The Hindu Business Line : Near-term outlook positive for Tata Motors

Buy June futures. The near-month contract trades at 5-point discount to the spot price. Initiate the position with spot-market-stop-loss at Rs 385. This exposes the position to 11-point downside risk. This risk is high but cannot be cost-effectively hedged with horizon-matching puts.

Note that the outlook will be negated only if the stock trades below Rs 370. The position has to be traded with trailing stop-loss to control the risk. The margin on the futures position is approximately 30 per cent of the contract value. The minimum order size is 825 units.

An alternative strategy would be to construct a vertical bull spread. This can be initiated with long June 400 calls and short 420 calls. The position can be set up for a net debit of seven points. The spread's primary risk is the high time decay.

The implication is that the spread will not generate profits unless the stock moves to the upside price target in quick time. Note that the spread does not help in volatility capture because the implied volatilities for out-of-the-money calls are not significantly different from the in-the-money calls.

Reliance Industries: The stock closed at Rs 445 in the spot market. The outlook appears positive. The upside price target is Rs 456. The stock could move to Rs 469 if buying interesting continues.

Buy June futures. The near-month contract trades at one-point premium to the spot price. Initiate the position with spot-market-stop-loss at Rs 433.

The position has to be traded with trailing stop-loss to control the downside risk. Note that the outlook will be negated only if the stock trades below Rs 423.

Placing a stop-loss so far away will, however, skew the risk-return trade-off. The margin on the futures position is approximately 25 per cent of the contract value. The minimum order size is 600 units.

Traders should note that the alternative strategy of buying calls would not be optimal. The reason is that the upside price target is close to the current market price.

Under such circumstances, buying futures will generate more profits than buying calls. The reason is that the futures price will change faster than the option price for every point change in the underlying.

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