Financial Daily from THE HINDU group of publications
Wednesday, Apr 14, 2004
Financial Daily from THE HINDU group of publications Wednesday, Apr 14, 2004 |
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Markets
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Derivatives Markets Columns - On the hedge Positive outlook for NIIT, M&M B. Venkatesh
THE following strategies are based on Tuesday's trading in the spot and the derivatives segments on the NSE: NIIT: The stock closed at Rs 204 in the spot market. The near-term outlook appears positive. The upside price target is Rs 226. Buy 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 195. This exposes the position to 9-point downside risk. The position has to be traded with trailing stop-loss to control for the downside risk. The minimum order size is 1,500 units. Traders can consider buying the April 200 calls instead of futures. The option currently trades for 13.50 points. The position will be profitable even if the stock moves to the upside price target on option expiration. The reason is that price target is above the strike plus the option premium. Note that the maximum loss on the option position is higher than the initial stop-loss on the futures position. M&M: The stock closed at Rs 482 in the spot market. The outlook appears positive. The upside price target is Rs 518. Buy April futures. The near-month contract trades on par with the spot price. Initiate the position with spot-market-stop-loss at Rs 473. This exposes the position to 13-point downside risk. This risk cannot be hedged, as puts on the stock are not actively traded. The position has to be traded with tight stop-loss. Otherwise, the downside risk will be high because the contract-multiplier is 625 units. The alternative strategy of buying April 480 calls is also optimal. The option trades for 17 points. The position will be profitable even if the stock reaches the upside price target on option expiration. This is because the option will be in-the-money inclusive of the premium. So, time decay will not lead to negative payoffs. Note that the maximum loss is higher for the option contract.
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