The Hindu Business Line : Outlook negative for Bank of India

Bank of India: The stock closed at Rs 77 in the spot market. The outlook appears negative. The stock is likely to retrace its recent gains from Rs 49 to Rs 85. Its first support level is Rs 66.

Sell May futures after the stock gaps down on Monday in the spot market. This means that Monday's high should be lower than Rs 73, which is Friday's low.

Initiate the position with spot-market-stop-loss at Rs 74. The position has to be traded with trailing stop-loss to control the upside risk. Hedging the upside risk with horizon-matching calls will not be optimal. The reason is that such hedging would entail huge outlay because the contract-multiplier is 3,800 units. The margin on the short futures position is approximately 27 per cent of the contract value.

An alternative strategy would be to buy the May 70 puts. The option trades for 2.20 points. The position will be 4-point in-the-money even if the stock declines to the downside price target on expiration. If the stock declines to this price level in quick time, the option will also carry good time value. Note that the least-best outcome will be 2-point profit. The puts may be a better strategy than futures because the maximum loss is lower than the stop-loss limit for the futures position.

Hero Honda: The stock closed at Rs 492 in the spot market. The primary trend appears positive, though the stock may see some immediate correction to its recent gains. On the upside, the stock may move to Rs 520.

Buy May futures after the stock declines to Rs 475 in the spot market. Initiate the position with spot-market-stop-loss at Rs 467. The position has to be traded with trailing stop-loss. Otherwise, the downside risk will be high because the contract-multiplier is 400 units. The margin on the long futures position is approximately 17 per cent of the contract value.

Note that the position cannot be hedged with horizon-matching puts because options on the stock are not actively traded. For the same reason, no alternative strategies to the long futures position are available on this stock.

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