Financial Daily from THE HINDU group of publications
Wednesday, Jun 09, 2004
Financial Daily from THE HINDU group of publications Wednesday, Jun 09, 2004 |
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Markets
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Derivatives Markets Columns - On the hedge MTNL: Outlook negative, sell June futures B. Venkatesh
THE following strategies are based on Tuesday's trading in the spot and the derivatives segments on the NSE: ACC: The stock closed at Rs 248 in the spot market. The outlook appears negative. The downside price target is Rs 236. If selling pressure continues, the stock could well decline to Rs 224. Sell June futures. The near-month contract trades at a 3-point discount to the spot price. Note that the underlying carries Rs 4 dividend, which is subject to shareholder approval. Initiate the futures position with spot-market-stop-loss at Rs 255. The recommended view will be negated if the stock trades above this level. The position has to be traded with trailing stop-loss to control this risk. The margin on the futures position is approximately 23 per cent of the contract value. The minimum order size is 1,500 units. The only alternative options strategy available is the bear vertical call spread. This can be constructed with short June 250 calls and long June 260 calls. The long call protects the position from upside risk if the stock moves above Rs 260. The position generates a net credit of four points. Note that the position is highly negatively convex. The maximum profit is four points while the loss is higher. MTNL: The stock closed at Rs 120 in the spot market. The outlook appears negative. The downside price target is Rs 111. If the stock meets with selling pressure, it could further decline to Rs 107. Sell June futures. The near-month contract trades on par with the spot price. Initiate the position with spot-market-stop-loss at Rs 125. Note that the recommended outlook will be negated if the stock trades above this level. The margin on the futures position is approximately 30 per cent of the contract value. The minimum order size is 1,600 units. No alternative strategies are available, as options on the stock are not actively traded yet. In any case, buying puts would not be optimal because the downside price target is close to the current market price. The upshot is that the out-of-the-money puts will be unprofitable while the in-the-money puts will run a high theta risk.
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