The Hindu Business Line : Positive outlook for Satyam, negative for Polaris

Satyam Computer: The outlook on this stock is positive. The upside price target is Rs 280. The downside risk level is Rs 220. Note that the put-call ratio and the put implied-volatility have risen in recent times, indicating that the stock may see some downside first.

Consider buying the September 250 calls, as they are cheaper in terms of implied volatility. The calls are trading rich, perhaps, because the writers are pricing in high forward volatility of the stock.

The position's directional risk is high, because the calls are at-the-money. The primary risk is the theta-gamma trade-off. The implication is that the calls will lose more value due to time decay than they will gain from long gamma, if the stock declines or trades near the current level.

If the stock rises to Rs 280 at the horizon, the September 250 calls will generate 112 per cent returns. If the stock declines to Rs 220, the position will lose 98 per cent. The trading horizon is 8 days. The market lot is 1,200.

Polaris Software: The outlook on this stock is negative. The downside price target is Rs 132. The upside risk level is Rs 163. Note that the open interest position as a percentage of the market-wide limit is above 90 per cent, leading to doubling of margins.

Consider shorting September futures on the stock. At the current level, the position will be subject to 15-point downside. This position cannot be cost-effectively hedged with calls because the options are trading rich. The position has to be initiated with appropriate stop-buy limits.

If the stock declines to Rs 132 at the horizon, the short September futures position will generate 16-points per unit (1400 units per contract). If the stock rises to Rs 163, the position will lose 15-points per unit. The trading horizon is 7 days.

Article E-Mail :: Comment :: Syndication

Stories in this Section
Flood of payouts from fund houses likely this month

Initial gains lost

CSE to seek more time to reply to SEBI notice

Block deal propels Welspun to year high

Parent influence on Nestle

Panic selling as stocks put under trade-to-trade segment

Positive outlook for Satyam, negative for Polaris

Bull run paused; Reliance, Infosys gain