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Wednesday, May 13, 2009

Futures Options Trading Strategy Ahead Of Election Results

The eagerly eyed US stress test results came in line with the Street’s expectations and did not have any negative surprises. This has proved to be a positive for the stock markets across the globe. On the whole, the global equity markets may see further upside in the near term.

However, for the Indian markets, uncertainty over the parliamentary elections is a major cause of concern from a very short term point of view, except if the Third Front comes in power. The Indian stock market is passing through tremendous pressure in the form of election results, which will be announced on May 16.

Karvy Stock Broking advises players to use derivatives tools to avoid loosing from high volatility. “Long-term investors with holdings in cash markets can use put options to partially hedge their portfolios for a limited period and remove the hedge once clarity emerges about the new government and its policies. Also, investors can buy call options which would enable them to participate in the rally, but limit the downside to a great extent,” the brokerage advises.

“Overall, the Nifty is likely to be highly volatile within the broad range of 3500-3800-4000 levels during the week. Long positions can be assumed in the stock from energy, metals, construction, capital goods and BFSI sectors from lower levels. Short positions can be assumed in telecom, software and cement sectors,” said a report of Karvy Stock broking.

Derivatives strategy:

Reliance:
Buy one lot of Reliance May futures at Rs 1898-1902 and buy one lot of May Rs 1890 put price 78-82; Break even point: Rs 1980; timeframe: 8-10 days.

The positive developments like the commencement of production of oil & gas from the KG basin and signing the gas supply agreements have boosted the positive developments for the stock. The waning economic recession has triggered an increase in demand for petroleum products across the globe and led to sharp rise in crude oil prices which is a positive development for the company in the near term.

In the F&O segment, the stock open interest increased marginally to 67.14 lakh shares in the near month. Call options open interest has increased to 15 lakh shares, whereas put options open interest has increased to 9.15 lakh shares. Overall, the stock is likely to trade on a moderately bullish note in the next few trading sessions, but the downsides should be protected considering the volatility in the markets. Hence, we recommend a protective put strategy in this scenario.

Tata Steel
Buy one lot of Tata Steel May futures at Rs 280-284 & buy one lot of May Rs 280 at put price18-22; Break even point: Rs 300; timeframe: 6-8 days.

The stock witnessed heavy buying interest on expectations of a rebound in demand for metals amid signs of easing economic recession. Anticipating higher demand for base metals on the back of rising metal prices has led to a sharp rally in domestic metal stocks.

In the F&O segment, the near-month open interest has decreased marginally to 1.27 crore shares. Call options’ open interest has increased to 50 lakh shares, whereas the open interest of put options has increased to 32.82 lakh shares. Overall, the stock is likely to trade on a bullish note for the next few trading sessions. Hence, we recommend a protective-put strategy in this scenario.
Source: EconomicTimes

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