Financial Daily from THE HINDU group of publications
Friday, Apr 30, 2004
Financial Daily from THE HINDU group of publications Friday, Apr 30, 2004 |
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Markets
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Derivatives Markets Columns - On the hedge Outlook positive for SBI, Tata Tea B. Venkatesh
The following strategies are based on Thursday's trading in the spot and derivatives segments on the NSE: SBI: The stock closed at Rs 639 in the spot market. The primary trend appears positive. The upside price target is Rs 680. The stock may see some downside in the near-term. On the downside, it could find support at Rs 619 and then at Rs 604. Buy May futures if the stock closes above Rs 642 in the spot market. Initiate the position with spot-market-stop-loss at Rs 632. If the stock declines from the current level, buy the futures contract after the stock finds support at Rs 619 in the spot market. In that case, the stop-loss should be placed at Rs 604. The position has to be traded with trailing stop-loss to control the downside risk. The margin on the long futures position is approximately 17 per cent of the contract value. An alternative strategy would be to construct long bull call-spread. This can be initiated with long May 640 calls and short May 680 calls. The position can be set up for a net debit of 15 points. The position will generate maximum profits if the stock moves to the upside price target on option expiration. This is because the long option will be deep in-the-money while the short option will expire worthless. The minimum order size is 500 units. Tata Tea: The stock closed at Rs 359 in the spot market. The primary trend appears positive. The upside price target is Rs 400. In the near term, however, the stock may retrace some of its earlier gains. If the stock declines, it could find support at Rs 340. Buy May futures after the stock declines to Rs 340. Initiate the position with spot-market-stop-loss at Rs 331. If the stock exhibits secular uptrend from the current level, initiate the long futures position after the stock closes above Rs 377. In the event, the stop-loss should be set at Rs 369. Note that the downside risk in the long futures position has to be controlled with strict stop-loss limits. The risk cannot be hedged with horizon-matching puts because options on the stock are not actively traded. For the same reason, alternative strategies on the stock are not available. The margin on the long futures position is approximately 16 per cent of the contract value. The minimum order size is 550 units.
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