Financial Daily from THE HINDU group of publications
Wednesday, Jul 14, 2004
Financial Daily from THE HINDU group of publications Wednesday, Jul 14, 2004 |
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Markets
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Derivatives Markets Columns - On the hedge Reliance: Outlook negative, sell July futures B. Venkatesh
THE following strategies are based on Tuesday's trading in the spot and the derivatives segments on the NSE: Reliance Industries: The stock closed at Rs 431 in the spot market. The outlook appears negative. The downside price target is Rs 409. If selling pressure continues, the stock could test the May 17 low of Rs 383. Sell July futures. The near-month contract trades on par with the spot price. Initiate the position with spot-market-stop-loss at Rs 440. The recommended outlook could be negated if the stock trades above this level. Cautious traders can initiate the short futures position after the stock cuts below Rs 420. The position has to be traded with trailing stop-loss to control the upside risk. The margin on the futures position is approximately 20 per cent of the contract value. The minimum order size is 600 units. An alternative strategy would be to buy July 420 puts. The option trades for 8 points and is only marginally rich. The position, however, suffers from high theta risk because the first price target is not far away from the strike. Put spreads are not possible because out-of-the-money options are not actively traded. Bear call spreads are not viable because in-the-money options are not trading rich. The short futures position is, hence, an optimal strategy. BHEL: The stock closed at Rs 545 in the spot market. The outlook appears positive. The upside price target is Rs 567. Buy July futures. The near-month contract trades at 7-point discount to the spot price. Initiate the position with spot-market-stop-loss at Rs 532. This exposes the position to initial downside risk of 13 points. The position has to be traded with trailing stop-loss to control the risk. The margin on the futures position is approximately 25 per cent of the contract value. The minimum order size is 600 units. No alternative strategies are available, as options on the stock are not actively traded.
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