The Hindu Business Line : Outlook positive for MTNL, Reliance Energy

MTNL: The stock closed at Rs 133 in the spot market. The near-term trend appears positive. The stock is likely to retrace its recent losses from Rs 166 to Rs 132. On the upside, the stock may meet with resistance at Rs 150 and then at Rs 154.

Buy May futures. The near-month contract trades on par with the spot price. Initiate the position with spot-market-stop-loss at Rs 127. The position has to be traded with tight stop-loss. Otherwise, the downside risk will be high because the contract-multiplier is 1,600 units. The margin on the long futures position is approximately 22 per cent of the contract value.

An alternative strategy would be to construct a long vertical spread. This can be initiated with long May 135 calls and short May 150 calls. The strategy will be better than a straight call. The reason is that traders are exposed to high vega risk because call options on the stock are trading rich.

The short call-leg of the vertical spread will lower this risk. Besides, the cash outlay will be lower, as the spread position can be set up for a net debit of 3.5 points. The maximum loss is, hence, lower than the stop-loss limit for the long futures position.

Reliance Energy: The stock closed at Rs 709 in the spot market. The primary trend appears positive. In the first leg of the upside movement, the stock is likely to claw back some of its recent losses from Rs 818 to Rs 660. The near-term price target is Rs 745.

Buy June futures. The farther-month contract trades at 5-point premium to the spot price and at a 7-point premium to the near-month contract. The June contract will be optimal for traders with longer trading horizon, especially because the upside potential is high.

Initiate the futures position with stop-market-stop-loss at Rs 697. The position has to be traded with trailing stop-loss to control this risk. The margin on the futures position is approximately 16 per cent of the contract value.

The minimum order size is 550 units.

Note that the downside risk cannot be hedged with horizon-matching puts because options on the stock are not actively traded. For the same reason, traders cannot employ an alternative strategy to the long futures position.

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