Financial Daily from THE HINDU group of publications
Thursday, Oct 16, 2003
Financial Daily from THE HINDU group of publications Thursday, Oct 16, 2003 |
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Markets
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Derivatives Markets Columns - On the hedge Outlook negative on Bharat Electronics, Punjab National Bank B. Venkatesh
THE following strategies are based on Wednesday's trading in the derivatives segment on the NSE: Equity options Bharat Electronics: The outlook on this stock is negative. The downside price target is Rs 450. The upside risk level is Rs 491. Consider shorting the November futures on the stock. At the current level, the position will be exposed to 10-point risk. This risk cannot be hedged because call options on the stock are not actively traded. Trading the short futures position with strict stop-buy limits may not also be an optimal strategy because of the high volatility in the spot price. The position can, therefore, be exposed to high risk if the stock moves beyond Rs 491. If the stock declines to Rs 450 at the horizon, the short November futures will generate 32 points per unit (1,100 units per contract). If the stock rises to Rs 491, the position will lose 10 points per unit. The trading horizon is nine days, which may be extended to 23 days. Note that extending the trading horizon may increase the position risk. Punjab National Bank: The outlook on this stock is negative. The downside price target is Rs 178. The upside risk level is Rs 214. Consider shorting the November futures on the stock. Note that the farther-month futures contract is not active yet. Traders may initiate a short position in the near-month contract, and shift to the farther month at a later date. The short futures position will be exposed to 13-point risk. This risk can be hedged with October 220 calls. The long calls will be an optimal hedge only if the stock rises above Rs 225 during the initial phase of the trading horizon. If the stock declines to Rs 178 before expiry of the October calls, the short November futures, long October 220 calls will generate 34 points per unit (1,200 units per contract). If the stock rises to Rs 214, the position will lose 8 points per unit. If the position is instead held till the trading horizon, the short futures will gain 37 points, but will lose 13 points for the price projections of Rs 178 and Rs 214 respectively. The trading horizon is 17 days.
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