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Wednesday, May 05, 2004

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Canara Bank: Buy May futures

B. Venkatesh

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

Tata Steel: The stock closed at Rs 350 in the spot market. The outlook could turn positive if the stock closes above Rs 358. In the event, the stock could find resistance at Rs 370 and then at Rs 381. If the stock closes below Rs 334, the outlook could turn negative. In that case, the stock could find support at Rs 319.

Buy June futures if the stock closes above Rs 358 in the spot market. Initiate the position with spot-market-stop-loss at Rs 348. Traders should consider shorting May futures if the stock closes below Rs 334. Initiate the position with spot-market-stop-loss at Rs 340.

The long or the short position has to be traded with trailing stop-loss to control the risk. Otherwise, the risk will be high because the contract-multiplier is 900 units. Based on the price targets, the stock has 15 points on the downside and 20 points on the upside. Such wide price swings can be usually exploited with volatility spreads such as straddle or strangle. The problem is that the options are trading rich. This means that the strangle will not generate profits unless the stock moves to either price target in quick time. Otherwise, the position will lose more value due to time decay.

Canara Bank: The stock closed at Rs 171 in the spot market. The stock appears to be on a corrective phase to its recent rally from Rs 122. The downside price target for this near-term corrective phase is Rs 152.

Sell May futures. Initiate the position with spot-market-stop-loss at Rs 174. The reason is that the outlook could turn positive if the stock closes above this level. The stop-loss is, indeed, very tight for comfort.

Traders can alternatively consider shorting the near-month futures after the stock declines to Rs 159. In the event, the downside will be limited to just 7 points, though the risk is lower.

Traders can alternatively buy May 160 puts. The option trades for 6.5 points. The position will be profitable if the stock reaches the downside price target before May 18.

Otherwise, the option will lose more value due to time decay than it will gain due to long delta and gamma. The minimum order size is 1,600 units.

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