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

Sell June futures. The near-month contract trades on par with the spot price. Initiate the position with spot-market-stop-loss at Rs 238. Note that the stop-loss has to be suitably adjusted if the short position is initiated at a higher level on Thursday. The position has to be traded with trailing stop-loss to control the upside risk.

The margin on the futures position is approximately 25 per cent of the contract value. The minimum order size is 1,500 units.

An alternative strategy would be to construct a vertical bear spread. This can be initiated with long June 240 puts and short June 220 puts. The position can be set up for a net debit of 10 points. The spread will generate profits even if the stock trades near or at the downside price target on expiration. The position also helps in volatility capture because the short option is richer than the long option.

Maruti Udyog: The stock closed at Rs 382 in the spot market. The outlook appears negative. The near-term downside price target is Rs 352.

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 396. This exposes the position to 14-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 400 units.

The margin on the futures position is approximately 35 per cent of the contract value.

Traders can also consider constructing a vertical bear spread instead of selling futures. This can be initiated with the short June 380 calls and long June 410 calls. Note that constructing bear spread with puts ought to be a better strategy. The problem is that the puts are trading rich, which exposes the position to high vega risk. The risk-reward on the call spread is, however, highly negatively convex.

The maximum gain is the net credit earned on initiating the spread, which is 9 points based on the current premium levels. The loss is higher.

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