Financial Daily from THE HINDU group of publications
Wednesday, Jun 30, 2004
Financial Daily from THE HINDU group of publications Wednesday, Jun 30, 2004 |
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Markets
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Derivatives Markets Columns - On the hedge Outlook positive for Tata Power, SBI B. Venkatesh
THE following strategies are based on Tuesday's trading in the spot and the derivatives segments on the NSE: Tata Power: The stock closed at Rs 233 in the spot market. The outlook could turn positive if the stock trades above Rs 237. In the event, it could move to Rs 257 and then to Rs 270. Note that the stock faces strong resistance at Rs 247. Buy July futures. The near-month contract trades on par with the spot price. Initiate the position with spot-market-stop-loss at Rs 228. Note that the spot-loss is not far away from the current price level. The reason is that the outlook could turn negative if the stock trades below this level. The margin on the futures position is approximately 28 per cent of the contract value. The minimum order size is 800 units. An alternative strategy would be to construct a vertical bull-spread. This can be initiated with long July 240 calls and short July 260 calls. The position can be set up for a net debit of 5.5 points. Note that the spread primarily helps in reducing the cash outlay. There is no volatility capture because the short option is not trading rich. The position will be profitable even if the stock does not reach the price target in quick time. The reason is that the long call will be deep in-the-money if the stock moves to Rs 257 or Rs 270. SBI: The stock closed at Rs 429 in the spot market. The positive outlook will be confirmed if the stock trades above Rs 437. In the event, the stock could quickly drift to Rs 455. Aggressive traders can buy July futures at the current levels. The cautious ones can initiate the position after the stock trades above Rs 437. The position has to be initiated with stop-loss at Rs 418. The margin on the futures position is approximately 26 per cent of the contract value. The minimum order size is 500 units. Traders can also consider constructing a vertical bull-spread instead of buying futures. The spread can be initiated with long July 440 calls and short July 460 calls. The position can be set up for a net debit of 8 points. The spread's payoff will depend on how fast the stock reaches the upside price target. Otherwise, the option theta of the long call will work against the position. The futures position is, hence, optimal.
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