Financial Daily from THE HINDU group of publications
Tuesday, Nov 23, 2004
Financial Daily from THE HINDU group of publications Tuesday, Nov 23, 2004 |
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Markets
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Derivatives Markets Columns - On the hedge Outlook may turn positive for Bharat Electronics B. Venkatesh
THE following strategies are based on Friday's trading in the spot and the derivatives segment on the NSE: Bharat Electronics: The stock closed at Rs 575 in the spot market. The outlook could turn positive if the stock moves above Rs 577. The upside price target is Rs 595. Buy December futures after the stock moves above Rs 577 in the spot market. Initiate the position with spot-market-stop-loss at Rs 564. The risk-reward trade-off may not be attractive if this protective stop is used. Traders can alternatively place a protective stop at the day's low at the time the position is initiated. The position has to be traded with trailing stop-loss to control the downside risk. The margin on the futures position is approximately 17 per cent of the contract value. The minimum order size is 550 units. No alternative strategies are available, as options on the stock are not actively traded. ACC: The stock closed at Rs 277 in spot market. Sell December futures after the stock moves below Rs 276 in the spot market. The downside price target is Rs 267. Initiate the position with spot-market-stop-loss at Rs 279. The position has to be traded with trailing stops. Otherwise, the upside risk is high, as the contract-multiplier is 1,500 units. The margin on the futures position is approximately 17 per cent of the contract value. Traders can alternatively set up a position with December options. The optimal strategy would be to buy December 270 puts and sell the December 280 calls. Note that this is not a synthetic short because different strikes have been used to construct the position. The position can be set up for a net credit of 4 points. The position will payoff 9 points if the stock reaches the downside price target within 5 trading sessions. The position will lose 1 to 2 points if the stock moves to Rs 280 during this period. It may best to close the options position if the stock moves above Rs 280. Otherwise, the negative convexity of the short call will expose the position to high risk.
(Note: The opinion expressed in this column is based on technical analysis. There is risk of loss in trading.)
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