Financial Daily from THE HINDU group of publications
Thursday, Apr 22, 2004
Financial Daily from THE HINDU group of publications Thursday, Apr 22, 2004 |
||
|
|
||
|
Markets
-
Derivatives Markets Columns - On the hedge Outlook positive for Arvind Mills, IPCL B. Venkatesh
THE following strategies are based on Wednesday's trading in the spot and the derivatives segments on the NSE: Arvind Mills: The stock closed at Rs 56 in the spot market. The outlook appears positive. The upside price target is Rs 64. Buy May futures. The farther-month contract trades at half-point premium to the spot price. The May contract extends the trading horizon without a term premium because April and May contracts trade at the same price. Initiate the position with spot-market-stop-loss at Rs 53. This exposes the position to 3-point downside risk. The position has to be traded with strict stop-loss. Otherwise, the risk will be high because the contract-multiplier is 4,300 units. The margin on the futures position is approximately 20 per cent of the contract value. Traders can also buy the April 55 calls instead of May futures. The option currently trades for 3 points. The position is subject to high time decay, as the contract expires in seven days. The position will be profitable only if the stock reaches the upside price target in quick time. Note that the break-even price is Rs 58 without including brokerage commission. IPCL: The stock closed at Rs 205 in the spot market. The primary trend appears positive but the stock could retrace some of its earlier gains before moving up. On the downside, the stock could find support at Rs 192. On the upside, it could move to Rs 215. Buy May futures when the stock declines to Rs 192 in the spot market. Initiate the position with spot-market-stop-loss at Rs 188. The position has to be traded with trailing stop-loss. Otherwise, the downside risk will be high, because the contract-multiplier is 1,100 units. Alternatively, traders can hedge the futures position with near-month 200 puts. The option trades for 3 points. Note that the hedged position will perform better than the unhedged position only if the stock declines below Rs 197. Traders can also consider constructing a near-month bull call-spread instead of buying futures. The spread can be initiated by buying the April 200 calls and selling the April 210 calls. The position can be set up for a net debit of 4 points, which is also the stop-loss point for the unhedged futures position. Note that the position will pay off only if the stock reaches the upside price target in quick time. Otherwise, the loss due to time decay will be higher than the gain due to net delta and gamma.
More Stories on : Derivatives Markets | On the hedge
Article E-Mail :: Comment :: Syndication :: Printer Friendly Page
|
Stories in this Section |
|
The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription Group Sites: The Hindu | Business Line | Sportstar | Frontline | The Hindu eBooks | The Hindu Images | Home |
Copyright © 2004, The
Hindu Business Line. Republication or redissemination of the contents of
this screen are expressly prohibited without the written consent of
The Hindu Business Line
|