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

Tata Tea: The stock closed at Rs 385 in the spot market. The outlook will turn negative if the stock declines below Rs 379. In the event, the stock could move down to Rs 367. If selling pressure continues, the stock could drift to Rs 356.

Consider shorting the March futures after the stock declines below Rs 379. The position has to be traded with appropriate buy stops. Otherwise, the upside risk will be high because the contract-multiplier is 1,100 units. The upside risk cannot be cost-effectively hedged with calls, as the options are trading rich.

Traders can also initiate long put position instead of short futures. The February 390 puts traded for 12.50 points on Tuesday. The option is trading rich. This exposes the position to high risk due to change in the volatility of the underlying. The long puts also run high theta risk. The sooner the stock reaches the downside price target, better the payoff. The puts will be profitable if the stock trades below Rs 377 on option expiration.

M&M: The stock closed at Rs 491 in the spot market. The uptrend is likely to continue if the stock closes above Rs 500. Otherwise, the stock is likely to lose strength. The downtrend will, however, be confirmed only if the stock gaps down.

Traders can consider buying the February futures if the stock closes above Rs 500. The position has to be traded with tight stop-loss. Otherwise, the downside risk will be high, as the contract-multiplier is 2,500 units. Note that the position cannot be cost-effectively hedged with horizon-matching puts. The long futures position will serve the trader better than long calls because the former's directional speed will be higher. Besides, calls carry high theta risk, as they have just 8 days to expire.

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