Financial Daily from THE HINDU group of publications
Tuesday, Apr 20, 2004
Financial Daily from THE HINDU group of publications Tuesday, Apr 20, 2004 |
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Markets
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Derivatives Markets Columns - On the hedge Tata Tea: Outlook negative; sell May futures B. Venkatesh
THE following strategies are based on Monday's trading in the spot and the derivatives segments on the NSE: Tata Motors: The stock closed at Rs 488 in the spot market. The outlook appears negative. The downside price target is Rs 473. Sell May futures. The farther-month contract trades at five-point premium to the spot price and at three-point premium to the near-month contract. Initiate the position with spot-market-stop-loss at Rs 497. This exposes the position to nine-point upside risk. The position has to be traded with trailing stop-loss to control for the upside risk. The minimum order size is 825 units. Traders can also consider buying the April 480 puts instead of selling May futures. The near-month contract trades for nine points. The position will be profitable only if the stock reaches the downside price target in quick time. Otherwise, the loss in option value due to time decay will be more than the gain due to option delta and gamma. Note that the maximum loss on the put position is equal to the initial stop-loss level on the futures position. If the position is controlled for nine-point upside risk, futures appear more optimal than the puts. i-Flex Solutions: The stock closed at Rs 589 in the spot market. The outlook appears positive. The near-term upside price target is Rs 621. Buy April futures. The near-month contract trades at seven-point premium to the spot price. Initiate the position with spot-market-stop-loss at Rs 577. This exposes the position to initial downside risk of 11 points. The position has to be traded with trailing stop-loss. Otherwise, the risk will be higher because the contract-multiplier is 300 units. Traders should note that the alternative strategy of buying calls or the negatively convex strategy of writing puts is not available because options on the stock are not actively traded.
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