Financial Daily from THE HINDU group of publications
Wednesday, Sep 24, 2003
Financial Daily from THE HINDU group of publications Wednesday, Sep 24, 2003 |
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Markets
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Derivatives Markets Columns - On the hedge Negative outlook on Maruti, HDFC; short Oct futures B. Venkatesh
THE following strategies are based on Tuesday's trading in the derivatives segment on the NSE: Equity options Maruti Udyog: The outlook on this stock is negative. The downside price target is Rs 185. The upside risk level is Rs 235. Note that the open interest position as a percentage of the market-wide limit is above 70 per cent. Besides, put implied volatility has risen, as has the put-call volume ratio. Consider shorting the October futures on the stock. At the current level, the position will be exposed to 20-point risk. This risk cannot be hedged with call options because the farther month contracts are not traded yet. The best strategy would be to initiate the position with appropriate stop-buy limits. If the stock declines to Rs 185 at the horizon, the October short futures will generate 30 points per unit (1,600 units per contract). If the stock rises to Rs 235, the position will lose 20 points per unit. The margin is approximately 15 per cent of the contract value. The trading horizon is 18 days. HDFC: The outlook on this stock is negative as well. The downside price target is Rs 440. The upside risk level is Rs 512. Consider shorting the October futures on the stock. The position will be exposed to 27-point risk. This risk has to be controlled with appropriate stop-buy limits. The reason is that the short futures position cannot be hedged with calls, as options on HDFC are not frequently traded. The open interest position on the stock, for instance, is entirely constituted by futures. If the stock declines to Rs 440 at the horizon, the October short futures position will generate 45 points per unit (600 points per contract). If the stock rises to Rs 512, the position will lose 27 points per unit. The margin is approximately 12 per cent of the contract value. The trading horizon is 12 days, but can be extended to 14 days.
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