Date:09/08/2005 URL: http://www.thehindubusinessline.com/2005/08/09/stories/2005080902341500.htm

Back Outlook may turn positive for Satyam Computer

B. Venkatesh

THE following strategies are based on Monday's trading in the derivatives segment on the NSE:

Bajaj Auto: Buy August futures if it trades above 1443. The upside target is 1455-1468. Place the protective stop at 1429. The open interest position is about 10 per cent of the market-wide limit. The minimum order size is 200 units.

Ranbaxy Labs: Buy August futures if it trades above 495. The upside target is 499-501. Place the protective stop at 490. The open interest position is about 45 per cent of the market-wide limit. The minimum order size is 400 units.

Orchid Chemicals: Buy August futures if it trades above 362.50. The upside target is 366-368. Place the protective stop at 358. The open interest position is about 45 per cent of the market-wide limit. The minimum order size is 700 units.

Note that all the above-mentioned positions are intra-day trades.

If the futures price gaps up on Tuesday so as to trade 2-3 points above the recommended entry price, traders should enter the short position after the price breaks above the 5-minute high. If the futures price gaps down and then triggers the recommended entry level, the protective stop should be placed at day's low at the time the position is initiated, if that price is lower than the stop-loss level recommended above. Option-based strategies on these positions will not be optimal because the price targets are not far away from the recommended entry levels.

Position trade: Satyam Computer's August futures closed at 514.50. Buy the August contract it trades above 525. The upside target is 551-555. Initiate the position with protective stop at 507. The margin on the futures position is approximately 15 per cent of the contract value. The minimum order size is 600 units.

Traders can alternatively construct ratio call spread. This position can be initiated with one long August 520 calls and two short August 560 calls. The spread can be set up for a net debit of 7-8 points. The position would payoff 9-10 points net if the stock reaches the price target before 6 trading sessions.

Note that the payoff will be lower if the target is reached earlier. This is because the position is theta-positive, meaning that the spread benefits from time decay. The reason ratio spread has been suggested instead of bull call spread is that the former will provide better margin of safety during intermediate price declines.

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