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Wednesday, May 12, 2004

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ACC: Outlook negative, short June futures

B. Venkatesh

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

ACC: The stock closed at Rs 256 in the spot market. The outlook appears negative. The stock is on a corrective phase to its recent uptrend from Rs 238 to Rs 296. On the downside, the stock could find support at Rs 238.

Sell June futures. The farther-month contract trades on par with the spot price and at a marginal premium to the near-month contract. Initiate the short position with a spot-market-stop-loss at Rs 279. The upside risk is high but so is the reward. This position cannot be cost-effectively hedged with horizon-matching calls. The position has to be, hence, traded with trailing stop-loss to control this upside risk. The margin of the short futures position is approximately 20 per cent of the contract value. The minimum order size is 1,500 units.

An alternative strategy would be to buy May 270 puts. The option trades for 14 points. The position will be profitable if the stock declines below Rs 256 before option expiration. Otherwise, the loss in option value due to time decay will be higher than the gain due to long delta and gamma. Note that the maximum loss is higher for the option position than for the futures position. The opportunity cost is, however, higher for the futures position because the stock may well trigger the stop-loss limit and then decline.

Satyam Computer: The stock closed at Rs 297 in the spot market. The near-term outlook appears positive. The stock could retrace its decline from Rs 391 to Rs 281. On the upside, the stock could meet with resistance at Rs 319.

Buy May futures. The near-month contract trades at 2-point discount to the spot price. Initiate the position with spot-market-stop-loss at Rs 287. The outlook will turn negative if the stock closes below this level. The downside risk is high because the contract-multiplier is 1,200 units. The position has to be, hence, traded with trailing stop-loss. The margin on the long futures position is approximately 20 per cent of the contract value.

The alternative strategy would be to buy calls or construct vertical spreads. Long call position can be initiated with the May 290 calls. A vertical spread can be initiated by combining the long May 290 calls with short May 320 calls. The position can be set up for a net debit of 8 points. The position will be profitable if the stock moves to the upside price target in quick time.

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