Financial Daily from THE HINDU group of publications
Friday, Aug 29, 2003
Financial Daily from THE HINDU group of publications Friday, Aug 29, 2003 |
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Markets
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Derivatives Markets Columns - On the hedge BHEL: Trend reversal likely, short Sept futures B. Venkatesh
THE following strategies are based on Thursday's trading in the derivatives segment on the NSE: Equity option: The outlook on BHEL appears negative. Note that more open positions have been added to puts than calls in the recent trading sessions. The downside price target is Rs 327. The upside risk level is Rs 377. Consider shorting the September futures on the stock. At the current level, the position will be exposed to 24-point risk. This risk cannot be cost-effectively hedged, because the September options are trading rich. The best strategy under the circumstances would be to initiate the short position with stop-buy limits. If the stock declines to Rs 327 at the horizon, the September short futures will generate 26 points per unit (1,200 units per contract). If the stock rises to Rs 377, the position will lose 24 points per unit. The trading horizon is 13 days. Index options: The outlook on the Nifty spot index is positive. The upside target is 1375. The downside risk level is 1315. Consider buying the September 1340 calls. Note that the put-call ratio has been gradually inching up, as more traders are taking a view on a trend reversal. The recommended position is, hence, fraught with risks. The position is exposed to high theta-gamma trade-off. The implication is that the calls will lose more value due to time decay than they will gain due to long gamma. The position is also subject to high risk in the event of fall in volatility. If the Nifty spot index rises to 1375 at the horizon, the September 1340 calls will generate 62 per cent returns. The long calls will lose 46 per cent if the spot index declines to 1315. Note that buying calls on Friday will expose the position to 2 days of time decay without any benefit of long gamma. The trading horizon is 4 days. The market lot is 200.
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