Financial Daily from THE HINDU group of publications
Wednesday, Nov 26, 2003
Financial Daily from THE HINDU group of publications Wednesday, Nov 26, 2003 |
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Markets
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Derivatives Markets Columns - On the hedge IPCL: Outlook negative, short Dec futures B. Venkatesh
THE following strategies are based on Tuesday's trading in the derivatives segment on the NSE: Equity options IPCL: The stock closed Rs 5 higher at Rs 204 in the spot market. The stock could see some trend-reversal in the near term. Note that the put open interest position has gradually increased in recent times. The total open interest position as a percentage of the market-wide limit is, however, just 22 per cent. Consider shorting December futures on the stock. The position cannot be hedged with horizon-matching calls because the farther-month contracts are not actively traded yet. Initiate the futures position with strict stop-loss at Rs 210. The stock could move to Rs 173 if the price cuts Rs 191. If the stock declines to Rs 173 at the horizon, the short December futures will generate 31 points per unit (2,200 units per contract). If the stock triggers the stop-loss of Rs 210, the position will lose 6 points per unit. The margin requirement is approximately 13 per cent of the contract value. The position will be sub-optimal if the stock triggers the stop-loss first and then declines. The trading horizon is 21 days. Union Bank: The outlook on this stock is positive. The upside price target is Rs 57 but the uptrend will be confirmed if the stock moves above Rs 47 in the spot market. Consider buying the December futures on the stock. Initiate the position with stop-loss at Rs 39. A strict stop-loss is necessary because of the high leverage effect. This could lead to sub-optimal payoffs if the stock triggers the stop-loss first. If the stock rises to Rs 57 at the horizon, the long December futures will generate 15 points per unit (4,200 units per contract). If the stock triggers the stop-loss of Rs 39, the position will lose 3 points per unit. The margin requirement is approximately 11 per cent of the contract value. The trading horizon is 21 days.
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