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

Nifty: The spot index closed at 1521. The outlook appears negative. The downside target is 1465. If selling pressure continues, the spot index could well decline to 1424.

Sell June futures. The near-month contract trades at 26-point discount to the spot price.

Initiate the position with spot-market-stop-loss at 1567. The stop loss is kept far away from the current level because the negative outlook will not be negated until the spot index trades above that level.

This upside risk cannot be cost-effectively hedged with horizon-matching calls. The margin on the futures position is approximately 21 per cent of the contract value. The minimum order size is 200 units.

Traders can consider buying options instead of selling futures. The optimal strategy would be to construct a bear vertical spread. This position can be initiated with long June 1500 puts and short 1460 puts.

The position can be set up for a net debit of 10 points. The spread helps the trader capture volatility because the short put trades at higher implied volatility than long puts. The position will deliver profits even if the spot index moves to the downside target on option expiration.

Polaris Software: The stock closed at Rs 133 in the spot market. The retracement to the decline from Rs 211 appears to have ended at Rs 148. The stock appears to have started another leg of decline. The near-term downside price target is Rs 115.

Sell June futures. The near-month contract trades on par with the spot price. Initiate the position with spot-market-stop-loss at Rs 140.

The recommended outlook will be negated if the stock trades above this level. The position has to be traded with trailing stop-loss to control the upside risk. The margin on the futures position is approximately 34 per cent of the contract value.

The minimum order size is 1,400 units. No alternative strategies are available because options on the stock are not actively traded.

More Stories on : Derivatives Markets | On the hedge

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Inflows drying up for equity mutual funds

Speculation in retrospect

Bear-run arrested

3 Indian cos eye Singapore bourse for listing

Bonus hopes spur buying interest in Tata Steel

HPCL up despite thumbs down to disinvestment

Concor gains on FII picking

Nifty: Outlook negative, sell June futures

Canbank Mutual starts investment in derivatives

Buying interest propels market

NTPC IPO plans on track; SEBI approval received