Financial Daily from THE HINDU group of publications
Wednesday, Jul 23, 2003
Financial Daily from THE HINDU group of publications Wednesday, Jul 23, 2003 |
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Markets
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Derivatives Markets Columns - On the hedge HLL: Outlook positive, construct bull call spread B. Venkatesh
THE following strategies are based on Tuesday's trading in the derivatives trading on the NSE: Equity options HLL: The outlook on this stock is positive. Note that futures and calls constitute about 90 per cent of the total open interest positions on the stock's derivatives. Further, call implied-volatility has gradually increased, while the put-implied volatility has fallen in recent times. The upside price level is Rs 165. The downside risk level is Rs 140. Consider initiating July bull call-spread. This position can be constructed by buying the July 150 calls and selling the July 170 calls. This strategy captures the rich-implied volumes, and also lowers the initial outlay. If the stock rises to Rs 165 at the horizon, the spread position will generate 261 per cent returns. If the stock declines to Rs 140, the spread will lose its initial investment. The risk-return ratio is marginally better than initiating long calls position, and far better than long futures position. The trading horizon coincides with the expiration of the option contract. The market lot is 1,000. Tata Power: The outlook on this stock is negative. The put-implied volumes has been increasing in recent times, and is considerably higher than the call-implied volumes. The downside price target is Rs 132. The upside risk level is Rs 146. Consider buying the July 140 puts. The position's primary risk in the first 2-3 days is the directional risk. Thereafter, the position will be subject to high time decay as the option approaches expiration. If the stock declines to Rs 132 at the horizon, the July 140 puts will generate 102 per cent returns. If the stock rises to Rs 146, the puts will tend towards zero. The position is, therefore, risky as the risk-reward ratio is even. The trading horizon is seven days. The market lot is 1,600.
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