Financial Daily from THE HINDU group of publications
Wednesday, Jul 21, 2004
Financial Daily from THE HINDU group of publications Wednesday, Jul 21, 2004 |
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Markets
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Derivatives Markets Columns - On the hedge Outlook negative for Tata Power, Bajaj Auto B. Venkatesh
THE following strategies are based on Tuesday's trading in the spot and the derivatives segments on the NSE: Tata Power: The stock closed at Rs 254 in the spot market. The outlook appears negative. The downside price target is Rs 232. An aggressive target would be Rs 212. The recommended outlook may be negated if the stock trades above Rs 268. Sell August futures. The farther-month contract trades at 3-point premium to the spot price. Initiate the position with spot market stop-loss at Rs 263. This exposes the position to an initial upside risk of 9 points. The position has to be traded with trailing stop-loss to control this risk. The margin on the futures position is approximately 23 per cent of the contract value. The minimum order size is 800 units. An alternative strategy would be to construct a long put spread. This can be initiated with long July 250 puts and short July 230 puts. The position can be set up for a net debit of 4.50 points. The spread helps in volatility capture, as also in lowering the initial outlay. The position will generate profits if the stock declines to the downside price target of Rs 232 even on option expiration. This is because the long put will be deep in-the-money if the stock reaches the price target. Bajaj Auto: The stock closed at Rs 832 in the spot market. The outlook appears negative. The downside price target is Rs 810. An aggressive price target would be Rs 795. Sell August futures. The farther month contract trades at 2-point premium to the spot price. Initiate the position with spot market stop-loss at Rs 860. 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 400 units. No alternative strategies are available, as options on the stock are not actively traded.
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