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B. Venkatesh

THE following strategies are based on Friday's trading in the derivatives segment on the NSE. Note that the risk-return trade-offs for these strategies may not be very attractive.

The reason is that high intra-day volatility has led to wide-ranging price bars. The protective stop is, therefore, far away from the recommended entry price. The upshot is that capital-at-risk will be high.

Nifty: The June futures contract closed at 2048. The outlook may turn negative if the June contract trades below 2040. The downside target range is 2017-2010.

Sell June futures after it trades below 2040. Initiate the position with protective stop at 2072. Note that the protective is far away from the recommended entry price. Moreover, the distance between the entry price and the stop-loss is greater than that between the entry price and the target level.

The position could still be profitable because the price pattern suggests a negative bias. The margin on the futures position is approximately 10 per cent of the contract value. The minimum order size is 100 units.

Risk-averse traders can alternatively construct an options-based strategy to ride a possible decline in the Nifty index. Constructing bear call spreads will not be optimal, as there will not be any volatility capture. Unfortunately, setting up put spreads also does not seem optimal because of the volatility structure. The optimal strategy would be to buy the June 2050 puts.

TCS: The June futures contract closed at 1263. The outlook may turn negative if the June contract trades below 1256. The downside target range is 1211-1207.

Sell June futures after it trades below 1256. Initiate the position with protective stop at 1291. Trail the stop 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 250 units. Alternative strategies will not be optimal, as calls are trading cheap and puts are rich.

Dr Reddy's Labs: The June futures contract closed at 713. The outlook may turn negative if the June contract trades below 708. The downside target range is 687-685.

Sell June futures after it trades below 708. Initiate the position with protective stop at 722. Trail the stop 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 400 units.

No alternative strategies are available, as options on the stock are not actively traded.

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

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