Financial Daily from THE HINDU group of publications
Friday, Apr 02, 2004
Financial Daily from THE HINDU group of publications Friday, Apr 02, 2004 |
||
|
|
||
|
Markets
-
Derivatives Markets Columns - On the hedge Tata Power: Outlook positive, buy April futures B. Venkatesh
THE following strategies are based on Thursday's trading in the spot and the derivatives segments on the NSE: Tata Power: The stock closed at Rs 384 in the spot market. The outlook appears positive. The upside price target is Rs 410. Consider buying April futures on the stock. The near-month contract trades at one-point premium to the spot price. Initiate the position with spot-market-stop-loss at Rs 373. The position will be subject to 12-point downside risk. The position has to be traded with trailing stop-loss to control for this risk. An alternative strategy of buying calls might not be optimal. The reason is that the calls are trading rich. This exposes the position to high risk due to the change in the volatility of the underlying. Besides, the calls suffer from high time decay. Note that the maximum loss is the option premium, which is marginally higher than the initial stop-loss on the long futures position. L&T: The stock closed at Rs 587 in the spot market. The stock could move to Rs 614 before retracing its recent gains. Traders can take advantage of this upmove by initiating long futures position on the stock. The near-month contract trades at 2-point premium to the spot price. The position has to be initiated with spot-market-stop-loss at Rs 575. This subjects the position to 10-point downside risk. It is not cost-effective to hedge this downside risk with horizon-matching puts. The alternative strategy of buying April 600 calls might not be optimal, unless the stock reaches the upside target in quick time. The reason is that the upside price target is far below the strike plus the premium. This means that the option will lose more value due to time decay than it will gain due to upside movement in the underlying.
More Stories on : Derivatives Markets | On the hedge
Article E-Mail :: Comment :: Syndication :: Printer Friendly Page
|
Stories in this Section |
|
The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription Group Sites: The Hindu | Business Line | Sportstar | Frontline | The Hindu eBooks | The Hindu Images | Home |
Copyright © 2004, The
Hindu Business Line. Republication or redissemination of the contents of
this screen are expressly prohibited without the written consent of
The Hindu Business Line
|