Financial Daily from THE HINDU group of publications
Tuesday, Jul 20, 2004
Financial Daily from THE HINDU group of publications Tuesday, Jul 20, 2004 |
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Markets
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Derivatives Markets Columns - On the hedge Tata Motors: 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: Tata Motors: The stock closed at Rs 408 in the spot market. The outlook appears negative. The downside price target is Rs 374. Sell August futures. The farther-month contract trades on a par with the spot price. Initiate the position with spot-market-stop-loss at Rs 425. Note that the risk-return trade-off is symmetrical. The position has to be traded with trailing stop-loss to control the upside risk. The outlook will be negated if the stock trades above Rs 425. The margin on the futures position is approximately 20 per cent of the contract value. The minimum order size is 825 units. Traders can consider constructing a put backspread. This can be initiated with one short July 410 puts and two long July 390 puts. Note that this position will be delta-neutral on initiation. The position can be set up for a net credit of 4.5 points. If the stock declines to the desired price target, the long puts will move faster, thus, generating profits. If the stock were to trade above Rs 425 on option expiration, the maximum profit will be the net premium received. Andhra Bank: The stock closed at Rs 44 in the spot market. The outlook appears positive. The upside price target is Rs 48. An aggressive price target will be Rs 55. Buy July futures. The near-month contract trades on par with the spot price. Initiate the position with spot-market-stop-loss at Rs 40. Note that the downside risk is very high because the contract-multiplier is 4,600 units. The position can 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. Traders can consider buying July 45 calls. The option can be bought for a premium of one point. The call is priced at its theoretical value. The position will generate profits if the stock trades above Rs 46. Note that Andhra Bank offers good potential for scalping trade in the derivatives market because of its high contract multiplier. Futures position will, hence, be an optimal strategy because of its speed.
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