Financial Daily from THE HINDU group of publications
Tuesday, Jun 17, 2003
Financial Daily from THE HINDU group of publications Tuesday, Jun 17, 2003 |
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Markets
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Derivatives Markets Columns - On the hedge Reliance: Outlook negative, short July futures B. Venkatesh
THE following strategies are based on Monday's trading at the derivatives segment on the NSE: Equity options Reliance Industries: The outlook on this stock is negative. The downside price target is Rs 275. Momentum trading may push the stock to Rs 345. Consider shorting the July futures on the stock. You will be exposed to a 35-point risk on the short futures position. You can hedge this risk with July 320 calls. This is not a cost-effective hedge, but will protect you from taking on more than 10-point risk on your position. If the stock declines to Rs 275 at the horizon, the short July futures-long calls will generate gains of Rs 14,400 per contract. If the stock rises to Rs 345, the position will lose Rs 10,200. The horizon is 19 days. The market lot is 600. Should you hold position in the spot market, do not short futures; for your upside will be capped, if the stock trades near Rs 345. The July puts are currently not traded. The available alternative at present is writing July calls against the stock. You can write (sell) the July 340 calls. You will get to keep a 5-point premium should the stock go down. Your downside protection is, of course, only 5 points. Satyam: The outlook on this stock is negative. The downside price target is Rs 165. The risk is that the stock may trade near Rs 190. Consider buying the July 170 puts. The directional risk is not very high, as the puts are currently out-of-the-money. Note, however, that the puts are currently trading rich; you may have to pay a 10-point premium (implied volatility) to buy the puts. This will naturally reduce your payoffs at the horizon. Due to low option gamma, the puts will rapidly lose if the stock does not decline at the horizon. If the stock declines to Rs 165, the July 170 puts will generate 30 per cent returns. If the stock trades near Rs 190, the position will lose 70 per cent. The payoffs will be better if the realised volatility is higher than the forecast volatility, which is considerably lower than the current implied volatility. The trading horizon is 13 days. The market lot is 1,200. You can also buy the July puts to protect your downside in the spot market.
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