NSE Ticker

Tuesday, January 29, 2013

RBI cuts repo, CRR by 25 bps

The Reserve Bank of India on Tuesday cut the repo rate—the rate at which it lends to banks—and also cash reserve ratio by 25 basis points each. While the stock market cheered the move even though the cut in repo rate was on expected lines, bond market remanined lacklusture as it already factored in. The central bank also lowered its inflation forecast for the current fiscal to 6.8 percent from 7.5 percent. The simultaneous cut in both repo and CRR has surprised many economists considering RBI's cautious view in its macroeconomic report released yesterday.

A section of the market feels the central bank may have had little choice other than to cut the rate considering that the government has been doing its bit to address the fiscal deficit issue. So far, the RBI had been insisting that monetary easing would do little to stoke growth as long as the government did not manage its finances well. This time, the RBI has admitted to the government's efforts in its policy statement.

"Various measures undertaken by the Government since mid-September have significantly lifted market sentiment which, in due course, should spur investment," the RBI policy said.

At the same time, the RBI has cautioned that it will take time before the government policies actually revive growth in the economy.

Some feel the cut in policy could be also to lower borrowing costs for the government and facilitate the fiscal consolidation process by helping the government fix its balance sheet.

Many equity analysts have cautioned that banks will not be able to reduce their lending rates despite the rate cut, as deposit growth remains weak. Cutting lending rates would also necessitate cutting deposit rates, and the latter move could further alienate depositors.

And many bank chiefs had cautioned that unless there was a CRR cut as well, they would not be able to transmit the repo rate cut to their customers. So that could explain the CRR cut. But some economists point out that the CRR cut contradicts inflation management, as the RBI will now have to grapple with excess liquidity in the system. (The CRR cut will infuse around Rs 18,000 crore into the system).

By the RBI's own admission, inflation remains one of the key threats to its macroeconomic management going ahead. That is because demand pressures have begun to ease, but supply side constraints remain.

“In the absence of an effective supply response, inflationary pressures may return and persist with adverse implications for macroeconomic stability,” the RBI policy said, adding, “further moderation in domestic inflation going into 2013-14 is likely to be muted as the correction of under-pricing of administered items is still incomplete and food inflation remains elevated.”

But the biggest headache for the RBI remains the widening current account deficit. Because of the weakness in the global economy, it is unlikely that India's export growth will recover to the point where it can solve a good chunk of the CAD problem.

Foreign portfolio flows have helped bridge the CAD so far, but that is a risky strategy.

"Financing the CAD with increasingly risky and volatile flows increases the economy's vulnerability to sudden shifts in risk appetite and liquidity preference, potentially threatening macroeconomic and exchange rate stability," the RBI policy said.

And while the market is hoping the RBI move today marks the beginning of a declining interest rate environment, the key to growth will be outside the monetary policy.

"The key to stimulating growth is a vigorous and sustained revival in investment. Achieving this will, however, depend on a number of factors such as bridging the infrastructure gaps, especially in power and transport, hastening approvals, removing procedural bottlenecks, and improving governance," the RBI policy said.

Friday, January 25, 2013

UNDERSTANDING OPTION GREEKS

Option greeks

Option greeks are option sensitivity measures. They are so called because these are typically denoted by Greek letters. Since option price is a function of various factors i.e., underlying spot price, strike price, volatility, time to maturity, interest rate etc., option trader needs to know how the changes in these parameters affect the option price or option premium. Option greeks as explained below will attempt to measure the sensitivity of option price to changes in various option price determinants. One has to bear in mind that each option greek (measure) explained below will give the sensitivity of option price for change in a particular factor with all other things remaining constant. The Option greeks constitute an essential toolkit for an option trader as the greeks help option traders to understand and estimate the extent of risk while trading options.

Option Delta:
Delta is the most important of all the option greeks. Option delta represents the sensitivity of option price to small movements in the underlying price. Delta is usually expressed in percentage or decimal number and it will be between 0 and 1 for call options and between -1 and 0 for put options.

In case of put options, option price and the underlying price move inversely i.e., put option price increases if the underlying price decreases and it decreases if the underlying prices increases. Therefore put option delta is always negative while call options have positive delta. For instance, if a call option has a delta of 60% or 0.6, this means that if the underlying price increases by $1, the option price will increase by $0.60.  Similarly, when we say a put option has a delta of say -40% or -0.4, this means that if there is an increase of $1 in the underlying price, the option price will decrease by $0.40

As an in-the-money call option nears expiration date, its delta will approach 1 or 100%; Similarly, as an in-the-money put option nears expiration, its delta will approach -1 or -100%. Likewise, as an out-of-the-money option nears expiration date its delta approaches 0. At-the-money options have a delta of about 0.50 or 50% (in case of calls) or -0.50 or -50% (in case of puts)

Option Gamma:
Gamma measures the sensitivity of option delta with respect to changes in the underlying prices. Option traders need to know this because option delta does not remain constant in reality and it changes as the underlying price changes. Therefore option traders need to worry about delta sensitivity and accordingly measure gamma in order to understand and estimate the risk they are exposed to while trading options.

Deep in-the-money options and deep out-of-the-money options have relatively lower gamma.  However, at-the-money options have higher gamma and trades need to be watchful when dealing with these options.

Option Vega:
Vega (also known as kappa or zeta) measures the option price sensitivity to the changes in the underlying volatility. It represents change in the price of an option to 1% change in the underlying volatility. For example, if vega of an option is 1.5, it means that if the volatility of the underlying were to increase by 1%, then the option price will increase by $1.50.

Again vega is not constant and it changes when there are large price movements in the underlying. Also, vega decreases as the option gets closer to expiration date.

Option Theta:
Theta measures the change in the option value relative to the change in the time to maturity of the option. All other option parameters remaining constant, the option value will constantly erode with every passing day since the time value of the option diminishes as it approaches option expiration. This is also called as the time decay of option.

Theta is always negative since if other things remaining same, option value declines as it gets closer to expiration due to diminishing time value. To understand option Theta with illustration, if an option has Theta value of -0.15, it indicates that the option price will decrease by $0.15 the next day if the price of the underlying next day remains at same price as today's.

Option Rho:

Rho measures the sensitivity of option value to the changes in the risk-free interest rate. This is positive for call options (since higher the interests, the higher the call option premium) and negative for put options since higher the interest the lower the put option premium. For example, if Rho of a call option is 0.75, it indicates that if risk-free interest rate increase by 1% then the option price will increase by $0.75. Similarly, if Rho of a put option is -0.75, it means that the option price will decrease by $0.75 for a 1% increase in risk-free interest rate.

Deep in-the-money options have higher Rho since these options are most likely to be exercised and therefore the value will move in line with changes in the forward prices of the underlying asset. However, relatively speaking, when compared with other option greeks, the impact of Rho on option price is least significant.

Sunday, January 20, 2013

HOT STOCKS FOR THE WEEK


tips in stock options and stock futures



BEST TIPS IN STOCK FUTURES AND STOCK OPTIONS – JAN 2013
Date
STOCK
RATE
STOP
LOSS
TAR1
TAR2
TAR3
REMARKS
17/1
BUY NIFTY 5900 CALL
140
130
155
165

+ 1250
17/1
BUY RCOM 85 CALL
2.75
2.50
3.00
3.25

+ 1900
17/1
BUY TATASTEEL 420 CALL
7
6
8
9

+2000
17/1
BUY BHEL 230 CALL
5.50
4.50
6.50
7.50

-1000
18/1
BUY LT FUT
1558
1540
1568
1578


18/1
BUY ITC 300 CALL
2.50
1.50
3.50
4.50

+1500 29/1
18/1
BUY LIC HSG 280 CALL
7.50
6.50
8.50
9.50

+1000
18/1
BUY BHARTI 360 CALL
5.30
4.50
6
7

+1700
























































Saturday, January 19, 2013

BEST OPTION TRADING STRATEGY





































OPTION TRADING STRATEGY:

Before you begin buying options you must decide how much of your investment portfolio to risk.

Losing streaks are a fact of the game, so never put all of your capital into options. Set aside only a portion with which to speculate -- 10% of your portfolio is an ideal beginning maximum for most investors.

Your ability to manage your money will be key in your profitable options trading program.

Here's why...

Every day that passes costs you, and your option could expire worthless.

Cheaper options are usually the best plays. They give you the most leverage, the percentage returns are better, and if the market goes against you, you are risking less.

More important, you`re able to spread your capital over more positions, increasing your odds of winning.

The easiest, safest and potentially most lucrative way to profit with an option is to buy one. You simply pay your money (the premium) and wait to see if the stock does what you think it will: rise if you buy a call option, fall if you buy a put option.

If the stock price rises above the strike price specified in your call option, you win your bet. If the stock falls below the price specified in your put option, you win your bet.

If the stock does not behave the way you thought it would you lose your bet, as well as the premium you paid for your option. Don’t be dismayed by this.

Even the pros only win their bets about 20% to 30% of the time when they buy cheap options.


Our Number 1 Rule for buying options is: Only buy underpriced options.

Sticking with undervalued options gives you two advantages: First, you are risking less money when you buy a cheap option. It is much easier on the pocketbook to lose 3000 than 10000 if the option expires worthless.

Second, if the stock crosses the strike price (putting it "in the money") before your option expires, you not only win your bet but your percentage gains will be more than had you bought a more expensive option.

Price is the key to success in the options market.

When you pay too much for an option the odds are stacked against you. Finding underpriced options is simple in theory but in the real world it takes an enormous amount of work.

We have developed a computer pricing model that does this better than anyone else.

How to Maximize Profits
As important as selecting the right option to buy and paying the right price is knowing when and how to take profits. Most option buyers lose not because they take the wrong positions, but because they fail to take profits properly.

To make the biggest potential profit your first objective is to protect profits, and your second objective is to hit home runs. Most important, when your option begins to profit you must be ready to act.

First, be alert to sell your position if the stock pulls back (if you bought a call option), or rises (if you bought a put option) 5%.

And if the stock makes a sudden big move in your direction, don`t get greedy. Sell your position and pocket the money.

One other consideration: If your option is in the money goes past the strike price) and enters its last week before expiration, take profits.

Don`t wait for it to expire.

As important as taking profits is cutting losses to a minimum.

Losses are part of the game, and if you don`t take them and move on you will soon be out of the game. Cutting losses is easy -- if an option falls in value by 50% after you buy it, sell it and close your position. The harder part is convincing yourself to do it.

We can`t stress this enough -- if you do not cut your losses quickly, you will not last as an options player.

That, in a nutshell, is our fundamental trading strategy -- follow it and you`ll have your best shot at real success. It is your road map to making colossal profits with low-priced options.