Financial Daily from THE HINDU group of publications
Wednesday, Oct 01, 2003
Financial Daily from THE HINDU group of publications Wednesday, Oct 01, 2003 |
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Markets
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Derivatives Markets Columns - On the hedge Infosys: Outlook negative, short November futures B. Venkatesh
THE following strategies are based on Tuesday's trading in the derivatives segment on the NSE: Equity options L&T: The outlook on this stock is positive. The upside price target is Rs 350. The downside risk level is Rs 308. Note that the put-call volume ratio and the put open interest position have risen in recent times. This suggests that the stock may see some downside first. Consider buying the October futures on the stock. The position will be exposed to a 15-point risk based on the downside price projection. The long futures position can be hedged with October 310 puts. The long puts will be an optimal hedge if the stock declines first and bounces back. If the stock rises to Rs 350 at the horizon, the October long futures, long 310 puts will generate 18 points per unit (1,000 units per contract). If the stock declines to Rs 308, the position will lose 12 points per unit. The risk-return ratio will be favourable for the hedged position if the stock declines first. The reason is that the puts will generate profits points without much loss in time value. The trading horizon is 10 days. Infosys: The outlook on this stock is negative. The downside price target is Rs 4,250. The upside risk level is Rs 4,680. Consider shorting the November futures on the stock. At the current level, the position will be exposed to 140-point risk. This risk cannot be hedged with calls because long options on Infosys carry high theta-gamma trade-off. The implication is that the calls will fail to provide a good hedge if the stock trades near the current level for sometime or declines even marginally. The short futures position should, hence, be initiated with strict stop-buy limits. If the stock declines to Rs 4,250 at the horizon, the short November futures will generate 290 points per unit (100 units per contract). If the stock rises to Rs 4,680, the position will lose 140 points. The margin for the short position is approximately 15 per cent. The trading horizon is 27 days.
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