• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

B. Venkatesh

THE following strategies are based on Friday's trading in the derivatives segment on the NSE:

Equity options

Shipping Corporation: The outlook on this stock is positive. The upside price target is Rs 164. The downside risk level is Rs 127. The open interest position as a percentage of the market-wide limit is above 60 per cent.

Consider buying the December futures on the stock. At the present level, the position will be subject to a 14-point risk. This risk cannot be hedged with horizon-matching puts, as the farther month contracts are not traded yet. Initiating the position with stop-loss limits may not be optimal because of the high underlying volatility. If the stock rises to Rs 164 at the horizon, the long December futures will generate 23 points per unit (3,200 units per contract). If the stock declines to Rs 127, the position will lose 14 points per unit. The margin requirement is approximately 23 per cent of the contract value. The trading horizon is 16 days.

NIIT: The outlook on this stock is negative. The downside price target is Rs 171. The upside risk level is Rs 210. Though the risk points are higher than the profit points, the likelihood of a price dip is greater. The open interest position as a percentage of the market-wide limit is above 70 per cent. Consider shorting the November futures on the stock. The position will be subject to a 21-point risk. This risk cannot be cost-effectively hedged. The position cannot also be initiated with stop-buy limits because of the high underlying volatility. The position is, hence, risky.

If the stock dips to Rs 171, the position will generate 21 points per unit (1,500 units per contract). If the stock rises to Rs 210, the position will lose 21 points per unit. The margin requirement is approximately 42 per cent of the contract value. The trading horizon is 4 days.

Article E-Mail :: Comment :: Syndication

Stories in this Section
Bear onslaught

Copyright © 2003, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line