The Hindu Business Line : Tata Tea: Outlook negative, short February futures

Tata Tea: The stock closed at Rs 361 in the spot market. The outlook appears negative but the downtrend will be confirmed if the stock gaps down on Thursday. The stock touched a low of Rs 340 on Wednesday.

Consider shorting the February futures if the stock gaps down. Initiate the position with trailing buy stops. Otherwise, the position will be exposed to high upside risk because the contract-multiplier is high (1,100 units per contract). Note that the position cannot be cost-effectively hedged with horizon-matching calls. The margin on the short futures is approximately 30 per cent of the contract value.

Traders can also consider buying the February 350 puts instead of shorting futures. The problem is that puts on the stock are not actively traded. The implied volatility is, therefore richer, exposing the position to high vega risk. The open interest position as a percentage of the market-wide limit is above 35 per cent.

Shipping Corporation: The stock closed at Rs 163 in the spot market. The outlook appears negative, but the downtrend will be confirmed if the stock closes below Rs 151.

In the event, the stock could decline to Rs 144.

Consider shorting the February futures.

Initiate the position with buy stop at Rs 168. Trade the position with trailing buy stops to control the upside risk. Otherwise, the risk-return ratio will be skewed because the contract-multiplier is very high (3,200 units per contract).

Note that the short futures position cannot be cost-effectively hedged with horizon-matching calls.

The margin on the short futures position is approximately 50 per cent of the contract value. The steep margin is a function of the high open interest position, which is above 80 per cent of the market-wide limit.

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