The Hindu Business Line : SBI: Outlook positive, buy Feb. futures

Tata Tea: The outlook on this stock is positive. The upside price target is Rs 446. Consider buying the February futures on the stock. Initiate the position with sell stop at Rs 380. This exposes the position to 20-point risk. This risk is very high considering the position's high leverage.

Traders can instead hedge the long futures position with near-month 410 puts. An in-the-money put has been recommended because its implied volatility is lower compared with the out-of-the-money puts. The January 410 puts are currently available for 6.5 points.

The hedged position is exposed to high theta-gamma trade-off. The implication is that the hedged position will suffer heavy loss if the stock's price acceleration to the upside price target is slow. Note that the hedged position has a horizon mismatch because the farther month futures will be hedged with near-month puts. Traders can consider shifting to farther month puts at a later date to prevent high theta effect. The margin requirement on the futures position is approximately 20 per cent of the contract value.

SBI: The outlook on this stock is positive. The upside price target is Rs 720. Consider buying the February futures. Initiating the position with price stops may not be optimal because of high leverage effect. Traders may instead hedge the downside with near-month 600 puts. The option is currently available for 10 points.

Note that initiating a long position in January calls instead of futures may be costly because the options are trading rich. This exposes the position to high vega risk and high theta-gamma trade-off. The hedged futures position will generate maximum gains if the stock's upside price acceleration is high. Such a price move will lower the cost due to negative theta. The margin requirement on the futures position is approximately 30 per cent of the contract value.

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