Nifty Option Strategy

Target Achieved ! Once again !

Today Nifty was unpredictable but finally stayed below the resistance levels of 3100 after breaching the first resistance level of 2980.

Check out the old technical article on Nifty

Nifty Option Strategy

Today I just unwound the stratgey mentioned earlier in my blog: Nifty Back in Action

The analysis was about resistance level of 2980 on the Nifty. The March 3000 calls were as cheap as Rs. 5 when the strategy was posted. I was holding March calls with strike 3000 and 3050.

Today after the market was looking like not holding up the 3000 level I liquidated my position. 3000 call at Rs. 45.9 and the 3050 call at Rs. 14.3. At the end of the trading session the 3000 call had gone down to 15 rs. and the 3050 call to 8 Rs. Luckily was able to sell the 3000 call at intraday high but missed out the 23 Rs. level on the 3050 call (I had placed the limit order at 25)

  

Focus: Fed Funds Rate

Everyone in the market is expecting a cut in the target fed funds rate by Federal Reserve. This is the rate that Federal Reserve will try to achieve in the inter-bank borrowing market in US.

The futures on the t-bills can provide indicative market sentiment and expectations towards changes in future rates. The option contract on t-bills futures on C-bot (Chicago board of trade) can even provide the probability how much the market is pricing in a rate cut. Assuming there is a close relationship between fed funds rate and t bills rates.

If federal reserve cuts rates below to below 50bps then that will be the lowest rate since world war 2. Already market expectation of 75 bps cut was showing a probability of close to 90% week back, but one day before the cut has come down to 50-60%. What is more shocking that there is a 20% probability that the federal reserve will cut the Fed funds rate down to 0%. The effective federal funds rate on the futures market has fallen near zero as well -- as low as 0.0625 percent -- despite the Fed target of 1.0 percent.

Rate cuts do boost the economy, but there are times when rate cut do not really lead to economic growth, this is due to deflation (-ve inflation). During times of deflation even though the interest rates might be close to zero but real interest rates which is the difference between interest rates and inflation could end up being really high, making borrowing less attractive. At the same time there is a decline in the investments due to negative time value to money; money in future is more valuable that money now, so by just keeping money idle under the bed would generate a return!

The rate cut I believe is just a cosmetic measure to be taken by Federal Reserve even though it is occupying lot of media space. What I believe is more important are the measures to be taken by the government to boost spending and economic growth. That would be the true solution to the worst global economic period since great depression!