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Wednesday, Oct 27, 2004

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Trend reversal likely in M&M, Dr Reddy's

B. Venkatesh

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

M&M: The stock closed at Rs 419 in the spot market. The recent price decline presents buying opportunities for both short-term and medium-term traders.

Short-term traders (1 to 4 days) can take a long position in November futures. The farther-month contract trades at 3-point premium to the spot price. The position has to be initiated with spot-market-stop-loss at Rs 414. The upside price target is Rs 429. Medium-term traders (5 days to 2 weeks) can take a long position in November futures after the stock moves above Rs 423 in the spot market. The position has to be initiated with a spot-market-stop-loss at Rs 416. The upside price target is Rs 439.

Both short-term and medium-term traders have to control their downside risk with trailing stop-loss. The margin on the futures position is approximately 17 per cent of the contract value. The minimum order size is 625 units.

Traders can construct bull put-spread as an alternative strategy. This position can be initiated with short October 420 puts and long October 410 puts. The spread should be set up for a credit of not less than 3 points. The maximum profit is the premium received on initiation. The spread benefits from net positive theta but suffers from negative convexity. Note that the October contracts expire on Thursday.

Dr Reddy's: The stock closed at Rs 735 in the spot market. This stock has also fallen sharply in recent times. This price trend provides buying opportunities for traders.

Short-term traders (1 to 4 days) can buy November futures after the stock moves above Rs 731 in the spot market. The spot-market-stop-loss has to be placed at the day's low at the time the position is initiated. The upside price target is Rs 748. Medium-term traders (5 days to 2 weeks) can buy November futures after the stock moves above Rs 740 in the spot market. The stop should be placed at Rs 725. The upside price target is Rs 766. Both class of traders have to place a trailing stop-loss through their trading horizon. The margin on the futures position is approximately 17 per cent of the contract value. The minimum order size is 200 units. No alternative strategies are possible, as options on the stock are not actively traded.

(Note: The opinion expressed in this column is based on technical analysis. There is risk of loss in trading.)

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