Financial Daily from THE HINDU group of publications
Saturday, Sep 25, 2004
Financial Daily from THE HINDU group of publications Saturday, Sep 25, 2004 |
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Markets
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Derivatives Markets Columns - On the hedge Tata Tea: Outlook negative, sell October futures B. Venkatesh
THE following strategies are based on Friday's trading in the spot and derivatives segment on the NSE: Tata Tea: The stock closed at Rs 438 in the spot market. The near-term outlook appears negative. The downside price target is Rs 424. Sell October futures. The farther-month contract trades at two-point premium to the spot price. Initiate the position with spot-market-stop-loss at Rs 444. 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 550 units. An alternative strategy would be to buy September 430 puts. The option is trading rich. Traders should not buy the option for more than one point. Otherwise, the loss due to time decay will be high. The option will have just three days for expiry from the date of initiation. If the stock reaches the downside price target, the position will generate handsome returns. The maximum loss will be the premium paid for buying the puts. The optimal strategy, however, is to buy the futures contract because of the higher delta. Polaris Software: The stock closed at Rs 147 in the spot market. The outlook appears negative. The downside price target is Rs 137. Sell October futures. The farther-month contract trades at one-point premium to the spot price. Initiate the position with spot-market-stop-loss at Rs 150. The position has to be traded with trailing stop loss. Otherwise, the upside risk will be high, as the contract-multiplier is 1,400 units. The margin on the futures position is approximately 17 per cent of the contract value. No futures-replication strategy is available, as put options on the stock are not actively traded. Traders who hold the underlying can sell September 150 calls against the stock. The option is trading rich, which increases gains from positive theta if the stock does not move up before option expiration. Note that the covered call-write is an income-enhancing strategy and not a hedge.
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