Financial Daily from THE HINDU group of publications
Saturday, Apr 03, 2004
Financial Daily from THE HINDU group of publications Saturday, Apr 03, 2004 |
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Markets
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Derivatives Markets Columns - On the hedge M&M: Outlook positive, buy April futures B. Venkatesh
The following strategies are based on Friday's trading in the spot and the derivatives segment on the NSE: M&M: The stock closed at Rs 476 in the spot market. The outlook appears positive. The upside price target is Rs 504. Consider buying April futures. The near-month contract trades at 3-point premium to the spot price. Initiate the position with spot-market-stop-loss at Rs 464. This exposes the position to 12-point downside risk. This risk cannot be cost-effectively hedged. The position has to be traded with trailing stop-loss to control the downside risk. Traders should note that initiating long call position instead of long futures might not be optimal. Buying the April 490 calls, for instance, may be profitable only if the stock speeds to the upside price target. The reason is that the price target is close to the strike plus the option premium. If the stock were to reach the price target towards option expiration, the option will lose value due to time decay. Shipping Corporation: The stock closed at Rs 138 in the spot market. It faces resistance at Rs 143. The stock could touch Rs 159 if it breaks the resistance level. Consider buying April futures. The near-month contract trades at 2-point premium to the spot price. Initiate the position with spot-market-stop-loss at Rs 131. This exposes the position to 12-point downside risk. The position has to be traded with trailing stop-loss. Otherwise, the downside risk will be high because the contract-multiplier is 1,600 units. Traders can buy the April 140 calls instead of futures. The option is trading rich. This exposes the position to risk due to change in the volatility of the underlying. Besides, the option is subject to the theta risk. The position will be, however, profitable even if the stock reaches Rs 159 on option expiration. Note that the maximum loss on the call position is lower than the initial downside risk on the long futures position.
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