The Hindu Business Line : Tata Steel: Outlook positive, buy Dec 390 calls

Tata Steel: The outlook on this stock is positive. The uptrend will be confirmed if the stock drifts above Rs 385 in the spot market. Note that the call implied-volatility is higher than the put implied volatility, and increasing, indicating the traders' positive outlook on the stock.

Consider buying the December 390 calls, which trades at 7 points. The option will carry moderate directional risk, as they are currently out-of-the-money (OTM). The volatility risk is, however, high during the trading horizon because calls are trading rich; the implied volatility is 15 percentage points higher than the underlying volatility. Writing puts to capture the rich implied volatility may not be optimal given the low premium points, and the high negative convexity. Note that the calls will be highly sensitive to the movement in the underlying, as the trading horizon ends close to the contract expiry date.

If the stock rises to Rs 408 at the horizon, the long December 390 calls will generate 157 per cent returns. If the stock declines to Rs 362, the position will tend towards zero. The trading horizon is 7 days. The minimum market order quantity is 1,800.

i-Flex Solutions: The outlook on this stock is positive. The upside price target is Rs 910. Consider buying the January futures on the stock. Initiate the position with sell stop at Rs 815. This exposes the position to 30-point risk. This risk, though high, cannot be hedged because horizon-matching puts are not actively traded.

If the stock rises to Rs 910 at the horizon, the long January futures will generate 62 points per unit (600 units per contract). If the stock triggers the sell stop of Rs 815, the position will lose 30 points per unit. The margin requirement is approximately 19 per cent of the contract value. The open interest position as a percentage of the market-wide limit is about 35 per cent. The trading horizon is 10 days.

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