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

GAIL: The stock closed at Rs 173 in the spot market. The outlook appears negative. The downside price target is Rs 162. Continual selling could push the stock to Rs 156.

Sell September futures. The farther-month contract trades at one-point discount to the spot price and at three-point discount to the near-month contract.

Initiate the position with spot-market-stop-loss at Rs 182. It may not be optimal to hedge this risk with calls. The position has to be traded with trailing stop-loss. Otherwise, the upside risk will be high as the contract-multiplier is 1,500 units.

The margin on the futures position is approximately 19 per cent of the contract value.

Traders can construct bear put-spread as an alternative strategy. This position can be initiated with long September 170 puts and short September 150 puts.

The spread should be set up for not more than seven points. The position will suffer from high theta risk. This is because the net premium along with the long strike is close to the price target. The short futures position appears an optimal strategy.

IOC: The stock closed at Rs 386 in the spot market. The near-term outlook appears positive. On the upside, the stock could move to Rs 400. Note that the primary outlook for the stock is negative. A long position would, therefore, amount to trading against the primary trend.

Buy September futures. The farther-month contract trades at 14-point discount to the spot price. Note that the underlying carries Rs 16 dividend per share. Initiate the position with spot-market-stop-loss at Rs 377.

The position should 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 600 units.

Constructing alternative strategies with options is not optimal as the upside price target is not far away from the current price level. Moreover, a delta of less than one means that the payoffs will be lower for options than for futures.

More Stories on : Derivatives Markets | On the hedge

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
SBI Mutual to launch emerging business fund

What's been earned by the unearned

Fine line between traders and investors

Bear domination

Tata Power trips on profits concern

Hyderabad Ind jumps on strong Q1 numbers

Takeover rumours fuel growth

GAIL: Outlook negative, sell Sept futures

SEBI eyes `primary regulator' role

Sensex plunges into negative territory

Investor fund transfers: Ministry to condone delays