The Hindu Business Line : Outlook negative for SBI, Tata Steel

Sell September futures. The near-month contract trades on par with the spot price. Initiate the position with spot-market-stop-loss at Rs 469. 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 500 units.

Traders can construct a synthetic short as an alternative strategy. This position can be initiated with the long September 460 puts and short September 460 calls.

The synthetic short can be set up for a net debit of two points. The position will payoff handsomely if the stock reaches the downside price target before option expiration.

This strategy does not suffer much from time decay. The reason is that the long put will be deep in-the-money while the short call will gain due to time decay if the stock reaches the price target near the trading horizon. Note that the position is subject to high negative convexity.

Tata Steel: The stock closed at Rs 268 in the spot market. The outlook appears negative. The downside price target is Rs 252.

Sell September futures. The near-month contract trades at one-point premium to the spot price. Initiate the position with spot-market-stop-loss at Rs 271.

Cautious traders can initiate the short futures position after the stock trades below Rs 265 in the spot market. 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 26 per cent of the contract value.

An alternative strategy would be to buy the September 260 puts. The option currently trades for 3.50 points. Note that a spread strategy has not been recommended because the deep out-of-the-money puts carry low premium.

This means that the spread will not lower the initial outlay, yet will increase the convexity risk if the stock drifts downwards. The long put is subject to high time decay. The implication is that the payoff will be better if the stock reaches the downside price target in quick time.

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