The Hindu Business Line : ACC: Outlook negative, buy February 250 puts

ACC: The stock closed at Rs 255 in the spot market. The outlook appears negative. The downside price target is Rs 225. If the selling pressure persists, the stock could even decline to Rs 206.

Consider buying the February 250 puts, as they are cheaper in terms of implied volatility and are also fairly priced. The payoff on the long put position will be positive even if the stock declines to Rs 225 on option expiration. This is because downside price target is far away from the strike price. The payoff will be better if the stock declines sooner, as that will lower the loss due to time decay. Note that initiating a short futures position instead of long puts may not be optimal. The reason is tight buy stops will be triggered because the underlying volatility is high. Far-away buy stops, on the other hand, may increase the upside risk because the contract-multiplier is high (1,500 units per contract). Note also that the put implied volatility and the put open interest position have increased in recent times.

Tata Steel: The stock closed at Rs 400 in the spot market. The outlook appears negative. The downside price target is Rs 385, but the stock could decline to Rs 334 if selling pressure continues.

Consider buying the February 380 puts, which are available for 15 points. The position's primary risk is the theta-gamma trade-off. The implication is that the position's profitability will depend on the stock's downside price acceleration. The sooner the stock reaches the downside price target, higher the payoff. The reason is that time decay will have an overwhelming influence on the option value because the first price target is not far away from the strike price. The long put position will generate 4 points if the stock declines to the first downside price target on option expiration. As with ACC, the put implied volatility and put open interest position has increased considerably in recent times. The minimum order size is 1,800 units per contract.

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