Nifty Strategy: Long Volatility

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!

Nifty Option strategy:

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.

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)

  

Nifty back in action !

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.

Historic Volatility Calculation

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.

Pantaloon: Technical

For the past two months Pantaloon is showing a declining trend. It is showing movements against the movement of index like Nifty. According to the technical chart below of six month period there is a resistance level created by the two peaks created. This resistance level is graphically shown with a red horizontal line at around 440-445 level. This level seems very crucial for the stock. Yesterday the price closed right at Rs. 445 and today also when the market has not shown much movement after the initial gains, pantaloon has only moved around this critical level of Rs. 440 to Rs. 445.


Click to view the Chart in Detail

Friday would be a crucial day and if the stock crosses the resistance level with good volume and closes well above Rs. 450 then technically the stock should start an upward trend and price could reach as high as Rs. 500. On contrary if the share fails to close above this level or even worse falls significantly then further correction in prices seem very likely, below Rs. 400. Earlier the stock had broken the resistance level with but soon could not hold on to the gains, the volumes have also fallen which is a negative sign. Look at the large white candle stick (bar at the end).

Dow to beat S&P

The Dow is touching new highs and so is S&P.In this rising market it is important to know if the blue chip companies are going to be better or the Mid-caps. In my opinion exports and foriegn operations of compaies is now going to matter. Given the economic conditions where dollar is constantly depreciating companies with higher proportions of income from abroad are going to benefit. Traditionally companies in the Dow make a lot of money outside the country because of their multinational operations.Historically large caps have outperformed S&P by close to 15%. But in the last few years small caps were getting more attractive. This trend is now goin to change with MNC companies of DOW reporting higher earnings from abroad incomes.So in my opinion the Dow should confrotabily beat the S&P, in future at least in earinings.

Now lets get back to Indian Stock Markets.

The heavyweight companies in india are very much dependent on exports. So with current appreciating rupee it is logical to think that their performance will get worse compared to the Mid Caps. But in Indian context, my opinion is that the large caps will outperform the Mid Caps. The reason is that Large caps like TCS which rely heavily on exports are better prepared with hedge positions to protect themselves from adverse currency movements. Majority midcaps which are also into exports don't have highly hedged positions. This means that in the end the Large Caps basically comprising of Nifty (top 50) and Sensex (top 30), could still outperform the Mid caps and Small caps.

The first part of the article was written as comment on "US Market Watch"

Nifty loosing early gains

Markets falling lower after opening close to 1% high. This is after the Nifty touching breaking the 4200 barrier (touching 4212 points) in the morning with ease. It seems like a technical reaction to the levels that are broken. If all goes well market seems to close higher that 4200 today. This would be a very optimistic rally for the markets.