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

Sell August futures. The farther-month contract trades at four-point premium to the spot price. Initiate the position with spot-market-stop-loss at Rs 461. 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 500 units.

An alternative strategy would be to construct bear put-spread. This position can be initiated with long August 450 puts and short August 420 puts. The spread can be set up for a net debit of 13 points. The payoff will not be affected by time decay. The reason is that the premium differential between the long and short put will widen if the stock takes more time to reach the downside price target. For then, the long call will be deep in-the-money while the short call will rapidly lose value due to time decay. Note that the spread will only help in lowering initial outlay and not in volatility capture, as the options are not trading rich.

BPCL: The stock closed at Rs 349 in the spot market. The outlook appears negative. The downside price target is Rs 320. Continual selling pressure could push the stock to Rs 303.

Sell August futures. The farther-month contract trades at 12-point discount to the spot price. Note that the discount is because the underlying carries Rs 11.50 dividend per share. Initiate the position with spot-market-stop-loss at Rs 362. The recommended view may be negated if the stock trades above Rs 376. The position has to be traded with trailing stop-loss. Otherwise, the upside risk will be high, as the contract-multiplier is 550 units. The margin on the futures position is approximately 22 per cent of the contract value.

Alternative strategies are not available, as farther-month contracts are not traded yet. Traders can consider constructing bear put-spread when the August contracts becomes available. This position can be initiated with long August 340 puts and short August 320 puts.

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