Financial Daily from THE HINDU group of publications
Tuesday, Jul 13, 2004
Financial Daily from THE HINDU group of publications Tuesday, Jul 13, 2004 |
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Markets
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Derivatives Markets Columns - On the hedge HPCL: Outlook negative, sell July futures B. Venkatesh
THE following strategies are based on Monday's trading in the spot and the derivatives segments on the NSE: HPCL: The stock closed at Rs 288 in the spot market. The outlook appears negative. The downside price target is Rs 269. Sell 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 300. 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 650 units. No alternative strategies are available because options on the stock are not actively traded. Moreover, puts are trading rich. This exposes the position to high vega risk. A straight futures position appears an optimal strategy. Arvind Mills: The stock closed at Rs 74 in the spot market. The outlook appears positive. The upside price target is Rs 82. Buy July futures. The near-month contract trades on par with the spot price. Initiate the position with spot-market-stop-loss at Rs 69. The position has to be traded with trailing stop-loss. Otherwise, the downside risk is high because the contract-multiplier is 4,300 units. The margin on the futures position is approximately 50 per cent of the contract value. Note that the open interest position is more than 90 per cent of the market-wide limit. Alternative strategies might not be optimal because the options are trading rich. This exposes the position to high vega risk. Besides, the absolute premiums are high. This subjects even vertical spreads to high capital risk. The optimal strategy is, hence, a straight futures position. Those who hold the underlying can consider writing the July 65 puts. These puts are trading rich, which helps the writer in volatility capture. Besides, the strategy enhances portfolio income if the stock moves up. Note that the position will be subject to high risk, as the short puts will also contribute to the losses if the stock declines in value.
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