Financial Daily from THE HINDU group of publications
Friday, Jan 23, 2004
Financial Daily from THE HINDU group of publications Friday, Jan 23, 2004 |
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Markets
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Derivatives Markets Columns - On the hedge BPCL: Outlook negative, short Feb futures B. Venkatesh
The following strategies are based on Thursday's trading in the spot and the derivatives segments on the NSE: BPCL: The stock closed at Rs 443 in the spot market. The outlook on the stock is negative. The downside price target is Rs 408. Consider shorting the February futures on the stock. Initiate the position with buy stop at Rs 460. The position has to be thereafter traded with trailing buy stops. Otherwise, the risk of loss is very high because of the leverage effect (1,100 units per contract). Traders cannot initiate long put position instead of short futures to take advantage of the likely downside in the underlying. The reason is that farther month puts are not traded yet, and the near-month contracts have effectively two days for expiry. The margin on the short futures position is approximately 30 per cent of the contract value. The open interest position as a percentage of the market-wide limit is about 15 per cent. Tata Power: The stock closed at Rs 361 in the spot market. Further downtrend would be confirmed if the stock declines below Rs 348. In the event, the stock could first find support at Rs 325. Consider shorting February futures if the stock decline below Rs 348. The position has to be traded with trailing buy stops. The reason is that the upside risk in the short futures position cannot be cost-effectively hedged with horizon-matching calls. The volatility of the underlying has increased sharply in the last few trading sessions. Under the circumstances, a long put position offers a better risk-reward ratio. Farther month put options are, however, not traded yet. Hence, traders have to initiate short futures position. The margin on the short futures position is approximately 20 per cent of the contract value. The open interest position as a percentage of the market-wide limit is above 50 per cent.
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