Financial Daily from THE HINDU group of publications
Wednesday, Aug 18, 2004
Financial Daily from THE HINDU group of publications Wednesday, Aug 18, 2004 |
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Markets
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Derivatives Markets Columns - On the hedge Outlook negative for Tata Motors, BPCL B. Venkatesh
THE following strategies are based on Tuesday's trading in the spot and the derivatives segment on the NSE: Tata Motors: The stock closed at Rs 395 in the spot market. The outlook appears negative. The downside price target is Rs 363. Sell August futures. The near-month contract trades at one-point premium to the spot price. Initiate the position with spot-market-stop-loss at Rs 417. 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 constructing a bear put-spread. This position can be initiated with long August 410 puts and short August 380 puts. The spread can be initiated for a net debit of 13 points. Note that the short call is inside the price target. This strategy will lower the initial outlay. The position does not suffer from high theta risk. The reason is that the long call will be deep in-the-money when the stock reaches the downside price target. The spread will provide good payoffs when the stock trades above Rs 380 at the trading horizon, as the short call will be theta-positive. BPCL: The stock closed at Rs 318 in the spot market. The outlook appears negative. The downside price target is Rs 303. Sell August futures. The near-month contract trades on par with the spot price. Initiate the position with spot-market-stop-loss at Rs 331. The position has to be traded with trailing stop-loss. Otherwise, the upside risk will be high, as the contract-multiplier is 550 units. The margin on the futures position is approximately 18 per cent of the contract value. Alternative strategies are not optimal because puts are not actively traded and calls do not provide sufficient volatility capture. Those who hold the underlying can consider selling the August 340 calls against the stock. This strategy will fetch 2 points per option. Note that this is an income-enhancing strategy and not a short-term hedge.
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