Financial Daily from THE HINDU group of publications
Friday, Apr 23, 2004
Financial Daily from THE HINDU group of publications Friday, Apr 23, 2004 |
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Markets
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Derivatives Markets Columns - On the hedge GAIL: Outlook positive, buy May futures B. Venkatesh
THE following strategies are based on Thursday's trading in the spot and the derivatives segments on the NSE: GAIL: The stock closed at Rs 238 in the spot market. The primary trend appears positive but the stock could see some downside in the near term. On the upside, the stock could find support at Rs 223. On the upside, it could move to Rs 257. Buy May futures. The farther-month contract trades at one-point premium to the spot price. Initiate the position with spot-market-stop-loss at Rs 219. This exposes the position to 4-point downside risk. The position has to be traded with trailing stop-loss to control this risk. The minimum order size is 1,500 units. Traders can alternatively consider constructing long time-spread. This can be initiated by buying the May 240 calls and selling the April 240 calls. The advantage of constructing such a spread is two-fold. One, if the stock were to decline first to its near-term support level, the near-month call will rapidly lose value due to time decay. That will result in positive payoffs for the spread position. And two, if the stock declines first and then moves up, its volatility will increase sharply. Again, this will improve the payoff because the long time-spread will carry positive vega on initiation. The position can be set up for a net debit of 9 points. Reliance Energy: The stock closed at Rs 789. The outlook could turn positive if the stock closes above Rs 817. Traders should also keep in mind the demand for the stock from the newly launched power sector fund floated by Reliance Mutual Fund. Buy May futures after the stock closes above Rs 817. Initiate the position with stop-loss at Rs 811. The position has to be traded with trailing stop-loss. Otherwise, the downside risk will be high because the contract-multiplier is 550 units. No alternative strategies are available because options on this stock are not actively traded. Traders can consider hedging their long futures position with horizon-matching puts when such options become available.
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