Financial Daily from THE HINDU group of publications
Wednesday, Nov 19, 2003
Financial Daily from THE HINDU group of publications Wednesday, Nov 19, 2003 |
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Markets
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Derivatives Markets Columns - On the hedge Outlook negative on L&T, BEL 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 negative. The downside price target is Rs 339. The upside risk level is Rs 400. The trading horizon extends to the next month, but farther-month contracts are not traded yet. Consider buying the November 380 puts instead. The position can be rolled over to December puts at a later date. The position's primary risk is the high theta-gamma trade-off. The implication is that the puts will rapidly lose value if the stock does not decline in quick time. If the stock declines to Rs 339 at the horizon, the November 380 puts will generate 36 points. If the stock rises to Rs 400, the position will tend towards zero. The payoffs assume that the stock may reach the downside price target before the expiry of the November contracts. If the November contracts are rolled to the next month, the position will make a cash flow of 41 points plus the time value. The payoffs will depend on the cost of rollover. The time horizon is 11 days. The market lot is 1,000. Bharat Electronics: The outlook on this stock is negative. The downside price target is Rs 420. The upside risk level is Rs 545. Consider shorting the December futures on the stock. At the current level, the position will be subject to 49-point risk. This risk cannot be hedged with horizon-matching calls, because farther-month options are not traded yet. Initiating the position with strict stop-buy limits may not be optimal because the volatility of the underlying is very high. If the stock declines to Rs 420, the position will generate 76 points per unit (1,100 units per contract). If the stock rises to Rs 545, the position will lose 49 points per unit. The margin requirement is approximately 12 per cent of the contract value. The trading horizon is 11 days.
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