Financial Daily from THE HINDU group of publications
Thursday, Aug 14, 2003
Financial Daily from THE HINDU group of publications Thursday, Aug 14, 2003 |
|
|
|
|
|
Markets
-
Derivatives Markets Columns - On the hedge Digital: Outlook negative, buy August puts B. Venkatesh
THE following strategies are based on Wednesday's trading in the derivatives segment on the NSE: Equity options Tata Motors: The outlook on this stock is positive. Note that the open position as a percentage of the market-wide limit is over 75 per cent. The upside price target is Rs 275. The downside risk level is Rs 230; the stock may see some downside in the near term. Consider buying the September 245 calls. The farther month contracts are not liquid. Based on the underlying volatility, the September 245 calls can be bought at Rs 15 per option. In fact, two contracts were traded at that price on Wednesday. The primary risk is the high theta-gamma trade-off. The calls will lose more value due to time decay than they will gain due to long gamma if the stock trades near the current level or moves down. If the stock rises to Rs 275 at the horizon, the September 245 calls will generate 118 per cent returns. If the stock declines to Rs 230, the calls will lose 69 per cent. The trading horizon is 20 days. The market lot is 3,300. Digital Global: The outlook on this stock is negative. The put-call ratios have risen sharply since last Friday, with the put-call volume ratio above one. The downside price target is Rs 430. The upside risk level is Rs 483. Consider buying the August 460 puts. Note that options on Digital are not very liquid, because of the high absolute premium and high theta-gamma trade-off. If the stock declines to Rs 430 at the horizon, the August 460 puts will generate 28 per cent returns. If the stock rises to Rs 483, the puts will lose 95 per cent. The payoff function is skewed because the forecast volatility is far lower than the current implied volatility. Besides, the option carries high time decay. The trading horizon is seven days. The market lot is 400.
Article E-Mail :: Comment :: Syndication
|
Stories in this Section |
|
The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription Group Sites: The Hindu | Business Line | The Sportstar | Frontline | The Hindu eBooks | Home |
Copyright © 2003, The
Hindu Business Line. Republication or redissemination of the contents of
this screen are expressly prohibited without the written consent of
The Hindu Business Line
|