Financial Daily from THE HINDU group of publications
Tuesday, Aug 10, 2004
Financial Daily from THE HINDU group of publications Tuesday, Aug 10, 2004 |
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Markets
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Derivatives Markets Columns - On the hedge Maruti Udyog: Outlook negative, sell Aug futures B. Venkatesh
THE following strategies are based on Monday's trading in the spot and the derivatives segments on the NSE: Maruti Udyog: The stock closed at Rs 403 in the spot market. The outlook appears negative. The downside price target is Rs 370. Sell August futures. The near-month contract trades at 3-point premium to the spot price. Initiate the position with spot-market-stop-loss at Rs 421. Note that the recommended outlook will be negated if the stock trades above Rs 438. The position has to be traded with trailing stop-loss to control the upside risk. The minimum order size is 400 units. Traders can consider the alternative strategy of constructing a bear put-spread. This position can be initiated with long August 400 puts and short August 380 puts. The position can be set up for a net debit of 6 points. The spread does not suffer from high theta risk. The reason is that the long put will be deep in-the-money if the stock reaches the downside price target. Those who hold the stock in their long-term portfolio can sell August 420 calls. This strategy will fetch them 7 points per option. Note this is an income-enhancing strategy and not a hedge. GAIL: The stock closed at Rs 184 in the spot market. The outlook appears negative. The downside price target is Rs 164. Sell August futures. The near-month contract trades on par with the spot price. Initiate the position with spot-market-stop-loss at Rs 189. 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. Alternative strategy with options does not seem optimal. The reason is that the puts are trading rich. Besides, spread positions cannot be initiated because out-of-the-money puts on the stock are not actively traded. Traders who hold the underlying in their long-term portfolio can write the August 190 calls against the stock. This strategy will fetch 4.5 points per option. The covered call-write strategy will suffer opportunity cost if the stock trades above Rs 190.
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