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Thursday, May 06, 2004

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Tata Power: Outlook positive, buy May futures

B. Venkatesh

THE following strategies are based on Wednesday's trading in the spot and the derivatives segments on the NSE:

Tata Power: The stock closed at Rs 382 in the spot market. The stock appears to be on a corrective phase to its recent rally from Rs 336 to Rs 425. On the downside, the stock could seek support at Rs 342. On the upside, the stock could meet with resistance at 418. Note that these price levels refer to the near-term corrective phase.

Buy May futures because the stock's primary trend appears positive. The near-month contract trades on par with the spot price. Initiate the position with spot-market-stop-loss at Rs 362. The contract has to be traded with trailing stop-loss to control this risk. Otherwise, the downside risk will be high because the contract-multiplier is 800 units.

Traders can also consider holding the long futures position to gain from a possible rise in stock price after the corrective phase is completed. In that case, an optimal strategy would be to hedge the long futures with May 360 puts. The option trades for 10 points. This position provides a good hedge if the stock moves below Rs 360.

Bajaj Auto: The stock closed at Rs 935 in the spot market. The stock could retrace its recent gains from Rs 795 to Rs 975. On the downside, the stock could find support at Rs 884. Note that the outlook on the stock could turn positive if it breaks above Rs 965. In the event, it could find resistance at Rs 1,000 and then at Rs 1,050.

Sell May futures. The near-month contract trades at 9-point discount to the spot price. Initiate the position with spot-market-stop-loss at Rs 952. This exposes the position to 17-point upside risk. This risk is high but has to be suffered by the trader. The reason is that a lower stop-loss may be sub-optimal. A decisive break above Rs 965 could see an uptrend in the stock price. Aggressive traders can consider a long futures position with suitable stop-loss limits if the stock closes above Rs 965. The minimum order size is 400 units. Note that alternative strategies are not available because the options on the stock are not actively traded.

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