The Hindu Business Line : Outlook may turn positive for BPCL

BPCL: The stock closed at Rs 427 in the spot market. The outlook could turn positive if the stock moves above Rs 430. The upside price target is Rs 449.

Buy December futures after the stock moves above Rs 430 in the spot market. Initiate the position with spot-market-stop-loss at Rs 424. 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.

It is not optimal to construct an alternative strategy with options. Setting up ratio spreads will not be attractive because the options are already trading cheap. So, even if the stock trends in one direction, the volatility-collapse from the current level will not be enough to generate positive payoffs. Setting up bull put spreads will expose the position to high risk because the outlook on the stock could turn negative if it does not move above Rs 430.

Nifty index: The spot index closed at 1993. The outlook appears negative. The downside target is 1948.

Sell December futures. Initiate the position with spot-market-stop-loss at 2014. The outlook could be negated if the index crosses this level. The position has to be traded with trailing stops to control the upside risk. The margin on the futures position is approximately 8 per cent of the contract value. The minimum order size is 200 units.

Traders can construct synthetic short as an alternative strategy. This position can be initiated with long December 1980 puts and short December 1980 calls. The synthetic short can be set up for a net credit of 12 points. The position will generate 45 points if the stock moves to 1948 within 5 trading sessions. The synthetic short will benefit from time decay because of the short call-leg. Traders may do well to cover the position if the index moves above 2014. The maximum loss will be 26 points.

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

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