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THE following strategies are based on Monday's trading in the derivatives segment on the NSE:

Equity options

ACC: The outlook on this stock is negative. The downside price target is Rs 145. The risk is that momentum trading may push the stock up to Rs 165, its first resistance level during the trading-horizon.

Consider buying the March 150 puts. They are two reasons for recommending March contracts. One, trading horizon extends beyond the near-month contract. And two, the implied volatility of the March 150 puts are considerably lower than February contracts.

The put premium will not decline sharply even if the stock rises from the current levels. This is because the option is already deep out-of-the-money, and therefore, will not react sharply if the stock moves adversely to the put position. The put premium will also not fall sharply if volatility falls. Finally, the puts carry high time value, and hence, will not rapidly lose value, even if the stock does not decline to the downside price target within the trading-horizon.

If the stock declines to Rs 145 at the end of the trading-horizon, the March 150 puts will generate 130 per cent returns. If the stock rises to Rs 165, the puts will lose 60 per cent.

Note that the payoffs are based on theoretical value, which is somewhat higher than the current put premium. The reason this has been done is that the current implied volatility for the March 150 puts are too low, perhaps, because too few contracts were traded at that strike. The trading horizon is 10 days. The market lot is 1,500 options.

Wipro: The outlook on this stock is positive. The upside price target is Rs 1525. The risk is that profit-taking can push the stock down to Rs 1375, the stock's first support level during the trading horizon.

Consider buying the February 1450 calls, as they are cheaper in terms of implied volatility.

Though the option is OTM, the position runs the risk of the call premium falling sharply if the stock does not rise quickly. The reason is that the calls are due for expiry on February 27; the nearer the calls get to expiration, the faster it loses value, unless the stock rises sharply. The call premium is also likely to fall sharply if volatility falls.

If the stock rises to Rs 1525 at the end of the trading horizon, the calls will generate 130 per cent returns. If the stock declines to Rs 1375, the calls will tend towards zero. The trading horizon coincides with the expiry of the contract, which makes the position very risky. The market lot is 200 options per contract.

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