The Hindu Business Line : Outlook positive for BPCL, negative for BHEL

BPCL: The stock closed at Rs 348 in the spot market. The outlook appears positive but the uptrend will be speedy after the stock moves past Rs 353. The price target is Rs 370.

Buy October futures after the stock moves past Rs 353 in the spot market.

Initiate the position with spot-market-stop-loss at Rs 345. The position has to be traded with trailing stop-loss to control the downside risk. An effective trailing stop-loss would be the previous day's closing price.

The margin on the futures position is approximately 17 per cent of the contract value. The minimum order size is 550 units.

Traders can construct bull call-spread as alternative strategy. This can be initiated with long October 360 calls and short October 380 calls. The spread can be set up for a net debit of not more than 5 points. The options are trading rich. The implication is that the spread will generate handsome payoff if the stock reaches the upside price target at or near option expiration. For then, the long call will be deep in-the-money while the short call will be theta-positive.

Aggressive traders could consider selling naked puts to capture the premium. The October 340 puts should be sold for not less than 8.5 points.

Note that this strategy is risky because of the negative convexity.

BHEL: The stock closed at Rs 617 in the spot market. The outlook appears negative. The downside price target is Rs 604.

Sell October futures. The near-month contract trades on par with the spot price.

Initiate the position with spot-market-stop-loss at Rs 630. This means the trade will carry a one-for-one risk-return trade-off. Risk-averse traders can place the stop at Rs 627, which is Monday's high.

Note that the stock could drift to Rs 596 if profit-taking persists on price decline.

Traders setting up the futures position for this target should place their stop at Rs 630. The margin on the futures position is approximately 17 per cent of the contract value. The minimum order size is 600 units.

Alternative strategies with options are not optimal.

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

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