The Hindu Business Line : IOC: Outlook negative, sell June futures

IOC: The stock closed at Rs 384 in the spot market. The outlook appears negative. The downside price target is Rs 355. If selling pressure continues, the stock could even decline to Rs 340.

Sell June futures. The near-month contract trades at 3-point discount to the spot price. Initiate the position with spot-market-stop-loss at Rs 394.

Note that the recommended outlook could be negated if the stock trades above Rs 397. The position has to be traded with trailing stop-loss to control the upside risk. The margin on the futures position is approximately 35 per cent of the contract value. The minimum order size is 600 units. Alternative strategies are not available because options on the stock are not actively traded.

Tata Power: The stock closed at Rs 231 in the spot market. The outlook could turn positive if the stock gaps up on Monday. This means the stock has to trade above Rs 247, which is Friday's high. In the event, the stock could move to Rs 260. If the stock trades below the Friday's close, it could well decline to Rs 207.

Initiate the futures position based on the price movements on Monday. It may be optimal to set up the position on Tuesday because Monday's trading will provide a confirming trend on the stock's direction. This will not lower the attractiveness of the position, as the price target on either side is far away from the current market price. The margin on the futures position is approximately 34 per cent of the contract value.

Alternative strategies based on options are not optimal. The best strategy is a long strangle. This can be initiated with out-of-the-money calls and puts. The spread will, however, suffer from high vega risk because the options are trading rich. Besides, the spread will be exposed to high time decay. The spread could, hence, lose more value due to time decay than it gain due to long gamma.

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