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B. Venkatesh

THE following strategies are based on Wednesday's trading in the spot and the derivatives segments on the NSE:

Maruti Udyog: The stock closed at Rs 474 in the spot market. The outlook could turn negative, if the stock cuts Rs 453 on the downside. In the event, it could move to Rs 434 and then to Rs 420, if selling pressure continues.

Consider buying the February 450 puts. The option traded for 9.35 points on Wednesday. At the current level, the option allows for a 20 per cent error in forecasting volatility. This lowers the option's vega risk.

The position is, however, subject to high time decay. The reason is that the first downside price target is not far away from the strike price. The sooner the stock declines to the downside price target, better the payoff. The minimum order size is 1,600.

Note that initiating short futures contract imposes higher risk compared with long puts. The reason is that the stock has witnessed high volatility in recent times. Trading the short futures position with tight buy stops may be sub-optimal, while far away price stops would only increase the upside risk.

HDFC: The stock closed at Rs 676 in the spot market. The outlook could turn negative if the stock closes below Rs 660. In the event, the stock could decline to Rs 626 and then to Rs 602.

Consider shorting the February futures if the stock closes below Rs 660. The near month contract trades on par with the spot price. Initiate the short futures position with trailing buy stops.

Note that the upside price risk cannot be hedged away with horizon-matching calls. The reason is that options on the stock are not actively traded. The margin on the short futures position is approximately 20 per cent of the contract value. The minimum order size is 600.

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