The Hindu Business Line : HLL: Outlook positive, buy February 200 calls

HLL: The stock closed at Rs 203 in the spot market. The outlook appears positive but the uptrend would be confirmed if the stock closes above Rs 206. In the event, the stock could move to Rs 218 in the near term. The price target for a longer horizon is Rs 230.

Consider buying the February 200 calls. The calls traded for seven points on Friday. The calls are trading rich, which suggests there is no margin of error in forecasting volatility. The implication is that the option is exposed to high risk due to change in the underlying volatility.

The primary risk is, however, the option's time decay. The reason is that the strike price plus the option premium is not far away from the near-term price target. The payoff would, hence, depend on how fast the stock moves to the upside price target. The minimum order size is 1,000. The open interest position as a percentage of the market-wide limit is about 10 per cent.

National Aluminium: The stock closed at Rs 183 in the spot market. The outlook appears negative but the downtrend would be confirmed if the stock closes below Rs 176.

In the event, the stock could decline to Rs 154.

Consider selling the February futures on the stock. The near-month contract trades at one-point premium to the spot price. Initiate the position with trailing buy stops. Otherwise, the upside risk would be high because the contract-multiplier is 2,300. Note that the upside risk cannot be cost-effectively hedged with horizon-matching calls. The margin on the short futures position is approximately 40 per cent of the contract value. The open interest position as a percentage of the market-wide limit is about 50 per cent.

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