The Hindu Business Line : Tata Steel: Set up long call spreads to ride price turn

Tata Steel: The stock closed at Rs 318 in the spot market. The outlook may turn positive if the stock trades above Rs 324. The upside price target is Rs 340.

Buy December futures after the stock moves above Rs 324 in the spot market. Initiate the position with spot-market-stop-loss at Rs 318. The position has to be traded with trailing stops 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 1,350.

Traders can construct bull call-spread as alternative strategy. The position can be initiated with long December 320 calls and short December 340 calls. The spread can be set up for 5 points. The position would payoff 15 points if the stock reaches the upside price target within five trading sessions from the date of initiation.

Note that the spread benefits from positive theta and vega. The implication is that payoff will be better if the stock reaches the price target near option expiration.

Canara Bank: The stock closed at Rs 190 in the spot market. The outlook may turn positive if the stock trades above Rs 195. The upside price target is Rs 205. Continual buying could push the stock to Rs 214.

Buy December futures after the stock moves above Rs 195 in the spot market. Initiate the position with spot-market-stop-loss at Rs 190. The position should be traded with trailing stops.

Otherwise, the downside risk will be high, as the contract-multiplier is 1,600 units. The margin on the futures position is approximately 21 per cent of the contract value.

Traders can alternatively construct synthetic short position on the stock. This position can be initiated with long December 190 calls and short December 190 puts. The synthetic short can be set up for one point. The position would payoff 8 points if the stock reaches the upside price target within five trading sessions.

Note that the position has to be traded with appropriate protective stops. Otherwise, the short put will expose the position to high negative convexity.

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

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