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B. Venkatesh

The following strategies are based on Monday's trading at the derivatives segment on the NSE:

Equity options:

SBI: The outlook on this stock is positive. One factor that suggests as much is the sharp increase in the call implied volatility in recent times. The upside price target is Rs 415. The downside risk is Rs 365.

Consider buying the July 380 calls. The calls are just in-the-money. The directional risk is, hence, high. The position is subject to high risk because of high theta and low gamma. This means that the calls will rapidly lose value unless the stock rises to the upside price target at the horizon.

If the stock rises to Rs 415 at the horizon, the July 415 calls will generate 192 per cent returns. If the stock declines and trades near Rs 365, the calls will lose 85 per cent. The trading horizon is 16 days. The market lot is 1,000.

Tata Engg: The outlook on this stock is negative. Note that the open interest in the derivatives segment is gradually building up, and is currently above 70 per cent of the market-wide limit. The downside price target is Rs 170. The upside risk level is Rs 215.

Consider shorting the July futures on the stock. At the current level, the short futures will be subject to 15-point downside risk. You can buy the July 210 calls to hedge this risk. Note that the hedge will only provide a 3-point advantage should the stock trade near the downside risk level at the horizon; the calls will not protect the futures position from incurring losses.

If the stock declines to Rs 170 at the horizon, the short futures long calls position will generate Rs 27 per unit (3,300 units constitute a market lot). If the stock rises to Rs 215, the position will lose 12.15 per unit. The trading horizon is 25 days. The market lot is 3,300.

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