The Hindu Business Line : Reliance: Outlook positive, buy January futures

Reliance Industries: The outlook on this stock is positive. The upside price target is Rs 620. Consider buying the January futures. The stock may find support at Rs 525, which is far away from the current level. This exposes the futures position to high risk. This risk can be hedged with the near-month 560 puts. The option is available for 9 points.

The hedged position will generate optimal payoff if the stock declines in the near-term and then bounces back. Such a movement will lower the negative effect of theta-gamma trade-off. The position will suffer maximum loss if the stock trades near the current level when the option expires.

Note that initiating a long call position on the stock instead of futures may not be optimal. The reason is that calls are trading rich. This exposes the position to high vega risk and high theta-gamma trade-off. Shifting to the next month contract during mid-January can extend the trading horizon. The rollover cost is currently 5 points. The margin requirement is approximately 25 per cent of the contract value.

Punjab National Bank: The outlook on this stock is positive. The upside price target is Rs 278. Consider buying the January futures. Initiate the position will sell stop at Rs 230. This exposes the position to 10-point risk.

The long futures have to be initiated with dynamic sell stops because the position cannot be hedged with options. The reason is that options on the stock are not actively traded. Cautious traders can initiate the long futures position after the stock moves above Rs 248.

The one-month calendar premium on the futures is currently 11 points. The premium is likely to reduce during the last 2 weeks of January. Traders can consider shifting their futures to the next month when the premium is about 5 points. The margin requirement is approximately 30 per cent of the contract value.

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