Financial Daily from THE HINDU group of publications
Tuesday, Jun 01, 2004
Financial Daily from THE HINDU group of publications Tuesday, Jun 01, 2004 |
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Markets
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Derivatives Markets Columns - On the hedge Hero Honda: Outlook negative, sell June futures B. Venkatesh
THE following strategies are based on Monday's trading in the spot and the derivatives segments on the NSE: Infosys: The stock closed at Rs 5,200 in the spot market. It has moved up from a low of Rs 4,200 to a high of Rs 5,400 in the recent rally. The stock appears set to retrace these gains in the next leg. On the downside, the stock could find support at Rs 4,810 and then at Rs 4,670. Sell June futures. The near-month contract trades at 20-point premium to the spot price. Initiate the position with spot-market-stop-loss at Rs 5,360. This exposes the position to 160-point upside risk. The position has to be traded with trailing stop-loss to control this risk. It is not cost-effective to hedge this risk with horizon-matching calls. The minimum order size is 50 units. An alternative strategy would be construct bear vertical spread. This can be initiated with long June 5,100 puts and short June 4,800 puts. The position can be set up for a net debit of 80 points. The spread runs a high theta-gamma trade-off. The maximum loss, which is the initial outlay, is however substantially lower than the stop-loss limit on the short futures position. Note that the profit potential is also lower for the spread position. Hero Honda: The stock closed at Rs 446 in the spot market. It has moved up from a low of Rs 310 to a high of Rs 493 in the spot market. The stock is likely to claw back some of these gains in the next leg. On the downside, it is likely to find support at Rs 402 and then at Rs 380. Sell June futures. The near-month contract trades at three-point discount to the spot price. Initiate the position with spot-market-stop-loss at Rs 457, which is Monday's high. The recommended view will be negated only if the stock trades above Rs 493. But placing a stop-loss limit so far away will expose the position to high upside risk. The position has to be traded with trailing stop-loss. The minimum order size is 400 units. No alternative strategies are available because options on the stock are not actively traded.
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