The Hindu Business Line : Outlook negative for HLL, PNB; Sell July futures

Sell July futures. The near-month contract trades on par with the spot price. Initiate the position with spot-market-stop-loss at Rs 127. A higher stop-loss limit will skew the risk-return trade-off. Trade the position with strict stop-loss limits. Otherwise, the upside risk will be high because the contract-multiplier is 2,000 units. The margin on the futures position is approximately 17 per cent of the contract value.

Traders can also consider buying the July 120 puts instead of selling futures. The puts trade for 3 points. The position suffers from high theta risk because the price target is not far away from the strike plus the premium. Note that bear put spreads are not possible because out-of-the-money puts are not actively traded. Constructing bear call spread is not optimal because the position does not provide volatility capture. The short futures position, hence, appears the best available strategy.

PNB: The stock closed at Rs 254 in the spot market. The outlook appears negative. The downside price target is Rs 229. Sell July futures. The near-month contract trades at one-point discount to the spot price. Initiate the position with spot-market-stop-loss at Rs 264. This exposes the position to an initial upside risk of 11 points. The position has to be traded with trailing stop-loss to control the risk. The margin on the futures position is approximately 28 per cent of the contract value. The minimum order size is 1,200 units.

No alternative strategies are available, as put options on the stock are not actively traded. Traders who hold the underlying can consider selling the July 260 calls for not less than 8 points. Note that this covered call-write is only an income-enhancing strategy and not a hedge.

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