Financial Daily from THE HINDU group of publications
Friday, Feb 20, 2004
Financial Daily from THE HINDU group of publications Friday, Feb 20, 2004 |
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Markets
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Derivatives Markets Columns - On the hedge BHEL outlook negative; sell February futures B. Venkatesh
The following strategies are based on Thursday's trading in the spot and the derivatives segments on the NSE: BHEL: The stock closed at Rs 600 in the spot market. The outlook appears negative. The downside price target is Rs 583. If selling pressure continues, the stock could decline to Rs 569. Consider selling the February futures on the stock. The near-month contract trades on a par with the spot price. The farther-month contract trades at 16-point premium to the near-month contract. Initiate the short futures contract with stop-loss at Rs 608. The position has to be traded with trailing stop-loss. Otherwise, the upside risk will be high because the contract-multiplier is 1,200 units. The margin on the short futures position is approximately 20 per cent of the contract value. Traders should note that initiating a long put position is risky because the time decay is high. The pay-off will depend on how fast the stock declines to the downside price target. The February 580 puts will generate profit only if the stock trades below Rs 575 on option expiration, which is just 6 days away. Bank of India: The stock closed at Rs 65 in the spot market. The outlook could turn positive if the stock moves above Rs 70. Consider buying the March futures on the stock after the stock moves above Rs 70. The farther-month contract currently trades at one-point premium to the near-month contract. The position has to be traded with trailing stop-loss. Otherwise, the position will be subject to high downside risk, as the contract-multiplier is 3,800 units. Note that the long futures position cannot be hedged with long puts. The reason is that the near-month puts are trading rich, and the farther-month options are not traded yet. The margin on the long futures position is approximately 30 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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