The Hindu Business Line : Reliance: Outlook positive, buy May futures

Reliance Industries: The stock closed at Rs 497 in the spot market. The immediate outlook appears positive. The upside price target is Rs 511. If the stock trends up on good volumes, it could well move to Rs 530.

Buy May futures. The near-month contract trades at four-point discount to the spot price. Initiate the position with the spot-market-stop-loss at Rs 483. This exposes the position to 14-point downside risk. This is indeed high because the contract-multiplier is 600 units. The position cannot be cost effectively hedged with horizon-matching puts.

Note that selling out-of-the-money (OTM) calls against the long futures position will not be optimal. The reason is that the stock has an upside bias. The OTM calls will not, therefore, decline enough to provide a partial hedge even if the stock were to decline to the support level. Traders can instead buy the futures position after the stock gaps up. In that case, the price target has to be raised to Rs 530.

An alternative strategy would be to construct a vertical spread. This can be initiated with long May 500 calls and short May 520 calls. The position can be set up for a net debit of 8 points. The position will be profitable only if the stock moves to the upside price target soon. Otherwise, the vertical spread will lose more value due to time decay than it will gain due to long delta and gamma.

Syndicate Bank: The stock closed at Rs 43 in the spot market. The near-term outlook appears positive. The stock is likely to retrace its recent losses from Rs 56 to Rs 42. On the upside, the stock could meet with resistance at Rs 48 and then at Rs 50.

Buy May futures. The near-month contract futures trades on par with the spot price. Initiate the position with spot-market-stop-loss at Rs 41. The downside risk is high because the contract-multiplier is 7,600 units. The position has to be traded with tight stop-loss limits to control this risk. The margin on the long futures position is approximately 50 per cent of the contract value.

The alternative strategy of buying calls is not optimal. The May 45 calls, which is the most optimal strike, will not be profitable even if the stock moves to the upside price target in quick time. The reason is that the strike plus the option premium is greater than the price target.

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