Financial Daily from THE HINDU group of publications
Tuesday, Sep 09, 2003
Financial Daily from THE HINDU group of publications Tuesday, Sep 09, 2003 |
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Markets
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Derivatives Markets Columns - On the hedge Outlook positive on M&M, i-flex B. Venkatesh
THE following strategies are based on Monday's trading in the derivatives segment on the NSE: Equity options M&M: The outlook on this stock is positive. The upside price target is Rs 225. The downside risk level is Rs 195. Note that the open interest position as a percentage of the market-wide limit has crossed 80 per cent. The margin requirement is, hence, high for futures contracts and for option writers. This factor has led to options trading rich. Consider buying the September 210 calls, as they are cheaper in terms of implied volatility. The directional risk is high as the calls are near at-the-money. The primary risk is the theta-gamma trade-off. The implication is that the position will lose more value due to time decay than it will gain due to long gamma, if the stock declines or trades near the current level. If the stock rises to Rs 225 at the horizon, the September 210 calls will generate 66 per cent returns. If the stock declines to Rs 195, the calls will lose 89 per cent. The payoffs are based on an acquisition price of Rs 10 per option. The trading horizon is 8 days. The market lot is 2,500. i-flex Solutions: The outlook on this stock is positive. The upside price target is Rs 755. The downside risk level is Rs 675. Consider buying the September futures on the stock. At the current level, the long futures position will be subject to 25-point downside. This risk cannot be hedged because options on the stock are not actively traded. The position has to be initiated with appropriate stop-loss limits. If the stock rises to Rs 755 at the horizon, the September long futures will generate 55 points per unit (600 units per contract). If the stock declines to Rs 675, the position will lose 25-points per unit. The margin is approximately 22 per cent of the contract value. The trading horizon is 13 days.
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