Financial Daily from THE HINDU group of publications
Friday, Oct 22, 2004
Columns - On the hedge
Outlook could turn positive for ITC, Polaris
THE following strategies are based on Thursday's trading in the spot and the derivatives segment on the NSE:
ITC: The stock closed at Rs 1,085 in the spot market. The outlook will turn positive if the stock moves above Rs 1,094. The upside price target is Rs 1,130.
Buy October futures after the stock moves above Rs 1,094 in the spot market. Because ITC futures contracts are not very actively traded, a sharp increase in spot price would be primarily reflected in the near-month contract than in the farther-month contract.
The position can be shifted to November futures if the stock does not reach the upside price target before October 28.
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 300 units. No alternative strategies are available, as options on the stock are not actively traded.
Polaris Software: The stock closed at Rs 149 in the spot market. The outlook will turn positive if the stock moves above Rs 151. The upside price target is Rs 160.
Buy October futures after the stock moves above Rs 151 in the spot market. Initiate the position with spot-market-stop-loss at Rs 148. This stop limit provides an attractive risk-reward payoff.
Traders, however, risk the stop-loss being triggered before the stock hits the upside price target because the stop is close to the current price level. The stop-loss should be upgraded to break-even price after the stock moves up. The margin on the futures position is approximately 17 per cent of the contract value. The minimum order size is 1,400 units.
Traders can buy the October 150 calls as alternative strategy. The option provides marginal theoretical edge. This gives the position some margin of safety against vega risk. The capital-at-risk is 3 points. The long call will generate at least 10 points if the stock reaches the price target before option expiration.
Note that spread positions will not be optimal because deep out-of-the-money calls carry low premium.
(Note: The opinion expressed in this column is based on technical analysis. There is risk of loss in trading.)
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