The Hindu Business Line : Tata Tea: Outlook negative, sell August futures

Sell August futures. The near-month contract trades at 5-point discount to the spot price. Note that the underlying carries a dividend of Rs 8.5 per share. Initiate the position with stop-market-stop-loss at Rs 422.

The position has to be traded with trailing stop-loss to control the upside risk. The margin on the futures position is approximately 16 per cent of the contract value. The minimum order size is 550 units.

The alternative strategy of constructing long bear-spread or backspread is not possible because puts on the stock are not actively traded. Traders have to, hence, consider short call spread. This can be initiated with short August 390 calls and long August 420 calls.

The spread should not be set up for a net credit lesser than 14 points. Importantly, the short call should be sold for at least 25 points. That way, the trader may be able to capture volatility and profit from negative theoretical edge. The maximum profit at the trading horizon, if the spread carries no time value, will be the premium received on initiating the position.

ICICI Bank: The stock closed at Rs 273 in the spot market. The outlook appears negative. The downside price target is Rs 264. Continual selling could push the stock to Rs 255.

Sell August futures. The near-month contract trades on par with the spot price. Initiate the position with spot-market-stop-loss at Rs 281. The position has to be traded with trailing stop-loss to control the upside risk. The margin on the futures position is approximately 17 per cent of the contract value. The minimum order size is 1,400 units.

Traders can consider constructing short call spread. This position can be initiated with short August 270 calls and long August 290 calls. The position should be set up for a net credit of 9 points or more. Importantly, the short call should fetch at least 12 points. Otherwise, the position will not profit from decline in volatility when the stock falls to the downside price target.

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