The Hindu Business Line : Reliance: Outlook negative, sell June futures

Reliance Industries: The stock closed at Rs 434 in the spot market. The recent uptrend of Rs 86 appears to be a retracement to the earlier decline from a high of Rs 610 to a low of Rs 383.

The outlook on the stock remains negative. The near-term downside price target is Rs 415. Sell June futures. The near-month contract trades at 7-point discount to the spot price.

Initiate the position with spot-market-stop-loss at Rs 445. The position has to be traded with trailing stop-loss to control the upside risk. It is not cost-effective to hedge the position with horizon-matching calls.

Aggressive traders can also consider selling the June 420 puts against the short futures position. The short put will lose value if the stock moves up. The premium received on puts will, hence, be a partial protection to the short futures position.

Should the stock decline, the position will be positive because the absolute change in the short futures position will be more than the absolute change in the put option premium.

An alternative strategy would be to construct vertical bear spread, as the options are not trading rich. The spread can be initiated with long June 440 puts and short June 420 puts. It can be set up for a net debit of 10 points.

The position carries low vega risk but high theta risk. The spread will generate maximum profits if the stock trades near Rs 420 at the trading horizon.

ACC: The stock closed at Rs 249 in the spot market. It appears poised for another leg of downtrend after recently retracing the earlier decline by Rs 72. In the near-term, the stock could find support at Rs 237 and then at Rs 224.

Sell June futures. The near-month contract trades at 4-point discount to the spot price. Initiate the position with spot-market-stop-loss at Rs 259, which is Friday's high.

Note that the recommended outlook will be negated only if the stock trades above Rs 265. But trading with a stop-loss at Rs 265 exposes the position to high upside risk because the contract-multiplier is 1,500 units. The position has to be traded with trailing stop-loss limits.

Alternative strategies can be constructed with puts. But such position may not be optimal because they carry high time decay. This could expose the traders to high risk because large capital outlay is required to construct the position.

Constructing a straight short futures position may be the most optimal choice under the circumstances.

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