The Hindu Business Line : Positive outlook for Canara Bank

Canara Bank: The stock closed at Rs 154 in the spot market. The outlook on this stock is positive. The upside price target is Rs 164. Consider buying the January futures. Initiate the position with sell stop at Rs 150. This exposes the position to 4-point risk.

Note that the long futures have to be initiated with dynamic sell stops because the position cannot be hedged with near-month puts. The reason is that options on the stock are not actively traded. Even dynamic sell stops could expose the position to large downside risk because of the high leverage effect (market lot is 1,600).

The margin on the long futures is approximately 65 per cent of the contract value. The high margin requirement is a function of the open interest position being 85 per cent of the market-wide limit. Cautious traders can consider buying the February futures instead of January futures, as the term premium is just one point. This could extend the trading horizon, which will help if the stock witnesses slow price acceleration.

Gail: The stock closed at Rs 245 in the spot market. The outlook on the stock appears negative. The downside price target is Rs 224. Consider shorting the January futures, if the stock opens with a downside gap. Initiate the position with buy stop at Rs 244. The position has to be traded with dynamic buy stops because of the high leverage effect (market lot is 1,500).

Note that initiating a long put position instead of short futures may not be optimal because of the high theta-gamma trade-off. Slow downside price acceleration could lead to losses because of the high theta effect. The margin on the short futures is approximately 30 per cent of the contract value. It may not be profitable to buy the February futures now because the term premium is more than 5 points.

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