Financial Daily from THE HINDU group of publications
Saturday, Sep 20, 2003
Financial Daily from THE HINDU group of publications Saturday, Sep 20, 2003 |
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Markets
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Derivatives Markets Columns - On the hedge HPCL: Outlook positive, buy Oct 360 calls B. Venkatesh
THE following strategies are based on Friday's trading in the derivatives segment on the NSE: Equity options HPCL: The outlook on this stock is positive. The upside price target is Rs 389. The downside risk level is Rs 327. Note that the open interest position as a percentage of the market wide-limit is above 80 per cent. This has led to doubling of margins on futures and short option positions. Consider buying the October 360 calls. The position will be exposed to high risk in the event of fall in volatility. The primary risk, however, is the high time decay. The implication is that the calls will rapidly lose value if the stock declines or traders near the current level.If the stock rises to Rs 389 at the horizon, the October 360 calls will generate 126 per cent returns. If the stock declines to Rs 327, the position will lose 60 per cent. The payoffs are based on forecast volatility that is higher than the current implied volatility. If the realised volatility at the horizon is lower, the payoffs will also be lower. The trading horizon is 10 days. The market lot is 1,300. Polaris Software: The outlook on this stock is negative. The downside price target is Rs 101. The upside risk level is Rs 150. Note that the open interest position as a percentage of market-wide limit is around 90 per cent. This has led to high margin requirement for the futures and short options. Consider shorting the October futures on the stock. At the current level, the position will be exposed to 19-point risk. This risk cannot be hedged with calls, as the farther month contracts are not traded yet. The short futures position will have to be initiated with strict stop-buy limits. If the stock declines to Rs 101 at the horizon, the October short futures will generate 30 points per unit (1,400 units per contract). If the stock rises to Rs 150, the position will lose 19 points per unit. The trading horizon is 20 days.
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