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

HPCL: The stock closed at Rs 344 in the spot market. The outlook appears negative. The downside price target is Rs 328. If selling pressure persists, the stock could decline to Rs 308. Note that the outlook will be negated if the stock trades above Rs 360.

Sell June futures. The near-month contract trades at 2-point discount to the spot price. Initiate the position with spot-market-stop-loss at Rs 350. The position has to be traded with trailing stop-loss to control the upside risk. The margin on the short futures position is approximately 27 per cent of the contract value. The minimum order size is 650 units.

An alternative strategy would be to construct a vertical bear-spread. This can be initiated with long June 340 puts and short June 320 puts. The position can be set up for a net debit of 4 points. The spread will marginally benefit from volatility capture. The position suffers from high theta risk. The loss in long option value due to time decay will be higher than the gain on the short option if the stock does not reach the downside price target in quick time. This could lead to negative payoffs.

Bank of Baroda: The stock closed at Rs 155 in the spot market. The outlook appears negative. The downside price target is Rs 130. The outlook may be negated if the stock trades above Rs 170.

Sell June futures. The near-month contract trades on par with the spot price.

Initiate the position with spot-market-stop-loss at Rs 160. The position has to be traded with strict stop-loss. Otherwise, the position will be exposed to high upside risk because the contract-multiplier is 1,400 units. The margin on the futures position is approximately 46 per cent of the contract value.

Alternative strategies are not available because put options on the stock are not actively traded. Traders who hold the underlying can consider selling an out-of-the-money call on the stock. Besides volatility capture, this strategy may generate short-term gains. Note that the stock could move up after drifting towards the downside price target.

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