The Hindu Business Line : Trend reversal likely in MTNL, Satyam

MTNL: The stock closed at Rs 152 in the spot market. The outlook could turn positive if the stock trades above Rs 155. The upside price target is Rs 164.

Buy December futures after the stock moves above Rs 155 in the spot market. Initiate the position with spot-market-stop-loss at Rs 146. The position has to be traded with trailing stops to control the downside risk. The margin on the futures position is approximately 17 per cent of the contract value. The minimum order size is 1,600 units.

Traders can construct long call spread as alternative strategy. This position can be initiated with long December 155 calls and short December 165 calls. The spread can be set up for a net debit of 3 points.

The position would payoff 7 points if the stock moves to the upside price target in five trading sessions from the date of initiation.

Note that the spread is subject to high vega risk because the options are trading rich. Setting up a bull put spread to take advantage of the time decay is, however, not optimal.

Satyam Computer: The stock closed at Rs 411 in the spot market. The outlook could turn positive if the stock moves above Rs 416. The upside price target is Rs 442.

Buy December futures after the stock moves above Rs 416 in the spot market. Initiate the position with spot-market-stop-loss at Rs 410.

The position has to be traded with trailing stops to control the downside risk. The margin on the futures position is approximately 17 per cent of the contract value. The minimum order size is 1,200 units.

Traders can alternatively construct ratio call spread. This position can be initiated with one long December 420 calls, one short December 440 calls and one short December 450 calls. The spread can be set up for 3 points. This position is aggressive and plays on the stock movement between Rs 420 and Rs 440.

The spread will generate 6 points if the stock reaches the upside price target within 5 trading sessions. The payoff will be better if the stock reaches the price target at or near option expiration.

The reason is that the long call will then be deep in-the-money while the short calls will generate positive theta.

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