The Hindu Business Line : Outlook negative for SBI, M&M

SBI: The stock closed at Rs 627 in the spot market. The outlook appears negative but the downtrend will be faster if the stock cuts Rs 578. In the event, the stock could decline to Rs 528. Consider shorting the February futures if the stock declines below Rs 578. Initiate the position with trailing sell stops. The position is highly risky because of the contract-multiplier effect (1,000 units per contract).

Alternatively, traders can consider buying the February 580 puts now. Deep out-of-the-money (OTM) option will be a better strategy because returns will be higher when the stock declines. The reason is that the implied volatility of OTM puts will increase when the stock declines.

Besides, the outlay for the OTM puts is lower. The risk is that the OTM puts will decline sharply if the stock moves up from the current level. The maximum loss would be the premium paid upfront. The February 580 puts currently trade at 10.50 points. Note that the company is set to announce its quarterly performance on January 30.

M&M: The stock closed at Rs 406 in the spot market. The outlook appears negative. The downtrend will be, however, confirmed if the stock cuts Rs 367.

This level may be far away from the current price level but the downside price acceleration will be faster if the stock cuts Rs 367. In the event, the stock may decline to Rs 305.

Consider shorting the February futures if the stock cuts Rs 367. Initiate the position with trailing sell stops. Otherwise, the position will incur heavy losses because the contract multiplier effect is high (2,500 units per contract).

Note that the position cannot be cost-effectively hedged with calls. Besides, traders cannot consider buying puts instead of shorting futures because puts options on the stock are not actively traded yet.

The margin on the short futures position is approximately 25 per cent of the contract value.

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