Financial Daily from THE HINDU group of publications
Wednesday, Sep 08, 2004
Financial Daily from THE HINDU group of publications Wednesday, Sep 08, 2004 |
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Markets
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Derivatives Markets Columns - On the hedge BHEL: Outlook negative, sell Sept futures B. Venkatesh
THE following strategies are based on Tuesday's trading in the spot and the derivatives segment on the NSE: ACC: The stock closed at Rs 268 in the spot market. The outlook could turn positive if the stock closes above Rs 273. In the event, it could move to Rs 291. Continual buying could push the stock to Rs 310. Buy September futures after the stock moves above Rs 273. Initiate the position with spot-market-stop-loss at Rs 266. Aggressive traders can consider a stop-loss of Rs 258. The position has to be traded with trailing stop-loss. Otherwise, the downside risk will be high as the contract-multiplier is 1,500 units. The margin on the futures position is approximately 11 per cent of the contract value. Traders can consider the alternative strategy of buying September 280 calls. The option currently trades for 3.5 points. A spread position is not optimal because the price target is far away from the current market price. This means that the short call will fetch lower premium and will expose the trader to high negative convexity should the stock trend up. Moreover, the spread does not lend to volatility capture because the options are not trading rich. BHEL: The stock closed at Rs 576 in the spot market. The outlook appears negative. The downside price target is Rs 544. Sell September futures. The near-month contract trades at one-point premium to the spot price. Initiate the position with spot-market-stop-loss at Rs 585. The position has to be traded with trailing stop-loss to control the upside risk. The margin on the futures position is approximately 12 per cent of the contract value. The minimum order size is 600 units. No alternative strategies are possible, as puts on the stock are not actively traded. Traders who hold the underlying can consider a covered call-write. The September 600 calls appears an optimal strike. The call should not be sold for less than 13 points. Otherwise, the option writer cannot capture high positive theta. Note that the covered call-write is only an income-enhancing strategy and not a hedge.
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