The Hindu Business Line : Outlook positive for ACC, Tata Motors

Buy May futures. The farther-month contract trades on par with the spot price. Initiate the position with spot-market-stop-loss at Rs 258. This exposes the position to a downside risk of 9 points. The position has to be traded with trailing stop-loss to control this risk.

Note that the downside in the futures position can also be hedged with horizon-matching puts. The options are not actively traded yet. The minimum order size is 1,500 units.

Traders can alternatively create a fence. This strategy can be initiated with long May futures, long May 250 puts and short May 300 calls. The premium on the short call position will lower the cash outflow on the long put position. The puts will provide the downside protection, while the calls will cap the upside at Rs 300. The futures will be primary profit generator.

Those who can risk capital can consider a long time-spread as a third alternative. This can be constructed by buying the May 270 calls and writing the April 270 calls. Premium from the near-month contract lowers the outflow for the next month. Besides, this position captures the high implied-volatility of the near-month vis-à-vis the farther-month contract.

Tata Motors: The stock closed at Rs 481 in the spot market. The primary trend appears positive. The near-term price target is Rs 537.

Buy May futures. The farther-month contract trades at 4-point premium to the spot price. Initiate the position with stop-market-stop-loss at Rs 467. This exposes the position to 14-point downside risk. Note that a tighter stop-loss may be sub-optimal because the stock may well trigger that limit and then move up.

An alternative strategy would be to construct a May bull call-spread. This position can be initiated with long May 480 calls and short May 530 calls. Based on the current premium levels, the position can be set up for a net debit of 15 points. The risk is marginally more than the initial stop-loss level on the futures contract but saves the trader the trouble of continually monitoring the position. The minimum order size is 825 units.

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