The Hindu Business Line : Tata Motors: Construct near-month bear put spread

Construct a bear put spread. This position can be initiated by buying the March 470 puts and selling the March 450 puts. The net debit will be 4 points. Note that the bear spread only lowers the high time decay on the long put.

The position is still subject to theta risk, which means that the stock has to reach the downside price target in quick time. The spread position lowers the initial outlay. The minimum order size is 3,300 units.

Initiating short futures position on the stock might not be optimal because the stop-loss has to be placed far away from the current price level. This increases the upside risk because of the high contract-multiplier. The open interest position as a percentage of the market-wide limit is less than 50 per cent.

L&T: The stock closed at Rs 565 in the spot market. The outlook appears negative. The downside price target is Rs 541.

Consider buying the March 540 puts. The option is trading cheap. The primary risk is the time decay because the strike price including put premium is lesser than the downside price target. The implication is that the puts will lose value if the stock reaches the price target towards option expiration. The minimum order size is 1,000 units.

Traders can also initiate short futures position on the stock instead of long puts. But the position is riskier because the initial stop-loss is 10-points away from the current level. This risk is more than the premium paid on the 540 puts. The margin on the short futures position is approximately 25 per cent of the contract value. The open interest position as a percentage of the market-wide limit is about 5 per cent.

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