Earlier Posted trade of Buy-nifty-5400 call as well as put has gone in the money in just 2 days. Today with Nifty going down to 5300 the combined option premium is now 184 (44+140), just few days back the same was trading at 150. With transaction charges of 4 rs. total profit comes to 30 per lot of 50! That too for a market neutral trade!
In last two months the implied as well as realised volatility of Nifty has fallen alot.
This leads to attractive long volatility strategies like straddle.
Trade idea: Buy 5400-Nifty April Call and Buy 5400-Nifty Put. The total option premium for the trade is arround Rs. 150 (Rs. 60 + Rs. 90)
The breakeven for the trade would be nifty ending lower than 5250 or higher than 5550.
The implied volatility for both trades is arround 14% p.a. and 13.6% p.a. These levels of implied volatility look very attractive since just few months back the levels were above 30%.
Techically nifty closed today at 5366 after remaining sticky at the resistance level of 5360. Month end view of Nifty would be atleast +-200 points, inline with the long volatility trade.
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
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)
Nifty has gained back the early losses made earlier in the beginning of the month. Opening strongly today morning with close to 3% gain it is inching closer to the resistance levels seen earlier this year. 
The first resistance to be tested will be around 2980 and after breaking this level Nifty to pounce towards the next resistance level of 3100. With the global trend it seems that the Nifty will reach 3000 levels within the end of the week.
Something like the 3000 near month call (Mar) looks like an ideal trade with premiums around Rs. 4. Again expecting the market to move close to 200 pts more this week (4 days) seems too much to ask but it seems like a good bet to take given the risk is only 4 Rupees of premium.
Recently as the Federal reserve has cut the target rate to close to zero. The shot term treasury bond in US has jumped to record high levels. Govt. securities because of the backing of government assures investors that they will get their money back. Yields on these shot dated T-bill has gone very close to zero and there were cases where the value of these bonds had gone up over face value of 100. Meaning they were actually yielding negative returns.
Such surge in the govt. bond prices has created "bubble" in the government T-bill market. A security which was considered too boring compared to exotic real estate and credit linked bubbles we have had in past.
One thing is for sure that the previous bubbles were also caused due to ridiculously low interest rate targets set by Greenspan in early and mid part of this decade. What followed after the bubble was something that had impact over economies throughout the globe.
Are we going to face another bubble again stirred off by the Federal Reserve? and in which market is this new bubble going to burst? Treasury Bills? Maybe its too early to take a call, but never forget that the earlier bubbles were equally nascent and not spotted off early.
In Lyon the city council with collaboration with an advertising agency has started a public cycling program called velib, which tries to solve the problem of traffic congestions, environment and public health. The scheme is funded by JC Decaux in exchange of exclusive access to public billboards. It all started with 2,000 bikes and 200 bike stations where the users can hire the bikes for a annual rental fee of few Euros. After using the bikes they have to park them back to any of the nearby stations.
Success of this system has lead to plans of introducing a similar system in other cities. Using a prepaid card, residents can rent city bikes for free for the first half hour. And for the next half hour there is charge of 1 Euro giving incentive for people to use these bikes for short duration and return them back.
The program which started in 2005 with few thousand bikes has now grown to 20,000 bikes and 1,450 rental stations! This means that you will find one rental station within 300 meters of any point in the city.
The addvertising company which funded the project believes that the revenue they generate from addvertising space whould be higher than the costs involved in running the trasport system. The users of the rental program are happy because it offers cheap and healthy transportaion. The city addministration is happy becasue it offers an alternative to existing crowded transport system and roads and provides good pitch for election campains. This is what i would call win win situation for all parties involves.
Click to play a video on Velib
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!
Dynamic replication of option price requires a key ingredient, volatility. Often we get into arguments about using Implied market volatility, Expected volatility (could be forecast/ prediction) or just historic volatility.
I was just trying to calculate historic volatility of major currency pairs and the Indian and World indexes. At first I thought using daily closing prices would be the most logical method. But later wanted to see if there is significant difference between calculations done on closing prices vs. opening and day high and day close.
I was expecting more or less same volatility figures for different data. But to my surprise the volatility figures based on Day high were significantly less volatile across markets and benchmarks.
The effect is more pronounced in stock Indexes like NSE Nifty, BSE Sensex and foreign indexes like Nikkei 225 and the Dow Jones. This is something very counter intuitive because in the last year all indexes have gone down but still the market highs from one day to other are less volatile compared to Open and High data.
The volatility was calculated by using daily log returns for past 256 data points (roughly 1 yr with 5 market days and 5 holidays)
The Currrencies are Pound, Euro, Yen and Swedis Krona all against USD.
In the latter half of the year Rupee has weakened against the Dollar significantly. Black line in the graph is USD/INR which has appreciated from close to 40 Rs for a Dollar in April to about 50 Rs.
At the same time it is argued by some that USD has strengthened across all currencies. Implying that INR has not weakened much its just USD showing lot of strengthening. The red like shows USD index which is trade weighted index of USD against major currency pairs. This like shows performance of USD against other major currencies like Euro, Pound and Yen etc.
There is a close association in the upward movement of Dollar against Rupee and against all other major currencies (in other words the black and red lines)
With the crude oil touching $130 per barrel all of a sudden the US looking more profitable. Take the steel industry for example; the US steel industry was hit very hard by the low cost competition from China. Year over year the steel factories were shut down resulting to huge job losses. But recent import and production figures show something different. The latest one year production figures for steel in US shows a 10% increase compared to 20% decline for the steel imported form China. These numbers show how the US steel is fast replacing the Chinese steel, possibly closing down the cost arbitrage that existed between US and China.
So how is Crude oil responsible for this! Analysts believe that the Chinese competitiveness has gone down because of the increasing cost of transportation for the bulky Chinese products. The Chinese Steel manufactures have to import raw materials like the coking coal and iron ore from Brazil and Australia. The shipping rates have gone up considerably for these products. For one barrel of oil the Chinese have to spend close to $10 on shipping. And with increasing crude oil prices the transportation cost will only go up, thus the cost arbitrage will become smaller.
There are analysts who predict that a similar trend will be seen in other bulky manufactured products, like air conditioners, washing machines etc. But we have to remember that many production facilities in US have shut down due to the rise in imports. It will take some time for businesses to put up new production facilities to take advantage of this new opportunity. It is clear that rising crude oil prices will make the domestic producers in US more competitive. At the same time declining dollar is helping the US exports to gain new grounds in Europe and Asia. Could this be a revival for the US economy which has only faced trouble so far in the new millennium? Well only time can tell, anyways they have more than 990 years to change things.
Two Fortune India Index was created by using two different methods. One was by using equal weights for all the 39 companies that were selected. Click here to read more about the original Index. The second method gave weights equal to the market cap of each individual share on the particular day. In other words the second portfolio was assumed to be dynamically adjusted to have weights depending upon the market cap of the shares. 
The returns calculated was the log return for the entire period starting from beginning of year to end of October. Similarly Beta was calculated by using the daily log returns.
It was found that the returns were as high as 80% in case of equal weights compared to only 23% and 26% for Sensex and Nifty. At the same time what was more interesting was that the Beta of the Index was very low around 0.82. If Beta is taken as the measure of risk (CAPM) then the alpha, or the excess return created for the level of risk taken (beta) would be very high. 
Globally almost all asset classes are again touching new highs. Just recently few days ago there were talks of crude oil staying above the $100 per barrel mark. Gold is also heading towards its all time high of $850, last time I checked it was around $830 per ounce. India being the largest consumer of Gold in the world is the major source of the increasing demand for this metal.
The price of gold in India per 10 gram is clearly above Rs. 10,000. The market analysts earlier had predicted that the gold will not touch the 10,000 level because the consumers would move away from gold due to the high price. Infact it was speculated that the gold prices will stay below Rs. 9,700 when the prices were touching the levels of Rs. 9,300.
Another main reason for the increase in the Gold and crude oil is due to depreciation of US dollar. The dollar has weakened in terms of Euro from the June levels of 1.34 to the levels of 1.45 now.
Year on year gold as an investment in India has not done extremely well with returns below 10%. But in the last few months it has made good return of close to 25% to 30%. Infact it makes more sense to invest in the gold overseas in dollar terms particularly in order to best capture the depreciation of dollar. The Gold ETF’s that were recently started in the county were a good example of this. Gold ETF’s have gone up by almost close to 30% in the last six months.
The crude iron costs around the world are increasing. The main reason for this is the increase in the freight cost of these goods. The laded cost for the crude iron in India is around $200 per ton for the crude that is coming from Brazil and FOB is around $150. The freight costs for China is also very high reaching levels of around $180 laded cost for a ton of crude iron.
What does this high crude iron cost mean for the producers of steel? Crude iron being a significant raw material input for the steel producers would mean that the prices of steel must rise to meet the increase in the prices of crude iron. If this is not the case then the producer of steel would see a reduction in the margin that they generate.
According to Essar steel the prices of steel have not gone up significantly in the last one year but still their margins have not taken a huge hit. The prices for the crude iron have doubled but the steel prices have gone up only by around 16%. Essar is attributing the healthy margins that they are generating to the captive mines facility that they are having. This means that the captive mines that the steel companies are after does gives the companies a lot of stability in margins. No wonder why steel companies are running after the iron ores in India.
Towards Divali of every year investors expect the market to do well. It is one of those end year phenomenon which cannot be easily explained by common rationality. In fact from 1998 every single year market has gone up during Divali.
During this Divali the Investment Pundits in India have become very cautious. Ever optimistic star investor Rakesh Jhunjhunwala could be easily quoted on CNBC that the inevitable correction in the market is near. He still believes in the long term future of the Indian market, saying that we are still in the initial phase of the long term India Growth story.
The markets are showing signs of being overheated. This is clearly evident from the stocks that are doubling in very short period of time.
We have seen many level wise correction in the market in the past one year or so. That is every time the market touches a particular psychological landmark level it goes for a correction. But we are yet to see good time-wise correction, which is not necessarily level dependent. For example a correction with a bear phase that lasts for many months to a year.
The long term market gurus say that these bear phases are not something to worry about. The markets may decline to levels that might be painful for people who rely on stock markets for their income. But this would provide the investors an opportunity to purchase the shares of companies at even better valuations.
Fortune India 2007
Indian stock market has gone up by close to 30% from the beginning of the year. This upswing in the market has resulted in almost all sectors doing phenomenally well. The growth story is not just applicable to the Large caps but also to the mid caps and the small caps. In this kind of a market picking a portfolio that makes more money than the Fixed deposit rates (close to 10% per an) is not at all difficult, but beating the indexes like Nifty and Sensex would be the thing that fund managers look forward to.
Picking a basket of shares like the Sensex (top 30 shares by market cap) or Nifty (top 50 by market cap) would be the ideal thing to do. But recently I found that that in Prowess database there is a group of companies called to Fortune India list. This list has selected companies as per the fortune rankings. I thought this would be a very good method to pick the top companies in the country and as long as the stock market is doing well this index must also perform better. The companies in the list are as following:
Watchout this space for more analysis to see how sucessful is it to invest in such index.
Can u rely of reliance? This is the question many people in the Market are starting to ask. Reliance has always been the stock in limelight, starting from the days of late Dhirubhai Ambani. Then the war between the brothers and excessive marketing made reliance a household name. People started speculating on whether Mukesh Ambani controlled business would be more profitable than ADAG (Anil's Cos) of vice-versa. But it was very shocking to see both brothers doing very well, at least in the stock market.
Fortune Favors the Brave!
Both brothers have consistently featured in the Fortune Magazine list of the richest people in the world. And according to the march 07 figures Mukesh was 12th richest and brother Anil at around 17th. All this changed with the stock market bull run. Now according to times Mukesh is the Fourth richest person in the world with $ 50 billion (Sept figures) just behind Warren Buffet $ 52 billion and Bill gates $ 57 billion and Carlos Slim $ 58 Billion (Aug figures). The combined wealth of the brothers (/family) stands at $ 80 billion, making them the richest family in the world. Amazingly Both brothers achieved this feat (journey beyond $ 1 billion) in only few years after the death of legendary Dhirubhai. Now the challenge for them is to stay in the top spot for a long time, remember Amiz Premji of Wipro, he became 3rd richest and was thrown out of position shortly within months.
Bubble?
I was amazed to see six Reliance companies in the top 10 companies by turnover in the NSE site. When i probed more i found out that earlier this year only two were present in a similar list. (see the chart below or click on the links for more detail on Year ending Mar 07 ; and Sept figures).
The recent surge in Reliance is making me worried about the valuation of these companies and the overall market (bec of high weight age of Reliance in stock market). Just few days ago one of my friend was justifying R Energy's PE of 40! I just couldn't belive that this was a power company. All this makes me believe that Reliance is cooking up something. Or maybe this is just a beginning of another era! This will be the difference between :
Reliance = Rely + alliance and
Reliance = Real + lying + alliance
