The Hindu Business Line : PNB: Outlook negative, sell August futures

PNB: The stock closed at Rs 268 in the spot market. The outlook appears negative. The downside price target is Rs 247. A more aggressive target would be Rs 220.

Sell August futures. Initiate the position with spot-market-stop-loss at Rs 280. This exposes the position to a 12-point initial upside risk. This risk cannot be hedged with horizon-matching calls. The position has to be traded with trailing stop-loss to control the risk. The margin on the futures position is approximately 25 per cent of the contract value. The minimum order size is 1,200 units.

An alternative strategy would be to construct a bear put-spread. The position can be initiated with long August 250 puts and short August 230 puts. Note that the short strike is inside the target price. This strategy would fetch a higher premium, thus, lowering the initial outlay. Otherwise, the risk will be high because of the contract-multiplier effect. The spread should be set up for a net debit of not more than 6 points. The payoff will be better if the stock reaches the downside price target in quick time.

Hero Honda: The stock closed at Rs 429 in the spot market. The outlook appears positive. The upside price target is Rs 460.

Buy August futures. Initiate the position with spot-market-stop-loss at Rs 412. The recommended view may be negated if the stock trades below this level. The margin on the futures position is approximately 18 per cent of the contract value. The minimum order size is 400 units.

Traders can also construct a bull call-spread instead of buying futures. The position can be initiated with long August 430 calls and short August 460 calls. The position can be set up for a net debit of 10 points. The spread does not suffer from high theta risk. The reason is that the long call will be deep in-the-money if the stock reaches the upside price target. Moreover, the short call will be theta positive, the longer the stock takes to reach the price target. The spread suffers from marginal vega risk.

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