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B. Venkatesh

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

BPCL: The stock closed at Rs 453 in the spot market. The outlook may turn negative if the stock trades below Rs 448. In the event, the stock may decline to Rs 421. Continual selling could push the stock to Rs 383.

Sell February futures after the stock trades below Rs 448 in the spot market. Initiate the position with spot-market-stop-loss at Rs 462. The position has to be traded with trailing stops to control the upside risk. The margin on the futures position is approximately 18 per cent of the contract value. The minimum order size is 550 units. Alternative strategies are not available.

The reason is that puts are not actively traded while calls are trading cheap. This robs the short-seller of volatility capture and hence exposes the position to high convexity risk.

Infosys: The stock closed at Rs 2,085 in the spot market. The outlook may turn negative if the stock trades below Rs 2,077. In the event, the stock may decline to Rs 2,002 and then to Rs 1,975.

Sell March futures after the stock trades below Rs 2,077 in the spot market. The next month contract is preferred because of the small term premium. This allows traders the opportunity to trade the position for a longer time with minimal cost. Initiate the position with spot-market-stop-loss at Rs 2,125. The position has to be traded with trailing stops 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 200 units.

Traders can alternatively construct ratio put spread.

This position can be initiated with one long February 2070 puts, one short February 2010 puts and one short February 1980 puts. The spread can be set up for a net debit of 2 to 4 points. The position will payoff handsomely if the stock reaches Rs 2,002. If the stock reaches the price target within 10 trading sessions, the spread can payoff 17-20 points net.

Note that the payoff will be better if the stock reaches the price target at or near option expiration, as the spread is theta-positive.

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

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