The Hindu Business Line : M&M: Outlook positive, buy Jan futures

BSES: The stock closed at Rs 567. The outlook could turn negative if the stock fails to moves above Rs 574. In the event, short January futures. The downside price target is Rs 544. Initiate the position will dynamic buy stops. Otherwise, the downside will be very high because of the leverage effect (the market lot is 1,100). Note that the short futures position cannot be hedged with calls because options on the stock are not actively traded.

Traders need not roll over the contract to the next month, as the downside price target is not far away from the current price level. The margin on the short futures position is approximately 20 per cent of the contract value. Note that the open interest position as a percentage of the market-wide limit is just above 20 per cent.

M&M: The stock closed at Rs 430 in the spot market. The outlook on the stock is positive. The upside price target is Rs 465. Consider buying the January futures. Initiate the long futures position with sell stop at Rs 415. Such a tight stop loss may be sub-optimal because the underlying volatility has been very high in recent times. The stock could cut Rs 415 on the downside before moving towards the upside price target. Note that the high leverage effect would magnify losses (2,500 per contract) if the sell stop were far away from the price current level.

Hedging the long futures with near-month puts may not be optimal because the options are trading rich. This exposes the hedged position to high vega risk and high theta-gamma trade-off. The margin for the long futures position is approximately 20 per cent of the contract value. Traders can consider rolling over to the next month contract if the term premium declines to approximately 5 points.

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