The Hindu Business Line : Arvind Mills: Outlook positive, buy June futures

Arvind Mills: The stock closed at Rs 64 in the spot market. The current uptrend appears to be a retracement to earlier decline from Rs 71 to Rs 41. The near-term outlook appears positive. The upside price target is Rs 71.

Buy June futures. The farther-month contract trades on par with the spot price. Initiate the position with spot-market-stop-loss at Rs 61. This exposes the position to 7-point downside risk. This risk is high because the contract-multiplier is 4,300 units. The upside price target may be well reached intra-day. The margin on the futures position is approximately 35 per cent of the contract value. An alternative strategy of buying calls might not be optimal.

The reason is that the change in the option price may not be speedier than the change in the futures price. The payoff on the call position may, hence, not be better than that on the futures position. It is, therefore, optimal to buy futures even though the maximum loss on the call position is no more than the stop-loss on the futures position.

Shipping Corporation: The stock closed at Rs 100 in the spot market. The current uptrend is a retracement to the recent decline from a high of Rs 150 to a low of Rs 61. The near-term outlook appears positive. The upside price target is Rs 110. If the stock trades above this level, it could well touch Rs 119.

Buy June futures. The farther-month contract trades on par with the spot price. Initiate the position with spot-market-stop-loss at Rs 96. 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 first level upside price target could be reached intra-day. The margin on the futures position is approximately 60 per cent of the contract value.

There is no alternative strategy to the futures position because June options on the stock are not traded yet. Aggressive traders can, however, consider buying May 100 calls. The option currently trades for 1.5 points. The position will payoff if the stock trades above Rs 102. Note that the long call strategy is purely an intra-day trade. The options expire on Thursday and therefore do not carry time value.

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