The Hindu Business Line : Reliance: Outlook positive, buy April 540 calls

Consider buying the April 540 calls, as they are cheaper in terms of implied volatility. The position is subject to high directional risk as the option is near-at-the-money. The long calls' primary risk is the high time decay.

The reason is that the target price is below the strike plus the premium. The implication is that the stock has to reach the upside price target in quick time to lower the loss due to time decay. The minimum order size is 600 units. Traders can also buy long April futures on the stock. The near-month contract trades at 4-point premium to the spot price. The position has to be initiated with an initial spot-market-stop-loss at Rs 505. This exposes the position to 9-point downside risk.

The position has to be traded with trailing stop-loss. The margin on the long futures position is approximately 15 per cent of the contract value.

Hero Honda: The stock closed at Rs 463 in the spot market. The outlook appears positive. The upside price target is Rs 487.Consider buying April futures on the stock. The near-month contract trades at 3-point premium to the spot price. Initiate the position with spot-market-stop-loss at Rs 451. This exposes the position to 12-point downside risk. This risk is high but cannot be hedged with horizon-matching puts. The margin on the long futures position is approximately 20 per cent of the contract value. The minimum order size is 400 units.

Traders should note that initiating long call position instead of long futures might not be optimal because the options are trading rich. This subjects the position to high additional risk due to change in the volatility of the underlying.

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