Financial Daily from THE HINDU group of publications
Friday, Nov 21, 2003
Columns - On the hedge
Bank of Baroda: Outlook positive, buy Dec futures
THE following strategies are based on Thursday's trading in the derivatives segment on the NSE:
M&M: The outlook on this stock is negative. The downside price target is Rs 292. Consider shorting the December futures on the stock. Initiate the position with strict stop at Rs 324.
At this level, the short futures position will be exposed to 14-point risk. Note that the short futures position cannot be cost-effectively hedged with horizon-matching calls. The open interest position is currently over 70 per cent of the market-wide limit.
An increase to 80 per cent and above will lead to doubling of futures margins.
If the stock declines to Rs 292 at the horizon, the short December futures will generate 18 points per unit (2,500 units per contract). If the stock triggers the stop of Rs 324, the position will lose 14 points per unit.
The margin requirement is approximately 14 per cent of the contract value. The trading horizon is 15 days.
Bank of Baroda: The outlook on this stock is positive. The upside price target is Rs 188. Consider buying the December futures on the stock. Initiate the position with stop at Rs 161.
A strict stop is required because the stock may decline sharply if it cuts Rs 161. The open interest position is currently around 30 per cent, consisting primarily of futures.
This trading pattern suggests that the position cannot be effectively hedged with puts.
If the stock rises to Rs 188 at the horizon, the long December futures will generate 20 points per unit (1,400 units per contract).
If the stock triggers the stop of Rs 161, the position will lose 7 points per unit.
Note that the trading strategy will be sub-optimal if profit taking pushes the stock down to the stop level first.
The margin requirement is approximately 18 per cent of the contract value. The trading horizon is 18 days.
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