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

Equity options

Tata Steel: The outlook on this stock is positive. The upside price target is Rs 165. The risk is that profit-taking may push the stock down to Rs 145. Note that the upside potential and the downside risk levels are near-symmetrical from the current spot price. The likelihood of the stock moving up, however, appears higher.

Consider buying the March 155 calls. The calls are trading way above the theoretical value. This exposes the position to high volatility risk.

The call premium is likely to decline sharply for every small decline in the stock price. This is because the calls are in-the-money (ITM) and carry high option delta. The call premium is likely to fall moderately if the stock does not reach the upside price target at the end of the trading horizon. This is because the option's theta is higher when compared to its gamma. The position is unlikely to rapidly lose value if volatility falls; the likelihood of the volatility falling is, however, high.

If the stock rises to Rs 165 at the end of the trading horizon, the March 155 calls will generate 50 per cent returns. If the stock declines to Rs 145, the calls will lose 90 per cent. The payoffs are asymmetrical because the forecast volatility is considerably lower than the current implied volatility. If the realised volatility is higher than the forecast volatility, the payoff will be better. The position is risky. The target trading-horizon is 15 days. The market lot is 1,800 options.

Satyam: The outlook on this stock is negative. The downside price target is Rs 190. The risk is that the stock may rise as high as Rs 260, its first resistance level during the trading horizon. If you can take the risk, consider shorting the March futures contract. This position will give you a point-for-point move if the stock declines. Note that the position will also hurt as much if the stock rises.

You can hedge the short futures position with March 240 calls. At the current levels, this exposes you to a 15-point risk on your short futures position before the calls start moving one-for-one with the stock price. You run the maximum risk when the stock price is between the short futures price and the call strike.

If the stock declines to Rs 190 by the end of the trading horizon, the short futures long calls position will generate a maximum return of Rs 33,000 per contract. If the stock rises to Rs 260, the maximum loss will be Rs 23,100 per contract. The payoff does not include margin requirement on futures position and commissions. The target trading-horizon is 17 days. The market lot is 1,200.

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