The Hindu Business Line : ACC: Outlook positive, buy April futures

ACC: The stock closed at Rs 255 in the spot market. The outlook appears positive. The stock faces some resistance at Rs 265. It could move to Rs 281 if it breaks the resistance level.

Consider buying April futures. The near-month contract trades at one-point premium to the spot price. Initiate the position with spot-market-stop-loss at Rs 249. This exposes the position to an initial downside risk of six points.

The position has to be traded with trailing stop-loss to control for downside risk. Hedging with horizon-matching puts might be not optimal. The margin on the long futures position is approximately 20 per cent of the contract value. Traders can also buy April 260 calls, as they are cheaper in terms of implied volatility.

The position, however, suffers from high time decay. This means that the stock has to speed to the upside price target. Otherwise, the position will not be profitable. The reason is that the upside price target of Rs 265 is lower than the strike plus the premium. If the stock were to move to Rs 281, the April 260 calls will generate large gains.

Tata Steel: The stock closed at Rs 384 in the spot market. The outlook appears positive. The stock faces some resistance at Rs 390. If the stock crosses that level, it could move to Rs 402. Consider buying April futures.

The near-month contract trades at one-point premium to the spot price. Initiate the position with spot-market-stop-loss at Rs 373. This exposes the position to 11-point downside risk. The position has to be traded with trailing stop-loss. The margin on the long futures position is approximately 20 per cent of the contract value.

Buying calls instead of futures will be profitable only if the stock reaches the upside price target in quick time.

Otherwise, the long call position will lose more value due to time decay than it will gain due to the upside movement in the underlying.

Traders preferring to initiate long call position can consider the April 400 calls, which currently trades for 10 points.

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