Hello Readers!! I'm back and hey, the markets have not been too good off late! Good is the last word on your minds for the time being, right?? Heart breaking is more like it! Okay, okay, so I'm being over dramatic but the bitter truth is that events of the last 6 months have left most investors reeling from the awe with which the Sensex rose and then the shock and mouth-gaping horror at the fall it registered.. Now isn't that precisely the reason why I call this space "The SenseXXXational Ride" .. It's a gut-wrenching ride and not for the faint hearted, let me mind you!
Investors entering the market around August 2007 were gingery because the Sensex had crossed the 15,000 mark, the skeptics were crying foul warning anyone who cared to listen that a correction was imminent but with the FIIs pouring in funds like never before, India's growth story was shining brighter than ever. Then came a big blow --- the SEBI banned, or shall I say, limited the investments made by Participatory Notes (PNs). This sent the markets crashing but heck, was anyone using any common sense? No ways dear readers, the markets again resumed their upward climb and then came the final big blow, a below-the-belt blow -- Fears of the U.S. economy going into a recession sent the Sensex on a downfall .. A never ending nadir, it seemed!
Now why this big intro?? Well, these last 6 months can be distinctly divided into 2 phases -- The rise which was then followed by the fall!! Long-term investors and investors owning stocks need not worry, the markets will rediscover the Midas touch, albeit a bit later than what we estimated. It's the investors dealing in futures who were emboldened by the meteoric rise of the Sensex. The lure of doubling the money in a short time was ample to hook -- and suck -- both new and experienced investors into this black hole which not only drained their investments but also saddled them with huge losses!!
Now, those of you who cocked a nose at us simple investors dealing in ONLY shares, where are you people now?? Investing in futtures is risky, so why not hedge or atleast protect your downside? Atleast buy a put option on the futures -- if the markets fall, atleast your loss is defined or limited, to say.
I believe trading in options is safer than dealing in futures. I mean, if you have to dine with the Devil, then why not ensure that you got something to help you digest the food as well? Ok, that sounds like a shit Simili.. I will try to compose a better one next time!! :D
Even options are not without risk; however, I would assume that you will be more cautious after the recent experience with the markets! So, suppose, with the markets poised at the current levels, you expect the markets to rise, i.e, you are bullish on the markets making an up move.. So ideally, one should buy a Call option on Nifty futures (lot size 50) expiring in February, i.e. the current month. This basically gives you an option to buy 50 nifty futures at a predetermined price; but does anything come for free? Ha ha, no readers! You got to pay a small premium, say Rs. 150 for one Nifty future for a strike price of Rs. 5300/- .. So, the maximum loss you can suffer is the premium that you paid for the call option, i.e., Rs. 150 x 50 = Rs. 7500 .. Theoretically, I've assumed that the call option has an ending value of 0, i.e., at the time of expiry. However, in the real market, you will be able to get some value for the call option; hence, your maximum loss is capped at Rs. 7500/- .. The breakeven Nifty level for an investor is Rs. 5450 (strike price Rs. 5300 + the call premium Rs. 150) .. So as long as the Nifty stays above Rs. 5450, your call option will be in the money ..
Gosh I'm tired after writing this post; I hope to come out with a follow-up on this article and more complex derivative strategies in my next post! Hope you enjoy this post!
2 comments:
hi varun,
great to see u writing such things.
But as far as my knowledge goes there was news in the market that sensex will take a churn but when ??????
even analyst were not able to give the clear pics.
After this fall we can still determine that our market depends on the other countries. country whose GDP is growing at 8.7% still depends on other. think ????
Derivative was never a swift proposal it always contain risks even when market is on bullish side.
The decoupling theory of the markets, which had been gaining some ground recently, has now been quietly buried! If news channels are to be believed, then analysts are now talking of a recoupling theory..
I know that derivatives are risky instruments and that's why it is always better and safer to deal in shares. However, for investors wanting a taste of exotic instruments like derivatives, it is always much safer to deal in options than derivatives. Again, I wouldn't recommend short-selling of options, either.
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