The Hindu Business Line : Canara Bank: Outlook negative, short Dec futures

Canara Bank: The outlook on this stock is negative. The downside price target is Rs 110. Note that the open interest position as a percentage of the market-wide limit is above 80 per cent. This has led to doubling of margins on futures and short option positions.

Consider shorting the December futures on the stock. Initiate the position with stop-loss at Rs 134. This exposes the position to 8-point risk. This risk cannot be hedged with horizon-matching calls because the farther-month contracts are not traded yet.

If the stock declines to Rs 110 at the horizon, the short December futures will generate 16 points per unit (1,600 units per contract). If the stock cuts the support price of Rs 134, the position will lose 8 points per unit. The margin requirement is approximately 29 per cent of the contract value. The trading horizon is 8 days.

Polaris Software: The outlook on this stock is positive. The upside price target is Rs 194. Note that the open interest position as a percentage of the market-wide limit is about 50 per cent.

Consider buying the December futures on the stock. Initiate the position with stop-loss at Rs 141. A stricter stop-loss can be placed at Rs 150, but that would lead to sub-optimal strategy if the stock triggers the stop-loss and then bounces back.

If the stock rises to Rs 194 at the horizon, the long December futures will generate 34 points per unit (1,400 units per contract). If the stock triggers the stop-loss level of Rs 141, the position will lose 19 points per unit. The margin requirement is approximately 17 per cent of the contract value. The trading horizon is 17 days.

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