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B. Venkatesh

THE following strategies are based on Thursday's trading in the derivatives segment on the NSE:

Reliance Industries: The outlook on this stock is negative. The downside price target is Rs 265. The risk is that momentum buying may push the stock to Rs 300. Consider shorting (selling) April futures on the stock. At the current level, you will be exposed to a 15-point downside.

You cannot buy a cost-effective hedge to protect this risk. You can, however, buy April 300 calls to protect the excess downside. If the stock declines to Rs 265 at the end of the trading horizon, the short futures long calls will generate a maximum profit of Rs 12,000 per contract. If the stock rises to Rs 300, the position will lose Rs 7,500 per contract. The trading horizon is 10 days. The market lot is 600.

HPCL: The outlook on this stock too is negative. The downside price target is Rs 285. The risk is that the stock may rise to Rs 320 before trending towards the downside price target. Consider shorting the April futures on the stock. You will be exposed to a 15-point loss if the stock trends up.

You cannot hedge this risk, as the lower-strike call premiums carry high value and will cut into the position's profits. You can hedge the excess downside by buying the April 320 calls. The calls will protect the position if the stock moves above Rs 320.

If the stock declines to Rs 285 at the trading horizon, the short futures long calls will generate a profit of Rs 18,450 per contract. If the stock rises to Rs 320, the position will lose Rs 17,950. The trading horizon is seven days. The market lot is 1,300.

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