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

Sell September futures. The farther-month contract trades at four-point premium to the spot price. Initiate the position with spot-market-stop-loss at Rs 466. It is not optimal to hedge the position with horizon-matching calls.

The position has to be traded with trailing stop-loss to control the upside risk. The margin on the futures position is approximately 17 per cent of the contract value. The minimum order size is 600 units.

Traders can construct bear put-spread as an alternative strategy as option implied volatility is low. The spread can be initiated with long September 450 puts and short September 430 puts. The spread can be set up for a net debit of eight points.

Interestingly, the payoffs will be attractive if the stock reaches the downside price target on expiration because the short put will then be theta-positive and the long put will be deep in-the-money.

The payoffs will be modest if the stock reaches the downside price target in quick time because the position is gamma-negative.

PNB: The stock closed at Rs 243 in the spot market. The outlook appears negative. The downside price target is Rs 230. Continual selling pressure can push the stock to Rs 220.

Sell September futures after the stock trades below Rs 240 in the spot market. The farther-month contract trades on par with the spot price. Initiate the position with spot-market-stop-loss at Rs 250.

The stop-loss should be ideally placed at Monday's intra-day high. But that price is far way from the closing price, which increases the upside risk. The position has to be traded with trailing stop-loss even for intra-day trades.

Otherwise, the upside risk will be high because the contract-multiplier is 1,200 units. The margin on the futures position is approximately 19 per cent of the contract value. No alternative strategies are possible because farther-month options on the stock are not actively traded yet.

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