The Hindu Business Line : Reliance Energy: Outlook negative, short March futures

Consider shorting the March futures. The near-month contract trades at 4-point premium to the spot price. Initiate the position with stop-loss at Rs 783. This exposes the position to 14-point upside risk. This risk cannot be cost-effectively hedged with near-month calls. Note that the position has to be traded with trailing stop-loss. Otherwise, the upside risk will be high because the contract-multiplier is 1,100 units. The margin on the short futures position is approximately 20 per cent of the contract value.

Traders should note that the alternative strategy of initiating a long put position is not available because put options on the stock are not actively traded. The open interest position as a percentage of the market-wide limit is about 20 per cent.

MTNL: The stock closed at Rs 142 in the spot market. The outlook appears positive. The upside price target is Rs 157.

Construct a bull call-spread on the stock. This position can be initiated by buying the March 145 calls and selling the March 160 calls. The net debit will be 2.95 points. The call spread captures the high implied-volatility of the short option and also lowers the initial cash outflow. The call spread will be subject to the moderate theta risk. The minimum order size is 1,600 units.

Traders can also initiate long futures position on the stock instead of long call spread. The position has to be traded with a stop-loss at Rs 139. This strategy could be sub-optimal because the stock could well trigger the stop-loss and then bounce back. The margin on the long futures position is approximately 20 per cent of the contract value. The open interest position as a percentage of the market-wide limit is around 15 per cent.

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