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B. Venkatesh

THE following strategies are based on Tuesday's trading in the spot and the derivatives segment on the NSE.

Tata Tea: The stock closed at Rs 424 in the spot market. The outlook could turn negative if the stock trades below Rs 422. The downside price target is Rs 407.

Sell November futures after the stock moves below Rs 422 in the spot market. Initiate the position with spot-market-stop-loss at Rs 430. The position has to be traded with trailing stop-loss to control the upside risk. Protective stops are important because the outlook for the stock is positive on the weekly chart. The short futures strategy is strictly for a 1-5 day trading horizon. The minimum order size is 500 units.

Traders can construct a synthetic short as alternative strategy. This position can be initiated with long November 420 puts and short November 420 calls. The synthetic short can be initiated for net credit of 8 points. The position should be closed if the stock moves above Rs 430. Otherwise, upside risk will be high because of negative convexity.

Assuming that the stock reaches Rs 430 or Rs 407 within a 5-day trading horizon, the maximum loss (based on the forecast volatility at the horizon) and maximum profit will be 4 points and 20 points respectively.

SBI: The stock closed at Rs 470 in the spot market. The outlook could turn negative if the stock trades below Rs 466. The downside price target is Rs 443.

Sell November futures after the stock moves below Rs 466 in the spot market. Initiate the position with spot-market-stop-loss at Rs 474. 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 500 units.

Traders can construct bear put-spread as alternative strategy. This position can be initiated with long November 460 puts and short November 440 puts. The spread should be set up for not more than 5 points. The position could generate 11 points if the stock reaches the downside price target within 5 trading days. Closing the position if the stock reaches the protective stop of Rs 474 could reduce the loss to 1-2 points.

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

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