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Tuesday, Mar 30, 2004

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Tata Motors: Outlook positive; buy April 460 calls

B. Venkatesh

The following strategies are based on Monday's trading in the spot and the derivatives segments on the NSE.

Tata Motors: The stock closed at Rs 473 in the spot market. The outlook appears positive. The upside price target is Rs 498.

Consider buying the April 460 calls, as they are cheaper in terms of implied volatility. The option is subject to high directional risk because the option is in-the-money. The position can be profitable even if the stock reaches the upside price target on option expiration. The reason is that strike plus the premium is far below the price target. The minimum order size is 825 units.

Traders can also buy April futures on the stock instead of call options. The position has to be initiated with spot-market-stop-loss at Rs 463. This exposes the long futures position to 10-point downside risk. The position has to be traded with trailing stop-loss. Otherwise, the downside risk will be high because of the contract-multiplier effect. The margin on the long futures position is approximately 20 per cent of the contract value. The open interest position as a percentage of the market-wide limit is 25 per cent.

BHEL: The stock closed at Rs 593 in the spot market. The outlook appears positive. The upside price target is Rs 640.

Consider buying May futures on the stock. The farther-month contract trades at 3-point discount to the spot price. Initiate the position with spot-market-stop-loss at Rs 580. This exposes the position to 13-point downside risk. This risk is high but cannot be hedged with puts. The margin on the long futures position is approximately 20 per cent of the contract value. The minimum order size is 600 units.

An alternative strategy of buying April calls instead of futures is not available because options on the stock are not actively traded. The open interest position as a percentage of the market-wide limit is 30 per cent of the contract value.

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