Financial Daily from THE HINDU group of publications
Wednesday, Mar 31, 2004
Financial Daily from THE HINDU group of publications Wednesday, Mar 31, 2004 |
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Markets
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Derivatives Markets Columns - On the hedge Tata Tea: Outlook positive; buy April futures B. Venkatesh
THE following strategies are based on Tuesday's trading in the spot and the derivatives segments on the NSE: Tata Tea: The stock closed at Rs 328 in the spot market. The outlook appears positive. The upside price target is Rs 351. Consider buying April futures on the stock. The near-month contract trades on par with the spot price. Initiate the position with spot-market-stop-loss at Rs 317. This exposes the position to 11-point downside risk. The position has to be traded with trailing stop-loss to control for downside risk. The margin on the long futures position is approximately 20 per cent of the contract value. The minimum order size is 550 units. The open interest position as a percentage of the market-wide limit is 20 per cent. The alternative strategy of buying April calls might not be optimal because the contracts are trading rich. This exposes the position to high risk due to change in the volatility of the underlying. Besides, call options on the stock are not actively traded. This exposes the position to high market risk. Bank of Baroda: The stock closed at Rs 239 in the spot market. The outlook on the stock appears positive. The upside price target is Rs 250. Consider buying April futures on the stock. The near-month contract trades on par with the spot price. Initiate the position with spot-market-stop-loss at Rs 232. Note that the stop-loss limit has been set at Tuesday's lowest price. If the stock declines below that level, the outlook could turn negative. The long futures position has to be traded with trailing stop-loss. Otherwise, the downside risk will be high because the contract-multiplier is 1,400 units. The margin on the long futures position is approximately 20 per cent of the contract value. The open interest position as a percentage of the market-wide limit is about 25 per cent. Options on the stock are not actively traded. Traders, therefore, cannot initiate long call positions on the stock instead of long futures.
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