monday's trading in the spot and the derivatives segments on the NSE:
GAIL: The stock closed at Rs 230 in the spot market. The outlook appears positive. The upside price target is Rs 252.
Consider buying the March futures.
The near-month contract trades at a six-point discount to the spot price. Initiate the position with stop-loss at Rs 220. This exposes the position to a 10-point downside risk.
The futures position has to be traded with trailing stop-loss. Otherwise, the downside risk will be high because the contract-multiplier is 1,500 units.
The margin on the long futures position is approximately 25 per cent of the contract value.
Traders can alternatively initiate long calls on the stock. The near-month 230 calls trade at a nine-point premium. The position will be profitable even if the stock moves to the upside price target on option expiration. The reason is that the strike price plus the premium is far away from the price target. The open interest position as a percentage of the market-wide limit is above 65 per cent.
Bank of India: The stock closed at Rs 64 in the spot market. The outlook appears positive. The stock could face some resistance at Rs 69.
Consider buying the March futures. The near-month contract trades on par with the spot price.
Initiate the position with stop-loss at Rs 60. This exposes the position to an initial downside risk of four points.
The position has to be traded with trailing stop-loss because the contract-multiplier is 3,800 units. The margin on the long futures position is approximately 25 per cent of the contract value.
Traders should note that initiating a long call position on the stock instead of long futures might not be optimal. The reason is that call options on the stock are trading rich.
This exposes the position to high risk due to change in the volatility of the underlying. Besides, the theta-gamma trade-off is very high, which means that the stock's upside price acceleration is the primary factor in the payoff function.
The open interest position as a percentage of the market-wide limit is above 40 per cent.
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