Financial Daily from THE HINDU group of publications
Saturday, Jun 19, 2004
Columns - On the hedge
Tata Steel: Outlook seen negative; sell July futures
THE following strategies are based on Friday's trading in the spot and the derivatives segments on the NSE:
Tata Steel: The stock closed at Rs 282 in the spot market. The outlook appears negative. The near-term downside price target is Rs 266. If selling pressure continues, the stock could also test Rs 231. The recommended view may be negated if the stock moves above Rs 323.
Sell July futures. The farther-month contract trades at one-point premium to the spot price. Initiate the position with spot-market-stop-loss at Rs 291.
The position has to be traded with trailing stop-loss to control the upside risk. It is not optimal to hedge this risk with horizon-matching calls.
The margin on the short futures position is approximately 27 per cent of the contract value. The minimum order size is 900 units.
An alternative strategy would be to construct a vertical bear spread. This can be initiated with long July 270 puts and short July 240 puts. The farther-month are not traded yet.
The spread should be set up for a net debit of not more than 10 points. Note that this spread will be optimal only if the stock moves towards Rs 231. The spread will not be profitable if set up for a target price of Rs 266. A straight futures contract will be best strategy for that price target.
IPCL: The stock closed at Rs 141 in the spot market. The outlook appears negative. The downside price target is Rs 126. The recommended view may be negated if the stock breaks above Rs 159.
Sell July futures. The farther-month contract trades on par with the spot price. Initiate the position with spot-market-stop-loss at Rs 150. Trade the position with trailing stop-loss.
Otherwise, the upside risk will be high because the contract-multiplier is 1,100 units. The margin on the futures position is approximately 35 per cent of the contract value.
No alternative strategies are available because put options on the stock are not actively traded. Traders who hold the underlying can consider writing July 150 calls against the long position.
Note that this is an income-enhancing strategy and cannot be considered as a hedge for the long position.
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