Financial Daily from THE HINDU group of publications
Saturday, Aug 28, 2004
Financial Daily from THE HINDU group of publications Saturday, Aug 28, 2004 |
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Markets
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Derivatives Markets Columns - On the hedge BPCL: Outlook positive, buy September futures B. Venkatesh
THE following strategies are based on Friday's trading in the spot and the derivatives segment on the NSE: BPCL: The stock closed at Rs 356 in the spot market. The outlook appears positive. The upside price target is Rs 372. Buy September futures. The near-month contract trades on par with the spot price. Initiate the position with spot-market-stop-loss at Rs 343. The position has to be traded with trailing stop-loss to control the downside risk. The margin on the futures position is approximately 19 per cent of the contract value. The minimum order size is 550 units. Traders can construct a bull call-spread as an alternative strategy. This position can be initiated with long September 360 calls and short September 380 calls. The spread can be set up for a net debit of 7 points. The position is theta-positive. The implication is that the payoff will be better if the stock takes time to reach the upside price target. The reason is that the long call will carry low time value while the short call will gain from time decay when the stock reaches the price target. Note that the spread does not help in volatility capture but will lower the initial outlay. Shipping Corporation: The stock closed at Rs 116 in the spot market. The outlook appears negative. The downside price target is Rs 103. Sell September futures. The near-month contract trades at one-point premium to the spot price. Initiate the position with spot-market-stop-loss at Rs 120. Cautious traders can initiate the position after the stock trades below Rs 114 in the spot market. The position has to be traded with trailing stop-loss. Otherwise, the upside risk will be high, as the contract-multiplier is 1,600 units. The margin on the futures position is approximately 19 per cent of the contract value. No alternative strategies are available, as options on the stock are not actively traded. Those who hold the underlying can sell the September 120 calls against the stock. This strategy would fetch a premium of 5 points. The covered call write will suffer losses if the stock moves above Rs 125. Note that this is an income-enhancing strategy and not a hedge.
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