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Tata Motors: Outlook negative, sell August futures

B. Venkatesh

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

Tata Motors: The stock closed at Rs 422 in the spot market. The outlook appears negative. The downside price target is Rs 408. If the stock trades below this level, it could drift to Rs 389.

Sell August futures. The near-month contract trades at two-point premium to the spot price. Initiate the position with spot-market-stop-loss at Rs 430. Aggressive traders who prefer to take short position with a spot price target of Rs 389 have to place the stop-loss at Rs 439. The position has to be traded with trailing stop-loss to control the upside risk. The margin on the futures position is approximately 18 per cent of the contract value. The minimum order size is 825 units.

Traders can consider an alternative strategy of constructing bear put-spread. This position can be initiated with long August 430 puts and short August 410 puts. The spread can be set up for a net debit of nine points. The position does not suffer from high theta risk. The reason is that the long call will carry low time value if the stock reaches Rs 408, while the short call will be theta positive.

Polaris Software: The stock closed at Rs 147 in the spot market. The outlook appears negative. The downside price target is Rs 136. Sell August futures. The near-month contract trades on par with the spot price. Initiate the position with spot-market-stop-loss at Rs 152. This exposes the position to an initial upside risk of five points. The position has to be traded with trailing stop-loss. Otherwise, the upside risk will be high, as the contract-multiplier is 1,400 units. The margin on the futures position is approximately 20 per cent of the contract value.

Alternative strategies are not optimal because options on the stock are not actively traded. Traders who hold the stock in their long-term portfolio can consider selling the August 150 calls. This strategy will fetch five points. Note that this is an income-enhancing strategy and not a short-term hedge.

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