Financial Daily from THE HINDU group of publications
Wednesday, Sep 17, 2003
Financial Daily from THE HINDU group of publications Wednesday, Sep 17, 2003 |
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Markets
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Derivatives Markets Columns - On the hedge ACC: Outlook positive, buy Oct 210 calls B. Venkatesh
THE following strategies are based on Tuesday's trading in the derivatives segment on the NSE: Equity options ACC: The outlook on this stock is positive. The upside price target is Rs 225. The downside risk level is Rs 185. The open interest position as a percentage of the market-wide limit is above 70 per cent. Note that the growth in call open interest position in recent times has been higher than in puts and futures. Consider buying the October 210 calls. The farther month contracts are not actively traded. Note that the implied volatility of the October 210 calls is lower than that of the same strike near-month contract. The position's primary risk is the high time decay. The implication is that the calls will rapidly lose value if the stock declines or trades near the current level at the horizon. If the stock rises to Rs 225 at the horizon, the October 210 calls will generate 129 per cent. If the stock declines to Rs 185, the position will lose 82 per cent. The payoffs are based on a call premium of Rs 8.50 per option. The trading horizon is 14 days. The market lot is 1,500. Canara Bank: The outlook on this stock is negative. The downside price target is Rs 97. The upside risk level is Rs 135. Note that the open interest position as a percentage of the market-wide limit is around 70 per cent. Consider shorting the October futures on the stock. The position will be subject to 15-point downside based on the upside risk level. This position can be hedged with calls but initiating the short futures position with appropriate stop-buy limits can marginally enhance the risk-reward ratio. Note that the farthest stop-buy limit must be Rs 137. If the stock declines to Rs 97, the short October futures position will generate 23 points per unit (1,600 units per contract). If the stock rises to Rs 135, the position will lose 15 points per unit. The trading horizon is 9 days, which can extended to 16 days.
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