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

Reliance Industries: The stock closed at Rs 575 in the spot market. The outlook will remain positive if the stock trades above Rs 580. In the event, the stock could move to Rs 612.

Consider buying April futures if the stock crosses Rs 580 in the spot market. The position has to be traded with spot-market-stop-loss at Rs 568. 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 can buy April 580 calls instead of futures. The option trades for 14.50 points. The maximum loss is the option premium, which is marginally higher than the initial stop-loss of the long futures position. The option will generate profits even if the stock reaches the upside price target on option expiration. This is because the price target is way above the strike plus the option premium. The minimum order size is 600 units.

MTNL: The stock closed at Rs 140 in the spot market. The primary trend appears positive though the stock is likely to retrace recent gains in the near term. On the upside, the stock could touch the previous high of Rs 157. On the downside, it could first test the support level of Rs 133.

Consider buying the April futures when the spot price is at or near Rs 133. Initiate the position with spot-market-stop-loss at Rs 130. This would expose the position to 3-point downside risk. The position has to be traded with tight stop-loss limit. Otherwise, the downside risk will be high because the contract-multiplier is 1,600 units.

Traders can also initiate long call position when the stock retraces its recent gains. At that time, call options will be cheaper. Besides, traders can preserve time value by delaying the purchase of call options. The April 140 calls may be an optimal strike. The option currently trades at 7 points. The option will be profitable even if the stock reaches the upside price target on option expiration.

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