Financial Daily from THE HINDU group of publications
Friday, Oct 15, 2004
Financial Daily from THE HINDU group of publications Friday, Oct 15, 2004 |
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Markets
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Derivatives Markets Columns - On the hedge Outlook could turn positive for Tata Steel, Oriental Bank B. Venkatesh
THE following strategies are based on Thursday's trading in the spot and the derivatives segment on the NSE: Tata Steel: The stock closed at Rs 285 in the spot market. The outlook will turn positive if the stock moves above Rs 291. In the event, the stock could drift to Rs 305. Buy October futures after the stock moves past Rs 291. Place a spot-market-stop-loss at the low for the day before the trade is initiated. The stop-loss can later be moved to the initiated price after the stock moves up. ]Alternatively, traders can place a stop-loss at Rs 280, which is Tuesday's closing price. Note that placing the stop-loss at that price will make the risk-return trade-off unattractive. The margin on the futures position is approximately 17 per cent of the contract value. The minimum order size is 1,350 units. Traders can construct a bull call-spread as an alternative strategy. This position can be initiated with long October 280 calls and short October 300 calls. The spread can be set up for less than 8 points. The position will provide 5-6 points if the stock reaches the upside price target before end next week. The payoff will be better if the stock reaches the price target at or near option expiration. The reason is that the short call is theta-positive. Oriental Bank of Commerce: The stock closed at Rs 239 in the spot market. The outlook will turn positive if the stock moves above Rs 244. In the event, the stock could rise to Rs 259. Buy October futures after the stock moves above Rs 244 in the spot market. Initiate the position with spot-market-stop-loss at Rs 239. The position has to be traded with trailing stop-loss to control the downside risk. The margin on the futures position is approximately 18 per cent of the contract value. The minimum order size is 1,200 units. The aggressive traders can consider selling the October 240 puts after the stock moves above Rs 244. The option should be sold for not less than 6 points if the stock reaches Rs 244 on Friday. Note that selling naked puts will attract high SPAN margin. Besides, the position suffers negative convexity. Structuring alternative strategies is not available, as options on the stock are not actively traded. (Note: The opinion expressed in this column is based on technical analysis. There is risk of loss in trading.)
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