The Hindu Business Line : Tata Tea: Outlook negative, sell Sept futures

Tata Tea: The stock closed at Rs 394 in the spot market. The outlook appears negative. The downside price target is Rs 361. Continual selling could push the stock to Rs 340.

Sell September futures. The near-month contract trades at 4-point premium to the spot price. Initiate the position with spot-market-stop-loss at Rs 406. The aggressive traders can even consider Rs 419 as the last stop. The position has to be traded with trailing stop-loss. Otherwise, the upside risk will be high, as the contract-multiplier is 550 units. The margin on the futures position is approximately 16 per cent of the contract value.

Traders can create a synthetic short position as an alternative strategy. This position can be created with long September 400 puts and short September 400 calls. It is optimal to set up the position with near in-the-money options because of moderate implied volatility. The synthetic short can be set up for a net debit of one point. The position will suffer losses if the stock moves past Rs 399.

Maruti Udyog: The stock closed at Rs 362 in the spot market. The outlook appears positive. The upside price target is Rs 388.

Buy September futures. It may be optimal to initiate the position after the stock closes above Rs 367 in the spot market. The position should be stopped when the stock touches Rs 356 in the spot market. The long futures position has to be traded with trailing stop-loss to control the downside risk.

The margin on the futures position is approximately 26 per cent of the contract value. The minimum order size is 400 units.

Traders can construct bull call-spread as an alternative strategy. This can be initiated with long September 360 calls and short September 380 calls. The position can be set up for a net debit of 9 points.

The spread is theta-positive. The implication is that the payoff will be better as the options approach expiration.

This is because the long call will be deep in-the-money while short call will tend towards zero if the stock touches the upside price target on or near contract expiration.

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