The Hindu Business Line : BHEL: Outlook positive, buy Sept futures

Buy September futures. The near-month contract trades at one-point discount to the spot price. Initiate the position with spot-market-stop-loss at Rs 569. The position has to be traded with trailing stop-loss to control the downside risk. The margin on the futures position is approximately 13 per cent of the contract value. The minimum order size is 600 units.

Traders can construct bull call-spread as an alternative strategy. This position can be initiated with the long September 580 calls and short September 600 calls.

The spread should be set up for not more than 7 points. At this level, the position will provide an 8 percentage-point theoretical edge.

Note that the spread is net theta-positive. This means that the payoff will be better if the stock reaches the upside price target near the option expiration date. The reason is that the spread will gain from long option's high delta value and short option's high time decay.

Bank of Baroda: The stock closed at Rs 177 in the spot market. The outlook appears negative. The downside price target is Rs 166. The stock could drift to Rs 161 if there is continual selling.

Sell September futures. The near-month contract trades on a par with the spot price. Initiate the position with spot-market-stop-loss at Rs 180.

The position has to be traded with trailing stop. Otherwise, the upside risk will be high, as the contract-multiplier is 1,400 units. The margin on the futures position is approximately 21 per cent of the contract value.

No alternative strategies are available, as options on the stock are not actively traded. Traders who hold the underlying can sell September 180 calls against the stock. The option should be sold for not less than 5 points.

This would provide the trader a margin of safety on the forecast volatility. Note that the covered call-write is an income-enhancing strategy and not a hedge for the underlying.

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