The Hindu Business Line : Tata Tea: Outlook positive, buy July futures

Buy July futures. The near-month contract trades at one-point premium to the spot price. Initiate the position with spot-market-stop-loss at Rs 386. The position has to be traded with trailing stop-loss to control the downside risk. The margin on the futures position is approximately 18 per cent of the contract value. The minimum order size is 550 units.

Traders can also construct a vertical bull spread instead of long futures. This can be initiated with long July 400 calls and short July 420 calls. The spread should be set up for a net debit of not more than 7 points. The position does not suffer from high theta risk. The implication is that the spread will generate positive payoffs even if the stock reaches the upside price target on expiration. The reason is that the gamma effect of the long option will be higher than the net theta effect of the spread and the gamma of the short option.

ACC: The stock closed at Rs 242 in the spot market. The outlook appears negative. The downside price target is Rs 230. If selling pressure continues, the stock could even decline to Rs 218.

Sell July futures. The near-month contract trades on par with the spot price. Initiate the position with spot-market-stop-loss at Rs 250. The recommended view may be negated if the stock trades above this level. The position has to be traded with trailing stop-loss. Otherwise, the upside risk will be high, as the contract-multiplier is 1,500 units. The margin on the futures position is approximately 18 per cent of the contract value.

An alternative strategy would be to construct a vertical bear spread with long July 240 puts and short July 220 puts. The position can be set up for a net debit of 7 points. The spread will generate positive payoffs if the stock declines to Rs 218. This is because the long put will be deep in-the-money and will dampen the effect of theta risk and short gamma risk. Note that the spread suffers from high theta risk if the strategy is traded for the price target of Rs 230.

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