Financial Daily from THE HINDU group of publications
Tuesday, Apr 13, 2004
Financial Daily from THE HINDU group of publications Tuesday, Apr 13, 2004 |
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Markets
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Derivatives Markets Columns - On the hedge PNB: Outlook positive, buy April futures B. Venkatesh
THE following strategies are based on Monday's trading in the spot and the derivatives segments on the NSE: Tata Tea: The stock closed at Rs 339 in the spot market. The outlook appears positive. The near-term price target is Rs 361. Buy April futures. The near-month contract trades at 1-point premium to the spot price. Initiate the position with spot-market-stop-loss at Rs 333. This subjects the position to 6-point downside risk. The position has to be traded with trailing stop-loss to control for the downside risk. The minimum order size is 550 units. Traders who have an aggressive view on the stock can buy April 360 calls instead of futures. The option trades for 4.5 points. The position will be profitable only if the stock moves to the upside price target in quick time. Otherwise, the option will lose more value due to time decay than it will gain due to long delta and gamma. Note that the maximum loss on the option position is lower than the initial stop-loss on the futures position. PNB: The stock closed at Rs 338 in the spot market. The outlook appears positive. The upside price target is Rs 369. Buy April futures on the stock. The near-month contract trades at 4-point discount to the spot price. Initiate the position with spot-market-stop-loss at Rs 329. The position will be subject to 9-point downside risk. This risk cannot be hedged. The position has to be traded with tight stop-loss. Otherwise, the long futures will be subject to high downside risk because the contract-multiplier is 1,200 units. Traders should note that the alternative strategy is not available because put options on the stock are not actively traded. A bull call-spread may instead be an optimal strategy. The position can be initiated by buying the April 340 calls and selling the April 370 calls. Note that the short-leg strike is not actively traded yet.
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