The Hindu Business Line : BOB: Outlook positive, buy Feb futures

Bank of Baroda: The stock closed at Rs 260. The upside price target is Rs 284. Consider buying the February futures. Initiate the position with sell stop at Rs 250. The position has to be traded with dynamic sell stops.

The reason is that the position cannot be hedged with puts because options on the stock are not actively traded. The sell stops can skew the risk-reward ratio of the long position because of the high leverage effect (market lot is 1,400).

The February futures allows the trader to extend the trading horizon if the upside price acceleration is slow. The margin on the long futures position is approximately 30 per cent of the contract value. The open interest position as a percentage of the market-wide limit is less than 20 per cent.

ONGC: The stock closed at Rs 841. The outlook could turn negative if the stock moves below Rs 826. In the event, short January futures. The downside price target is Rs 752. Initiate the position with buy stop at Rs 883. The position has to be traded with dynamic buy stops. Note that a tight initial buy stop may lead to sub-optimal payoffs because the underlying volatility is high. The implication is that the stock could initially trigger the buy stop and then move to downside price target.

The flip side is that sell stop far away from the current price level exposes the short futures position to high initial upside risk. This risk cannot be cost-effectively hedged with horizon-matching calls. The reason is that calls are trading rich. The hedged position will be exposed to high vega and theta risk. The short futures position is, hence, risky. The margin on the futures position is approximately 30 per cent of the contract value. The open interest position as a percentage of the market wide limit is less than 20 per cent.

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