Date:20/03/2004 URL: http://www.thehindubusinessline.com/2004/03/20/stories/2004032001971300.htm

Back HDFC Bank: Outlook negative, short March futures

B. Venkatesh

THE following strategies are based on Friday's trading in the spot and the derivatives segments on the NSE:

M&M: The stock closed at Rs 449 in the spot market. The outlook appears negative. The downside price target is Rs 432.

Consider shorting the March futures on the stock. The near-month contract trades on par with the spot price. Initiate the position with spot-market-stop-loss at Rs 460. This exposes the position to 11-point upside risk.

This risk cannot be cost-effectively hedged with options. The position has to be traded with trailing stop-loss to control for upside risk.

The margin on the short futures position is approximately 20 per cent of the contract value. The open interest position as a percentage of the market-wide limit is about 40 per cent. The minimum order size is 625 units.

The alternative strategy of buying puts might not be optimal. The March 440 puts, which is the cheapest in terms of implied volatility, will generate profits only if the stock closes below Rs 436 on March 25.

HDFC Bank: The stock closed at Rs 354 in the spot market. The outlook appears negative.

The downside price target is Rs 334.

Consider shorting the March futures on the stock. The near-month contract trades on par with the spot price. The farther-month contract trades at 9-point premium to the near-month contract. Initiate the position with spot-market-stop-loss at Rs 365. This exposes the position 11-point upside risk. This risk cannot be hedged because call options on the stock are trading rich. The position has to be traded with trailing stop-loss.

The margin on the short futures position is approximately 15 per cent of the contract value. The minimum order size is 800 units.

The alternative strategy of buying puts is not available because options on the stock are not actively traded.