Financial Daily from THE HINDU group of publications
Thursday, Nov 25, 2004
Financial Daily from THE HINDU group of publications Thursday, Nov 25, 2004 |
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Markets
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Derivatives Markets Columns - On the hedge Short-term price reversal likely in Reliance, Tata Tea B. Venkatesh
THE following strategies are based on Wednesday's trading in the spot and the derivatives segment on the NSE. The strategies are meant to take advantage of short-term price reversals. The recommendation is, hence, valid for just two trading sessions from the date of initiation. If profits are not taken or the position is not stopped, the contract has to be closed at the end of this period. Reliance Industries: Buy December futures after the stock moves above Rs 516 in the spot market. Initiate the position with spot-market-stop-loss at Rs 510. The upside price target is Rs 528. The position has to be traded with trailing stops to control the downside risk. Protective stops are important because the longer-horizon trend appears negative. The margin on the futures position is approximately 17 per cent of the contract value. The minimum order size is 600 units. It is not optimal to set up alternative position with call options. The reason is that the trading horizon is too short for the option delta to generate attractive payoffs. Tata Tea: Sell December futures after the stock moves below Rs 440 in the spot market. Initiate the position with spot-market-stop-loss at Rs 444. Protective stops are important because the longer-horizon trend appears positive. The downside price target is Rs 425. The position has to be traded with trailing stops to control the upside risk. The margin on the futures position is approximately 16 per cent of the contract value. The minimum order size is 550 units. Traders can construct bear call spread as alternative strategy. This can be initiated with short December 440 calls and long November 450 calls. The spread can be set up for net credit of 5 points. The spread will payoff 7 points if the stock reaches the downside price within the trading horizon. The position will lose 2 to 3 points if the stock trades at Rs 450 during this period.
(Note: The opinion expressed in this column is based on technical analysis. There is risk of loss in trading.)
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