Financial Daily from THE HINDU group of publications
Wednesday, Jun 16, 2004
Financial Daily from THE HINDU group of publications Wednesday, Jun 16, 2004 |
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Markets
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Derivatives Markets Columns - On the hedge SBI: Outlook negative, sell June futures B. Venkatesh
THE following strategies are based on Tuesday's trading in the spot and the derivatives segments on the NSE: SBI: The stock closed at Rs 442 in the spot market. The outlook appears negative. The downside price target is Rs 412. Sell June futures. The near-month contract trades on par with the spot price. Initiate the position with spot-market-stop-loss at Rs 449. Note that the suggested stop-loss level applies only if the position is initiated at or near the current market price. If the stock were to move up in early trades Wednesday, the stop-loss limit has to be suitably adjusted upwards. The position has to be traded with trailing stop-loss to control the upside risk. The margin on the futures position is approximately 30 per cent of the contract value. The minimum order size is 500 units. Traders can also consider buying an out-of-the-money put instead of selling futures. The June 430 put is an optimal strike. The option trades for 8 points. The position suffers from high theta risk what with the option having just 8 days for expiry. The long put will also be exposed to high vega risk, as the option is trading rich. The maximum loss on the option position is marginally higher than the stop-loss level on the short futures position. Tata Tea: The stock closed at Rs 332 in the spot market. The outlook appears negative. The downside price target is Rs 316. If selling pressure continues, the stock could drift to Rs 316. Sell June futures. The near-month contract trades at one-point premium to the spot price. Initiate the position with stop-market-stop-loss at Rs 343. This exposes the position to 11-point upside risk. This risk cannot be cost-effectively hedged with horizon-matching calls. The position has to be traded with trailing stop-loss. Otherwise, the upside risk will be high because the contract-multiplier is 550 units. The margin on the futures position is approximately 30 per cent of the contract value. No alternative strategies are available because options on the stock are not actively traded.
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