Financial Daily from THE HINDU group of publications
Wednesday, Apr 21, 2004
Financial Daily from THE HINDU group of publications Wednesday, Apr 21, 2004 |
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Markets
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Derivatives Markets Columns - On the hedge Outlook positive for Reliance, Bank of India B. Venkatesh
THE following strategies are based on Tuesday's trading in the spot and the derivative segments on the NSE: Reliance Industries: The stock closed at Rs 553 in the spot market. The primary trend appears positive. In the near-term, the stock is likely to retrace its recent gains. On the downside, the stock could find support at Rs 543. On the upside, the stock could move to Rs 564. Buy May futures after the stock retraces to Rs 543 in the spot market. Initiate the position with spot-market-stop-loss at Rs 534. This exposes the position to nine-point downside risk. The position has to be traded with trailing stop-loss to control this risk. The minimum order size is 600 units. Traders who can risk their capital can consider buying the April 560 calls instead of buying futures. The option currently trades for six points. The position's payoff will depend on how fast the stock reaches the upside price target. Otherwise, the position will rapidly lose value due to high time decay. The option is, hence, riskier though the initial stop-loss on the futures position is higher. Note that the farther-month strike trades at 22 points. Bank of India: The stock closed at Rs 77 in the spot market. The primary trend appears positive, though the stock is likely to retrace in its recent gains first. It could find support at Rs 66. On the upside, the stock could reach Rs 80. Note that this outlook could change if the stock immediately moves past Rs 80. Buy May futures after the stock retraces to Rs 66 in the spot market. Initiate the position with spot-market-stop-loss at Rs 61. Trade the position with trailing stop-loss to control for the downside risk. The minimum order size is 3,800 units. The alternative strategy of buying calls is not optimal. The reason is that the calls are trading rich and have just nine days for expiry. This exposes the position to high time decay unless the stock retraces and then reaches the upside price target in quick time. Constructing a bull call-spread is also not optimal because the net debit is high.
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