The Hindu Business Line : Tata Power: Sell August futures

Sell August futures. The near-month contract trades on par with the spot price. Initiate the position with spot-market stop-loss at Rs 268. The position has to be traded with trailing stop-loss to control the upside risk. The margin on the futures position is approximately 18 per cent of the contract value. The minimum order size is 800 units.

Traders can construct bear call-spread as an alternative strategy. Note that bear put spreads cannot be set up, as these contracts are not actively traded. The call spread can be initiated with short August 260 calls and long August 280 calls. The spread can be set up for a net credit of 4.5 points. The spread is theta-positive, meaning it will gain from time decay. The reason is that the short at-the-money call will rapidly lose time value as the option approaches expiration. The position will suffer maximum losses if the stock trades between Rs 260 and Rs 280 at the trading horizon. Note that maximum loss is higher than the maximum gains because of the position's negative convexity.

BHEL: The stock closed at Rs 533 in the spot market. The outlook appears negative. The downside price target is Rs 512. Persistent selling could push the stock to Rs 503.

Sell August futures. The near-month contract trades on par with the spot price. Initiate the position with spot-market stop-loss at Rs 553. Cautious traders can initiate the position after the stock trades below Rs 524 in the spot market. The stop-loss should then be placed at Rs 540. The position has to be traded with trailing stop-loss to control the upside risk. The margin on the futures position is approximately 18 per cent of the contract value. The minimum order size is 600 units.

No alternative strategies are available, as put options on the stock are not actively traded. Traders who hold the underlying can consider selling the August 560 calls against the stock. The position should fetch not less than 2.5 points. Note that this is an income-enhancing strategy and not a short-term hedge.

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