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

Sell September futures. The farther-month contract trades at 3-point premium to the spot price. Initiate the position with spot-market-stop-loss at Rs 448. This exposes the position to somewhat high upside risk. It is not optimal to hedge this risk with calls.

The position has to be traded with trailing stop-loss to control the risk. The margin on the futures position is approximately 18 per cent of the contract value. The minimum order size is 500 units.

Traders can construct bear put-spread as an alternative strategy. This position can be initiated with long August 430 puts and short August 410 puts. The position can be set up for a net debit of 4 points. The spread will payoff handsomely if the stock trades near the downside price target at the trading horizon. The spread will expire worthless if the stock trades above Rs 430. Note that the options will have just 3 days to expire from Monday.

Polaris Software: The stock closed at Rs 148 in the spot market. The outlook appears negative. The downside price target is Rs 130.

Sell September futures. The farther-month contract trades at 2-point premium to the spot price. Initiate the position with spot-market-stop-loss at Rs 152. Cautious traders can consider shorting futures after the stock trades below Rs 142 in the spot market. In the event, the stop-loss should be placed at Rs 148. The position has to be traded with trailing stop-loss. Otherwise, the upside risk will be high, as the contract-multiplier is 1,400 units. The margin on the futures position is approximately 18 per cent of the contract value.

Traders can consider constructing bear call-spread as an alternative strategy. This can be constructed with short August 145 calls and long August 155 calls. The position will fetch 5 points. The strategy is preferred over bear put-spread because the options are trading rich. Setting call spread will, hence, provide volatility capture.

The position's negative convexity is capped because the difference between the two strikes is just 5 points, net of the premium received.

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