Financial Daily from THE HINDU group of publications
Tuesday, May 11, 2004
Financial Daily from THE HINDU group of publications Tuesday, May 11, 2004 |
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Markets
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Derivatives Markets Columns - On the hedge Short Maruti, MTNL futures at higher levels B. Venkatesh
THE following strategies are based on Monday's trading in the spot and the derivatives segments on the NSE: Maruti Udyog: The stock closed at Rs 506 in the spot market. The stock is currently on a correction phase to its recent rally from Rs 440 to Rs 602. The outlook, therefore, appears negative, though the stock may immediately retrace some of its recent losses. On the downside, the stock may find support at Rs 497 but only after it moves up to a resistance level of Rs 527-534. Sell June futures after the stock moves to Rs 527 in the spot market. Initiate the short futures position with spot-market-stop-loss at Rs 534. The contract has to be traded with trailing stop-loss to control the upside risk. Otherwise, the position will suffer heavy losses because the contract-multiplier is 400 units. An alternative strategy would be to buy May 500 puts. The option trades for 23 points. The position will generate profits only if the stock reaches the downside price target in quick time. Timing the purchase of the option can, however, reduce the loss due to time decay. The option can be bought for a lower premium when the stock sees a temporary upside movement towards Rs 527. The minimum order size is 400 units. MTNL: The stock closed at Rs 150 in the spot market. The stock is in a correction phase to its recent rally from Rs 123 to Rs 166. On the downside, the stock may decline to Rs 138. On the upside, it may meet with resistance at Rs 156-159. Sell May futures after the stock moves to Rs 156 in the spot market. Initiate the position with spot-market-stop-loss at Rs 159. The position has to be traded with strict stop-loss to control the upside risk because the contract-multiplier is 1,600 units. Traders can consider buying puts as an alternative to short futures. The May 145 puts may be an optimal strike, as it is cheaper in terms of implied volatility. The position will be profitable only if the stock moves to the downside price target in quick time. Timing the purchase of the option when the stock moves up may reduce the position's theta risk.
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