Date:15/12/2004 URL: http://www.thehindubusinessline.com/2004/12/15/stories/2004121502681300.htm

Back Short-term outlook positive for Reliance, Dr Reddy's

B. Venkatesh

The following strategies are based on Tuesday's trading in the spot and the derivatives segment on the NSE.

Reliance Industries: The stock closed at Rs 506 in the spot market. The outlook remains weak on a longer time horizon. The stock has, however, signalled a short-term price reversal. The upside price target is Rs 524.

Buy December futures. The near-month contract trades at 4-point premium to the spot price. Initiate the position with spot-market-stop-loss at Rs 496. The position has to be traded with trailing stops, especially because the long position is bet against the broader trend. The margin on the futures position is approximately 17 per cent of the contract value. The minimum order size is 600 units.

Traders can alternatively set up ratio call spread. This position can be initiated with one long December 500 calls, one short December 520 calls and one short December 540 calls. The spread can be set up for 3 points net credit. The position will payoff 15 points if the stock reaches the upside price target is five trading sessions. Any delay in reaching the target will only aid the spread because the two short calls are theta-positive. It may be best to close the position if the stock moves above Rs 524, as the spread will then carry negative delta. On the downside, the spread would be marginally net positive if the stock moves to Rs 496.

Dr Reddy's Labs: The stock closed at Rs 819 in the spot market. The outlook appears positive. The upside price target is Rs 845.

Buy December futures. The near-month contract trades at 3-point premium to the spot market. Initiate the position with spot-market-stop-loss at Rs 809. The position has to be traded with trailing stops to control the downside risk. The margin on the futures position is approximately 17 per cent of the contract value. The minimum order size is 200 units.

Traders can alternatively construct a call butterfly spread. This position can be initiated with one long December 820 calls, two short December 840 calls and one long December 860 calls. The position can be set up for a net credit of 6 points. The total payoff would be 12 points if the stock reaches the upside price target in five trading sessions. Note that the butterfly will collapse to zero if the stock moves well below Rs 820. The maximum profit then will be premium captured on initiating the spread. It is best to close the position if the stock moves above Rs 845.

(The opinion expressed in this column is based on technical analysis. There is risk of loss in trading.)