Financial Daily from THE HINDU group of publications
Thursday, Aug 26, 2004
Financial Daily from THE HINDU group of publications Thursday, Aug 26, 2004 |
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Markets
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Derivatives Markets Columns - On the hedge Dr Reddy's Labs: Outlook positive, buy Sept futures B. Venkatesh
THE following strategies are based on Wednesday's trading in the spot and the derivatives segment on the NSE: Tata Steel: The stock closed at Rs 248 in the spot market. The outlook appears negative. The downside price target is Rs 227. Sell September futures. It may be optimal to initiate the futures position after the stock moves to Rs 260-262 levels. The stop-loss should be placed at Rs 269. The position has to be traded with trailing stop-loss. Otherwise, the upside risk will be high, as the contract-multiplier is 1,350 units. The margin on the futures position is approximately 19 per cent of the contract value. Traders can create a synthetic short position as an alternative strategy. This can be initiated with long September 260 puts and short September 260 calls. If the stock moves to higher levels on Thursday, the synthetic position can be set up for a net credit. Otherwise, the position can be created for a net debit of not more than 2 to 3 points. The synthetic short does not suffer much from time decay, as it will be theta-neutral. This is an aggressive position and is, hence, subject to high upside risk just as a short position in the spot market. Dr Reddy's Labs: The stock closed at Rs 692 in the spot market. The outlook appears positive. The near-term upside price target is Rs 742. Continual buying could push the stock to first resistance level of Rs 795. Buy September futures. The farther-month contract trades at 6-point premium to the spot price. Initiate the position with stop-market-stop-loss at Rs 650. 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 200 units. No alternative strategies are available, as options on the stock are not actively traded. In any case, it is not optimal to trade options on this stock. The reason is that the position will be highly theta-negative. This means that the option will suffer large losses if the stock does not move to the price target in quick time.
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