The Hindu Business Line : M&M: Outlook positive, buy August futures

M&M: The stock closed at Rs 433 in the spot market. It has fallen from a recent high of Rs 525. A trend reversal appears to be in order. On the upside, the stock could move to Rs 468. This view may be negated if the stock trades below Rs 425. In the event, it may drift to Rs 410 and then to Rs 393.

Buy August futures. Initiate the position with spot-market-stop-loss at Rs 425. The position has to be traded with trailing stop-loss to control the downside risk. The margin on the futures position is approximately 19 per cent of the contract value. The minimum order size is 625 units.

Traders can consider constructing bull call-spread instead of buying futures. This can be initiated with long July 440 calls and short July 460 calls.

Note that the short strike is inside the price target. The reason is that the outside strike does not give enough premium to lower the initial outlay. Besides, the outside strike trades cheap, which exposes the short-leg to negative theoretical edge if the stock moves up. The spread can be set up for net debit of 6 points. Note that the payoff will not suffer from high theta effect as long as the stock reaches the price target on or before option expiration. This is because the long call will be deep in-the-money if the stock reaches Rs 468.

Shipping Corporation: The stock closed at Rs 112 in the spot market. The outlook appears negative. The downside price target is Rs 97.

Sell August futures. Initiate the position with spot-market-stop-loss at Rs 120. The position has to be traded with trailing stop-loss. Otherwise, the upside risk will be high as the contract-multiplier is 1,600 units. The margin on the futures position is approximately 25 per cent of the contract value.

It might not be optimal to buy puts instead of selling futures. The reason is that the puts are trading rich. This exposes the long put position to high vega risk. Besides, traders will be constrained from setting up a spread position, as lower strikes are not actively traded.

Further, the delta of the active puts is far lower than that of the futures. The latter will, hence, move faster for every point change in the underlying.

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