The Hindu Business Line : Maruti: Outlook negative, sell October futures

HPCL: The stock closed at Rs 328 in the spot market. The outlook appears positive. The near-term upside price target is Rs 338. If the stock breaks this level, it could move to Rs 356.

Buy October futures. The near-month contract trades on par with the spot price. Initiate the position with spot-market-stop-loss at Rs 320. If traders are not comfortable with this risk-return trade-off, the spot-market-stop-loss should be placed at the low of the day when the position is initiated. The margin on the futures position is approximately 17 per cent of the contract value. The minimum order size is 650 units.

It is not optimal to set up alternative strategies with options. Initiating spreads will not generate handsome payoffs because the gap between the current price and the price target is not large enough for the option delta to change fast. Setting up naked calls will expose the position to high time risk.

Maruti Udyog: The stock closed at Rs 369 in the spot market. The outlook appears negative. The downside price target is Rs 348.

Sell October futures. The near-month contract trades at 2-point premium to the spot price. Initiate the position with spot-market-stop-loss at Rs 377. The position has to be traded with trailing stop-loss to control the upside 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 bear put-spread as alternative strategy. This position can be initiated with long October 360 puts and short October 340 puts. The spread can be set up for a net debit of 5 points. The spread will generate 10 points if the stock reaches the price target next week. Note that the payoff will be better if the stock reaches the price target at or near option expiration. The reason is that the short option is theta-positive while the long option will be only marginally sensitive to time risk as time passes by.

(Note: The opinion expressed in this column is based on technical analysis. There is risk of loss in trading.)

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