Financial Daily from THE HINDU group of publications
Friday, Apr 16, 2004
Financial Daily from THE HINDU group of publications Friday, Apr 16, 2004 |
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Markets
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Derivatives Markets Columns - On the hedge Negative outlook for GAIL, BoB B. Venkatesh
THE following strategies are based on Thursday's trading in the spot and the derivatives segments on the NSE: GAIL: The stock closed at Rs 239 in the spot market. The outlook appears negative. The downside price target is Rs 218. Buy the April 230 puts. The option trades for 4 points. The position will be profitable even if the stock reaches the downside price target on option expiration. The reason is that the strike including the option premium will be deep-in-the-money if the stock reaches the price target. Note that the position's break-even price is Rs 226, not including the commission. The minimum order size is 1,500 units. Traders who can assume higher risk can sell May futures instead of buying the 230 puts. The farther-month contract trades at 3-point premium to the spot price and at 2-point premium to the near-month contract. Selling the farther-month contract could help the traders capture the 2-point term premium. Typically, the term premium narrows as the near-month contract nears expiration. The position has to be initiated with spot-market-stop-loss at Rs 246. This exposes the position to 7-point upside risk. The position has to be traded with trailing stop-loss to control for upside risk. BoB: The stock closed at Rs 257 in the spot market. The stock appears poised for a decline. The outlook could, however, change if the stock moves past Rs 270. Sell the April futures. The near-month contract trades on par with the spot price. Initiate the position with spot-market-stop-loss at Rs 263. This exposes the position to 6-point upside risk. The position has to be traded with trailing stop-loss. Otherwise, the upside risk will be high, as the contract-multiplier is 1,400 units. Traders cannot construct an alternative strategy with puts, as the options on the stock are not actively traded. Selling calls instead of selling futures will expose the position to high negative convexity and is, therefore, not optimal.
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