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Tuesday, Mar 16, 2004

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ONGC: Outlook negative, buy March 760 puts

B. Venkatesh

THE following strategies are based on Monday's trading in the spot and the derivatives segments on the NSE:

ONGC: The stock closed at Rs 787 in the spot market. The outlook appears negative. The downside price target is Rs 750.

Consider buying the March 760 puts. The option's primary risk is the high time decay. The reason is that the strike less the option premium is below the downside price target. Besides, the option has just 9 days to expiry. The implication is that the stock has to reach the downside price target soon. Otherwise, the position will not generate profits.

Trades can consider constructing bear put-spread to lower the initial outlay and capture the high implied-volatility of the out-of-the-money options. To do this, the long 760 puts can be combined with short 720 puts. The position's net debit will be 5 points.

Traders can also sell March futures. The near-month contract trades at 10-point discount to the spot price. The position has to be initiated with spot-market-stop-loss of Rs 800. The margin on the short futures position is approximately 30 per cent of the contract value. The minimum order size is 600 units.

Shipping Corporation: The stock closed at Rs 133 in the spot market. The outlook appears negative. The downside price target is Rs 105.

Consider selling the March futures. The near-month contract trades at 2-point premium to the spot price. Initiate the position with spot-market-stop-loss at Rs 145. This exposes the position to 12-point upside risk. This risk can be hedged with the near-month 140 calls. The minimum order size is 3,200 units.

Traders who prefer to initiate puts can consider buying the March 140 puts. This is available for 9 points, which is the lower than the upside risk of the un-hedged short futures position. The puts will be profitable even if the stock reaches the downside price target on option expiration. This is because the strike less option premium is far above the downside price target.

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