How to trade index and stock options of December expiry?

DLF seems to be quite bearish as the real sector seems to have lost favor with the investors, inspite of property prices not dropping to a bigger extent in India as compared to the globe. But would the downtrend achieve its target in short frame of time, to give profits on investment in put options, DLF could trade at 310 and if possible dip to 260 by the year end, with a stoploss at 372, a short sell position could be initiated in this stock, if 310 is considered to be the target the risk reward ratio doesn’t justify disinvestment in DLF, the option contracts of december expiry seem to be quite expensive as the 310 PA is trading at close to 9.5 Rs, the strike price 310 is more than 11% out of the money and the premium stands at close to 3% of the Last Traded Price of the stock.

ONGC is another stock whose charts give a feeling that distribution is underway, should the stock not have bidders above the price of 1190 and generate enough sell orders to have bid prices even below 1120, the stock prices could weaken further and by the year end a bid price of 972 on the stock could find a place in the best 5 buy orders, so keeping a stoploss of 1190 the stock could be sold and the square order could be 1000 or below. The options on the underlying stock dont attract traders and as such is hugely illiquid, The December expiry contract with a strike price of 1050 which has the last traded price of 12.25 is trading at a fair value, if the downside target of 972 turns out be the Last Traded Price for the stock on any day upto 31st December, the 1050 PA could be offsetted at 80 Rs/-, close to 500% return on investment, The lot size of the contract is 225, so the total cost of investment stands at below 3000/-

NTPC just like ONGC is in a distribution phase, if the stock continuously attracts supply from the distributors so that there is no bid for the stock at a price of 209 which is just 0.5% away from the current close, or if this seems to be a quite close call, the best buy order on the stock, if it is not able to surplus 213 then the scarcity of the buyers might see an investor bidding on the stock for just above 190 or even 182 by the year end. The December expiry Put Option on the stock for the strike price of 200 was last trade at 2.5, which is a fair price if the stock opens without change on Monday, the investment of 4000 as the lot size of the contract is 1600 and can make the investor double happier as the investment could return double the initial investment if the scarcity of the bidders see the price plummet to our initial target of 192.

Options on Stocks are illiquid, hence utmost care should be taken while executing them, I am advising mostly sell as the Nifty looks to be in a distribution phase, after the initial euphoria which saw the index give more than 75% return to the investor who invested at March 2009 low which was the testing of the October 2008 low, the velocity of bullishness is decreasing although the index is making new highs after the smaller corrections of 5-12%, so the index might (if the history repeats itself) atleast correct 50% of the March 2009 to the October 2010 gains, 50% of 2500 to 5200 stands at 1350 which means investors might bid for the stocks composing the index in such a way that the Nifty Index on the trading terminal reflects the value of Nifty to be at 3850 in the coming time, The stocks composing Nifty index could not find sufficient investors bidding at higher prices and the stock market had to be closed for 1 hour in May 2004 due to the index hitting lower circuit, the lack of investors bidding saw the history repeat itself in May 2006 and January 2008, could we have one now again or in January 2010. If the investors don’t bid the stocks composing the Nifty index in such a way that Nifty trades above 4988 (or 5200 the next stoploss) then the deficiency of buyers in the stocks composing the Nifty index could see the index trade at 3850 by the year end or the first month of the next year.

Correlation between Stock Market and Currency

I had mentioned in my earlier post http://niftywhatcanhappen.blogspot.com/2009/11/stock-market-and-currency-movement.html that we would analyze how Deflation in Japan had an effect on the Japanese Currency Yen, so here it is.

The Japanese Nikkei traded at 2000 in 1971, at that time 30 Japanese Yen sufficed to buy 1 US Dollar, by 1990 the Japanese Nikkei went to trade at 40,000 but now you must be expecting that the 30 Japanese Yen invested could buy more than 1 US Dollar, contrary 158 Japanese Yen were required to buy 1 US Dollar, that means the theory that strong growth lead to strong returns on investment in stock markets which leads to strong currency are completely wrong, as when the Japanese stock market gave 2000% return on investment in the period between 1970 to 1990 for an foreign investor, the Japanese yen cut 500% from that investment, now when the Japanese Nikkei reached its life time high in 1990, the Japanese Yen too reached its lowest against the Dollar in 1990, When the Nikkei went on to trade at 15000 in 1994 i.e when it was losing more than 50% of its lifetime high, 84 Japanese Yen were enough to buy 1 US Dollar, i.e while the Nikkei was losing value, the appreciation in Japanese Yen saw to it that a foreign investor was loosing money at a smaller pace than the domestic investor, Cut to 2008 – 2009 when most of the Emerging Market Currencies are loosing there value against the US Dollar while the Stock Markets are appreciating, It is the Japanese Yen which has reached its 15 year high against the US Dollar while the Nikkei is taking drubbing.

Now let’s see the correlation between the Dow Jones with the US Dollar and Nikkei with the Yen. Dow Jones traded at close to 1000 in 1970 and by 1990 it traded at just 3000. But while the local investors in Japan can say that there Stock index gave more return on investment then their counterparts in United States (well that might also not stand true if real inflation adjusted return on investment is taken into consideration) this doesn’t stand true for the foreign investors because while in 1970 close to 70 US Dollars needed to be invested to buy 1 Japanese Nikkei (70*30 = 2000, the value of Nikkei), in 1990’s the number of US Dollars invested to buy 1 Japanese Nikkei stood at 250 (250*160 = 40,000) i.e in Dollar terms the Japanese Nikkei just appreciated 300% same as the US Dow Jones, so from an US investor perspective the return on investment which the Japanese Nikkei gave was the same as the Dow Jones in his own local markets was giving. Thus an investor doesn’t earn more money in investing in foreign assets as even if the foreign assets appreciate more than the local assets the inflation in the foreign country sees to it that the currency depreciates against the home country currency.

Time to Trade Nifty

Time to invest money (I mean invest in the dininvest) in the Nifty Put Options, once in a year or two opportunity has came, Invest your money in Nifty deep out of the money puts and wait for the market to fall, Nifty target is 3900 and it might be achieved by December end itself, if you can risk 2000 Rs buy Nifty 4200 Put at close to 35 - 40,  if you can risk 4000 Rs buy Nifty 4500 Put close to 75 - 80, both can if the target achieved settle at 300 and 600 Rs respectively which would mean a return of over 700% on ivestment. I am now busy in my trade would update later.

Intraday and Short Term Trading Calls

Bharat Heavy Electricals Limited (NSE Code – 438, Symbol – Bhel) CMP 2245 could be sold intraday with a stoploss 2258 target 2222, Bhel is also a short term sell, BHEL if it trades below 2280 could be sold for a short term target of 1922, the target could be achieved within 30 - 40 days so one can create the trade through Options also, Bhel is not a liquid stock but if the expectation of Bhel trading at 1922 is achieved the Bhel PA OPTISTK i.e Put Option with contract expiry date of 31 Dec 2009 and strike price of 2130 which has last traded price of 31 could be bought in a range of 33-36 which is a fair price if Bhel is trading in the band 2245 – 2255, The lot size for the contract is 150 so the total investment stands close to 5000/- and if the target is achieved the Put Option would be trading at 210Rs, return on investment would be 600% which is quite good. The risk in disinvesting in Bhel through Put Option is that Bhel being not an active stock in Options trade stoploss could not be executed, if you need to place any.

Reliance Communications (NSE Code – 13187, Symbol RCOM) might breakout in the either direction, if it moves up and above 183 which is quite big a resistance then it’s a buy with a short term target of 238 while if it is not able to clear the resistance of 183 in the coming 4-5 days then one can sell it for short term target of 131 and stoploss above 183, trading in RCOM through the option route is not viable idea as Options in RCOM are considerably costlier while the underlying stock is not showing that much volatility. For example RCOM Call Option with a strike price of 190 and expiry date of 31 Dec 2009 is currently trading at 5.8 Rs which means a Call option which is 10% out of money is demanding 3.5% of the Current Stock Price as a premium, on the other hand put option with an expiry date of 31 Dec 2009 and strike price of 160 Rs is trading at 4.7 Rs which is quite a high premium.

Educomp seems to be breaking down and once it moves up to trade at 805 or consolidates just below 780 in coming 2-3 days, one can sell it for a short term target of 578, Once the Stock trades close to 800 or above 780 in 2-3 days one can initiate a short position in the stock through the Options Channel, One can invest money in the Put Option PA of Educomp, The contract should be of Expiry date 31 Dec 2009 and the strike price should be 720, The fair value would be close to 7 Rs, the lot size is 375, so the investment would stand at close to 2500 Rs, if the target is achieved the Option might trade at 140 Rs i.e 20 times the investment price.

Stock Market and Currency Movement - Indian Perspective

On July 25, 1990 Sensex touched a milestone mark of 1000, 17.5 Rupees sufficed to buy 1 Dollar at that time, Sensex seemed to like to be a deer chased by the tiger i.e investors and Sensex touched the magical figure of 4000 just at the arrival of the spring i.e in March 1992, a whopping gain of 300% in over just 18 months, but contrary to the mass opinion that gains in stock markets lead to gains in currency as foreign investors would be lapping the listed equities at whatever price they get, the Indian currency Rupee depreciated against the Dollar and against every 28.37 Rupees 1 Dollar could be bought in March 1992, The Indian equity markets opened for the Foreign Investors in 1992 and celebrating the event the Sensex rallied from 2000 to 4000 from January 15, 1992 to March 30, 1992 i.e 100% within 2 months, your guess is my guess, you must be expecting that rush of the foreign investors pulled the markets and so Rupee might have appreciated against the Dollar, but contrary to our opinion while in January 1992 25.86 Rs fetched 1 Dollar, the rush of the foreign investors could not the stop the rupee from depreciating and 28.37 Rupees by an Indian Importer could purchase goods worth 1 Dollar, i.e while foreign investors were lapping Indian Equities they were hedging there positions by going short the Rupee and buying Dollars, or there were many other traders who were shorting the rupee and going long the dollar.

Stock Market and Currency Movement - Indian Perspective contd

The economic liberalization led to growth and India started having a place in the top growing countries of the world, Big time Fund Managers with billions of funds at disposal started mentioning India as one of there favorite money parking destination, again the facts about the movement of the currency don’t match the theory the analysts have on movement of currency, while India was growing the Indian currency was depreciating against the dollar and by January 2000, 43.58 Indian Rupees could fetch 1 Dollar, in the meantime Sensex which was at 4000 in 1992 could not keep the up the tempo which it had maintained in the period between 1990 -1992 and was trading at just 6k in Jan 2000, The burst of technology bubble saw the world markets sinking, and Sensex too could not hold onto the gains which it had accrued in the last 8 years and by 2003 the Sensex lost all the gains it made in the 8 years from 1992 to 2000 and was trading at 3000 i.e 25% loss in 8 years, the new money printing presses opened by Alan Greenspan (the Fed Chairperson) saw starting of a new bubble in United States, and going the theory that is US sneezes Emerging Markets catch cold, Is US Smiles the Emerging Markets should have a laugh, so the Sensex returned to its exuberant speed that it first saw in 1990 -1992 and this time it traded at 21,000 by the close of year 2007, well this rush of foreign investors who were selling the Japanese Yen and investing the money which they literally got at 0% in the high yielding but risky emerging markets, could not make the Indian currency appreciate to a level where it was when the doors of Indian equity markets were opened for Foreign Investors, well the rush of the foreign investors could only do as little favor to the Indian that now 38 Rs were required to purchase 1 Dollar i.e while the Indian Sensex returned 500% gains for the Foreign Investors who purchased in 1992, the Indian currency halved there profit by depreciating 50% in value.

In the next few posts we would see How the Chinese growth story of 10% made its impact on the Yuan, we will also have a look at how the deflation in Japan created a movement in Yen. And then we will try to analyze how the dollar is likely to move if it is going to follow history.

Is the Safe Haven called Government Bonds really so or instead eating into our investments while fooling us into believing its safeguarding our investments?

Are we robbed of our investment by investing money into the Government bonds, lets take the example of the US Government and see whether investing in Government Bonds is protecting our Capital or not (Most other Governments of the World fall in the same category, but it is the US Government which has been caught first). The US government issues Long Term Treasury bonds for common public, Foreign Investors & Sovereign Institutions, but now due to lack of demand for the huge record amounts of debt issued by the United States government, the US Federal Reserve is planning to buy more than $1 trillion in debt, which is like a taking loan by one hand and printing note by the other hand to giveback the money, means creating money out of thin air, now this money when it reaches the market it causes Inflation as I have explained in my previous post http://niftywhatcanhappen.blogspot.com/2009/11/what-drives-inflation.html

now lets see the consequence of this inflation on the lender, and how he has been fooled into believing that he is getting some return on the investment, nurturing the view that lending money to the government is the safest investment, as the government takes money from you and returns the original investment with some profits on expiry of the contract, and government is most unlikely to fail in repaying the loan, the lender falls into the trap, but the lender fails to understand the complete implications of investing money in government bonds, when the government is going to print money to repay the loan, suppose the lender is saving money to buy his dream home in a posh area, which he cant buy immediately due to shortage of cash, and doesn’t wants himself to be in debt so he saves the money instead and to get some return on investment, he invests it into the Government bonds thinking it as the most safe investment, but the government is printing money to repay the debt leading flooding the markets with paper money, increasing the cost of the lenders dream home much more than his assured return, so at the time of the expiry of the contract if the lender is getting 150 for very 100 invested the price of the dream home has rocketed and reached 300 for very 100 making it a loss of 150 Rs for the lender, so actually the dog kept to safeguard the house has stolen the beef in the house, so then where to invest money in this highly unpredictable situation where the unemployment is increasing but prices of the commodities too are increasing, the government is reporting deflation but the expenditure from the pocket is showing inflation, well you have to decide in the mind whether you expect growth to pull down the inflation, or the inflation to pull and show some inflated growth, if you feel inflation is going to win then you are better off investing in Indices via Exchange Traded Funds (ETF’s), albeit putting a stoploss somewhere round, for example Dow Jones Index has traded for most part of this decade in the range of 10K to 12K, so breaking up above 10K and maintaining it for considerable time could be considered positive while a break down below 10K should be considered negative and the Dow can then retest the March 2009 lows. An alternative investment could be buying Gold and maintain a stoploss of close to $1040, as gold has traded for a long time close to $1040 and just given a breakout above $1040, so keeping a stoploss at $1040 one can go long in Gold for an initial target of $1400, and if $1400 also broken sustainably then Gold can target $2000.

 

What drives the Inflation?

Well the answer is quite simple it’s printing of money which drives the Inflation, many already know this, but let’s illustrate

Suppose there are four People A, B, C, D in a very small town. There are four types of skilled workers in the Economy, suppose A is a Farmer in the Economy who produces agricultural products like Wheat, Rice, fruits etc. B in our hypothetical example is an Transporter who transports goods. C is an Artist who entertains people by enacting small stories, scripts, etc. D is a Mechanic who repairs vehicles, machines etc. Now suppose there is a Government in place which has issued Currencies which the people have to use while buying or selling goods, they cant reject the Government Notes, now suppose that D has found a machine which can print notes, now he becomes lazy and stops working as the printing machine suffices all his needs, he starts buying food from the farmer and pays him though the notes he has printed, when he needs entertainment he gets it from the artist and pays through the printed notes, but whenever the Transporter needs to repair his vehicles ‘D’ does not oblige and refuses to work, now lets see how the situation turns out, Farmer has a limit of producing agricultural goods, and also whenever any machines at his workplace stop functioning there is nobody round to repair them as the Mechanic refuses to work and repair the machines, so whenever any problem arises he has to use the services of Transporter to carry the machines to city for repairing, If he needs to entertain himself, needs relief from stress after rigorous work in the weekdays, he cant get it has the Mechanic with all of the printed cash he has already booked the artist for his service, Also since the Transporter cant get his vehicles repaired from the Mechanic he has to use the services of the Mechanics from the city and render them extra money as travelling allowances, to get all his vehicles repaired, increasing his cost which he passes on to the farmer whenever he needs to transport machines, All this leads to the farmer in believing that the current prevailing prices for his goods are not sufficient for him, as he has to render more money to the transporter, also he is not able to get refreshment after the rigorous work of the week, he hikes the prices of his goods, but to no avail as this is not sufficient due to the printing press of the Mechanic which renders money as and when required to get the services of his choice, but there is saying you cant fool all the people for all the time, slowly and steadily people start sensing something fishy is happening, after coming to know about the printing press they start pricing in such a manner that they might be able to beat the printing machine and all this leads to hyperinflation.

Well I have used a small example of a small town with just four Individuals, but this is what might happen when more people are involved but the price discovery would be albeit at a smaller pace. Printing Money not supported with sufficient goods money can buy lead to Inflation. User comments welcome.

Zimbabwe Not an Exception that 'Inflation drives Stock Markets'

In the previous post http://niftywhatcanhappen.blogspot.com/2009/11/what-drives-stock-market-up-growth-or.html I had mentioned that I will elaborate further on how Zimbabwe is not an exception to the contrarian theory that its inflations that drives the Markets, so here I am to put in some more facts that will prove the theory.

The Chinese Index, the Shanghai Composite was trading at close to 1500 in 1992, and the same index was languishing at 1000 in 2006, a loss of 50% after 14 yrs inspite of unbeatable GDP Growth rate of close to 10% in the same time frame, so friends has the GDP Growth pulled the Market, the answer is no. The Brazilian Index, Bovespa zoomed more than 200 times in the period between Jan 1993 to December 1994, But the Brazilian Economy was not growing at ultra super pace, infact the growth rate dropped a little from 1994 to 1995, but still the Markets gave this handsome return (one of the reason for this zooming was inflation, the other I will post later). The Mexico Economy could not surpass the GDP Growth rate that it saw in 2000 uptil now but the Mexico Stock Index IPC is trading 4 times its 2000 High, so what is driving the Mexico Index, is it the Inflation.

I will be researching further on this topic (and hope that my readers give their opinion maybe seconding me or contradicting me), also we will take a look at how the Government is creating inflation and how it might become necessary to invest in the Stock Markets if the DOW JONES index trades above 10.3K, Also I would be posting my opinion on how the US Dollar is not going to sink, while the other Currencies might sink.

GOLD might touch 1400$ as long as it stays above 1040$

What drives the Stock Market up GROWTH or INFLATION?

Most of the Fundamental Analysts say that growth drives the prices of the Stocks up, is it right? Most of those Analysts said that a drop in the prices of Crude would help the market rally but when Crude prices were tanking most of the World Markets too were tanking, when the Crude fell to 33$ the Dow Jones Industrial Average was not at its life time high, neither the Asian Market Indices like Sensex (India), HangSeng, Shanghai Composite (China) were trading close to lifetime highs but were languishing close to more than 50% down from there lifetime highs and now that the prices of World Markets have improved, the Crude too has more than doubled in price.

A small query for all my readers, do you know the Stock Markets in the World that gave most returns?

Was it Bovespa which traded at 19K in 2000, 8K in 2003 and traded at 74K in 2008 a whopping return of 900% over 5 years, or was it the Sensex which traded at 6K in 2000, 2.3K in 2003 and went on to trade at 21K in 2008 again a handsome return of 800% in 5 years, And I have not forgot the Shanghai composite which was trading at 1.2K in 2006 and went on to trade above 6K in 2008 a return of 500% in just 2 years. But dear readers it seems you have forgot Zimbabwe where the unemployment rate is close to 80%, yes dear readers you have forgot Zimbabwe

According to

http://www.zimbabwemetro.com/finance/stock-exchange/zimbabwe-stock-exchange-market-capitalisation-reaches-us203-billion/

Zimbabwean Stock Market gained 300000%,

http://www.thezimbabwetimes.com/?p=12045

Says that Most shares gained 50,000% in one day

http://www.dailyreckoning.com.au/zimbabwe-stock-market-booms/2007/06/04/

Attributes a smaller return of 12,000% over a year to the Zimbabwean Stock Markets

So friends how come a Country whose employment rate is just 20% gives such handsome returns on investments in Stock Markets, It just due to the fact that the inflation there is running hot as you all know and that the biggest note there is 1 Billion (approx) and it can purchase a loaf of bread for you.

In my next post I will elaborate how Zimbabwe is not an exception but an example of the Contrarian Theory that the Inflation drives the Stock Markets and in a post after that why the US $ would not be sinking but gaining, Till then Take Care and try to beat the INFLATION.

Nifty November Trade

Nifty closed @ 4750 at the F&O Settlement of the previous month, from that point forwards it has traded below 4750 for 4 days and closed 3 days below it, on the other hand for 5days (excluding today) it has closed above 4750, Nifty has traded in the November F&O from a low of 4538 to an high of 5012, which makes up close to 10% and normally Nifty doesn’t move more than 10-13% in a month, excluding times of high volatility when the difference between the highs and lows for the months accounts to about 30-40% of the value of the Nifty, So one can except a strong resistance close to 5020 for the Nifty in the November settlement, on the other hand the Nifty is currently trading above the 20 days simple moving average which should be considered as bullish, also all the short term averages are place above each other which too is bullish, Also there are only about to 37 days trading left in this year and normally nifty tends to close the year near about high if it has traded for most part near the high, so what to trade, it would be better to buy puts intraday near the 5012 and exit on an intraday dip of 50-70 points, or the trade could be to sell Nifty 5000 CE close to 80 and hedge it with Nifty 5200 CE close to 20 with max gains of 60 and max loss of 140 or the position could be squared of if the Nifty trades above 5052.

Where is the DOW headed now?

The Dow Jones Industrial Average after hitting a bottom just below 6.5k in March 2009 is now trading up above 10K, a whopping gain of 50% for all those who bought in at 6.5K, so what could be the next move, would it up or would it breakdown yet again, is this the correction to the major downtrend that saw the Dow Jones loose more than 55% of its value in a matter of 1 ½ year between October 2007 to March 2009 or is it just a building phase of the new bull market, Lets delve into the history and look, the DOW started its most bullish phase in 1995 at 4K’s and ended it at 12K in 2000, although the DOW managed to break past 12K in 2006 we cant call this a new bull market because it just satyed above 12k for a year and then even broke the 2002 bottom, so all in all the 2000 – 2008 could be called timewise correction for the bull market from 1980 – 2000, The Dow after cutting about 7.5k points from 14k to 6.5k has added about 3.8K points to trade at 10.3K that is it cut 50% of the fall which could be still called a correction, at the same time it reached the lower trough of the trading range of 10 -12K where it traded in 2000 – 2002, and 10 – 11 K trading range of 2004 – 2006, now this lower tough of about 10K which acted as a support that time could be the resistance this time round, so the level of 10K should be watched, also the markets don’t go down or go up in straight fashion they always tend to test the bottoms as well as the tops and for that matter the bottom at 6.5k has not been tested so could it be that the markets will break again and move down, lets keep our finger crossed and see what happens.