The Hindu Business Line : Negative outlook on ACC, HCL Tech

ACC: The near term outlook on this stock is negative. The downside price target is Rs 190. The outlook on the stock could turn positive if the price drifts above Rs 245. Note that the options on the stock are trading rich. Buying puts to profit from the downside in the underlying may, hence, subject the position to high vega and theta risk, especially when the contract nears expiration.

Consider selling the December 230 calls instead. The calls trade at an implied volatility that is 25 percentage points more than the underlying volatility. There is, hence, a large of margin of error in forecasting volatility at the horizon. The naked short calls will generate 6.5 points net credit. Note that the short call position will attract margins.

The position will profit if the stock declines or trades near the current level. The naked short call will suffer losses if the stock moves beyond Rs 230. This provides a safety margin of 7 points for the short call position.

The position will earn maximum profits of 6.5 points if the contract expires worthless. Traders who are long in the underlying may consider writing covered call-write. The market order quantity is 1,500.

HCL Tech: The outlook on this stock is negative. The downside price target is Rs 242. Consider shorting the January futures on the stock. Initiate the short futures position with a buy stop at Rs 280. This exposes the short futures position to 8-point risk. Note that this risk cannot be hedged with horizon-matching calls, as the farther month contracts are not traded yet.

If the stock declines to Rs 242 at the horizon, the short January futures will generate 30 points per unit (1,300 units per contract). If the stock cuts the buy stop trigger of Rs 280, the position will lose 7 points per unit. The margin requirement is approximately 30 per cent of the contract value. The open interest position as a percentage of the market-wide limit is less 30 per cent.

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