Date:07/05/2005 URL: http://www.thehindubusinessline.com/2005/05/07/stories/2005050701621300.htm

Back Outlook may turn negative for HPCL, Andhra Bank

B. Venkatesh

THE following strategies are based on Friday's trading in the derivative segment on the NSE:

HPCL: The May futures contract closed at 335.25. The outlook may turn negative if the May contract trades below 324.15. In the event, the downside target is 305.

Sell May futures contract if it trades below 324.15. Initiate the position with protective stop at 338. Trail the stop to control the upside risk. The margin on the futures position is approximately 17 per cent of the contract value. The minimum order size is 650 units. The open interest position is about 15 per cent of the market-wide limit.

Traders can alternatively buy May 330 puts for six points. The option could payoff 20-22 points net if the stock reaches the downside target of Rs 305. Note that setting up put spreads is not optimal because out-the-money options fetches low premium but will carry high option gamma. This means that the change in the option premium will be higher for the lower strike put than for the higher strike put. Shorting the lower strike put to construct the spread will, therefore, become gamma-negative, subjecting traders to higher risk.

Andhra Bank: The May futures contract closed at 101.30. The outlook may turn negative if the May contract trades below 98.25. The downside target is 87.

Sell May futures contract if it trades below 98.25. Initiate the position with position with protective stop at 103. Trail the stop to control the upside risk. The margin on the futures position is approximately 20 per cent of the contract value. The minimum order size per contract is 2,300 units. The open interest position is about 25 per cent of the market-wide limit.

A more conservative strategy would be to construct ratio put spread. This position can be constructed with one long May 100 puts and two short May 90 puts.

The spread can be set up for a net debit of 1.5-2 points. The spread could payoff 2-3 points net if the stock reaches the downside price target of Rs 90. Note that the position should not be allowed to run if the stock declines below Rs 90. For then, the payoffs could turn negative, as short puts will gain premium faster than the long put.

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