The Hindu Business Line : ACC: Outlook negative, sell August futures

Buy August futures. The farther-month contract trades at two-point premium to the spot price. Initiate the position with spot-market-stop-loss at Rs 346. This exposes the position to an initial downside risk of 11 points. The position has to be traded with trailing stop-loss to control the risk. The margin on the futures position is approximately 23 per cent of the contract value. The minimum order size is 900 units.

Traders can also construct a call backspread instead of buying futures. The position can be initiated with two long July 360 calls and one short July 340 calls. The spread will be delta-neutral on initiation, which is a condition for the spread to be profitable. The position can be set up for a net credit of two points. This strategy is optimal compared to the typical bull call-spread because the lower strike calls carry higher implied volatility. If the stock trends up from the current level, the underlying volatility will decline. This will help the backspread trader in volatility capture. The spread will generate profits if the stock moves to the upside price target, as the higher strike call will carry higher gamma.

ACC: The stock closed at Rs 232 in the spot market. The outlook appears negative. The downside price target is Rs 217.

Sell August futures after the stock trades below Rs 228 in the spot market. Initiate the position with spot-market-stop-loss at Rs 235. The position has to be traded with trailing stop-loss. Otherwise, the upside risk will be high because the contract-multiplier is 1,500 units. The margin on the futures position is approximately 17 per cent of the contract value.

An alterative strategy would be to buy the July 230 puts. The option trades for four points. The option will be profitable if the stock trades below Rs 226 in the spot market. Note that the primary risk is that of the stock sitting still. The position will be profitable even if the stock declines to the price target on option expiration. The reason is that the price target is far away from the put strike. The option will, hence, not suffer from slow stock speed.

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