Financial Daily from THE HINDU group of publications
Friday, Jul 16, 2004
Financial Daily from THE HINDU group of publications Friday, Jul 16, 2004 |
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Markets
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Derivatives Markets Columns - On the hedge BoB: Outlook negative, sell July futures B. Venkatesh
THE following strategies are based on Thursday's trading in the spot and the derivatives segments on the NSE: ONGC: The stock closed at Rs 654 in the spot market. The outlook could turn negative if the stock cuts below Rs 636. In the event, it could decline to Rs 605. The view will be negated if the stock trades above Rs 700. Sell July futures after the stock cuts below Rs 636 in the spot market. Initiate the position with spot-market-stop-loss at Rs 672. The upside risk is very high, as the stop-loss will be far away from the initiated price. Traders can instead hedge the short futures position with long July 660 calls. The hedged position will suffer higher risk if the stock trades between the initiated price and Rs 660 in the spot market. The margin on the futures position is approximately 23 per cent of the contract value. The minimum order size is 300 units. Traders who prefer to restrict their losses to the option premium can consider buying the July 640 puts. The option currently trades for 11 points. A spread can be constructed by combining this position with short July 580 puts. Note that the spread will only help in lowering the initial outlay. As the implied volatility is moderate, the spread will not provide volatility capture. BoB: The stock closed at Rs 146 in the spot market. The outlook appears negative. The downside price target is Rs 130. The stock could find support at Rs 135. Sell July futures. The near-month contract trades on par with the spot price. Initiate the position with spot-market-stop-loss at Rs 150. The stop-loss limit is set close to the current market price to control the upside risk. This is because the contract-multiplier is 1,400 units. Importantly, the upside risk cannot be hedged with horizon-matching calls, as options on the stock are not actively traded. For the same reason, no alternative strategies are available on the stock. The margin on the futures position is approximately 30 per cent of the contract value.
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