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

HPCL: The stock closed at Rs 310 in the spot market. The outlook will turn positive if the stock trades above Rs 317. In the event, the stock could move to Rs 348.

Buy August futures after the stock trades above Rs 317. Initiate the position with spot-market-stop-loss at Rs 305. The position has to be traded with trailing stop-loss to control the downside risk. The margin on the futures position is approximately 18 per cent of the contract value. The minimum order size is 650 units.

Traders can consider an alternative strategy of constructing bull call-spread. This position can be initiated with long August 310 calls and short August 340 calls. 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 310 calls will carry low time value if the stock reaches the upside price target, while the short call will be theta-positive.

Ranbaxy Labs: The stock closed at Rs 959 in the spot market. The outlook appears negative. The downside price target is Rs 920.

Sell August futures. The near-month contract trades at one-point premium to the spot price. Initiate the position with spot-market-stop-loss at Rs 983. Note that the recommended outlook may be negated if the stock trades above Rs 990. The short futures position has to be traded with trailing stop-loss. Otherwise, the upside risk will be high, as the contract-multiplier is 400 units. The margin on the futures position is approximately 17 per cent of the contract value.

No strategies can be constructed with put options, as such contracts are not actively traded. Traders can instead construct bear call-spread. This can be initiated with short August 960 calls and long August 1000 calls. The position will fetch 12 points.

Note that the position will suffer losses if the stock trades between Rs 980 and Rs 1,000. Moreover, the bear call-spread suffers from negative convexity. It is, therefore, optimal to set up futures position.

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