Market Calls

Karur Vysya Bank – Quicker Analysis

Rajandran R — Mon, 06 Sep 2010 14:18:36 PDT

Mr.Senthil One of the regular reader of marketcalls requested to have a look on KVB(Karur Vysha Bank). And from the charts the stock had a very steeper run in last one month and had done nearly about 35% and a whooping 4 times gain since March 2009. Two things we could notice from the chart

1)15 day ATR(Average True range) is at 52 week high which indicates stock is highly volatile
2)Unusual Volume activity along with the surge last week… which indicates that the stock could be in the Euphoria Phase.

Also there is a huge gap between the stock price and the cloud as shown which indicates reversion to mean is possible in near term towards 700 zone. Its better to stay away from Buy and Hold kind of strategy

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Rajandran R — Mon, 06 Sep 2010 13:47:46 PDT

NMA turns green finally after crossing the 5512 market after a heavy surge in nifty which turns nifty from sell mode to buy mode. And the current trailing stop loss comes near 5406

STRADDLES ARE STRANGLES – Lies, Lies and Damn Lies -9

Rajandran R — Sat, 04 Sep 2010 06:08:06 PDT

Previous Post : HERE ARE OPTIONS FOR HOLDERS OF ASSETS TOO – Lies, Lies and Damn Lies -8

STRADDLES ARE STRANGLES
Sellers of naked calls face unlimited loses if the price of asset they sold goes up. For example if a speculator sells 1000 MSFT calls at strike 25 for a premium of $2, his loses starts when MSFT closes above 27 on expiration date. For every dollar rise in price above27 he loses $1000. Similarly if a speculator sells 1000 MSFT puts at strike 25 for a premium of $2 his losses will start when MSFT closes below 23 on expiration date. Every dollar fall below 23 will cost him $1000.

Suppose our speculator sells 1000MSFT calls and puts together at strike 25, he gets $4 as premium. Now his loses start at 29 on higher end and at 21 on lower end. It is easy to see that his risk is now reduced. Thus selling a call and put at the same on the same strike price will actually reduce the risk. Therefore exchange will ask for lesser margin when a speculator does it. This strategy is called short straddle. A lot of speculators execute this strategy because of its many attractions.

It has less risk
It requires less margins
The speculator receives$4 premium free if MSFT closes at 25 on expiration date.
There are no losses if MSFT closes between 21 and 29.

It is this wide protection that makes speculators go easy on this strategy. When volatility is low this strategy might work very well and speculators will have a field day executing it. However when prices move violently due to unknown reasons, this strategy fails miserably and causing big losses to speculators. Here the losses are unlimited below 21 and above 29. All speculators should always be careful not execute any strategy that has unlimited risk even when the chances of an event precipitating it is very low. It is always true that all those execute this strategy will be strangled once at least in their lives.

There is another equally foolish strategy called long straddle. As the name suggests it is the reverse of short straddle. Here the speculator expects the share prices to move either up or down widely due to some price sensitive news. For example the failure of a merger between two big companies can produce violent gyrations in their prices. It is quite an expensive strategy and its failure will cost the speculator a lot of money.
For example some news is expected on MSFT, say court verdict. If the verdict is adverse share price can crash. If it is in favour price may shoot up. A speculator buying a put and call at strike 25 pays $4. It is quite risky to take chance like that. But once in a while it works. But once in a while is not always. A good strategy is that one works always. Therefore long straddle is not a good strategy.

There are many strategies like the above that are very dangerous. One such strategy is a modification of short straddle. However this is executed using a futures contract and two calls. Suppose a speculator sells two calls at 25strike on MSFT receiving $4 as total premium and buys a futures contract at 25. This strategy produces losses when MSFT moves over 29 or goes below 21 on the expiry date. This has the same risk profile of a short straddle and hence should be avoided.

The strategy above can be executed by using puts too. Here the speculators sells 2 puts on MSFT at 25 receiving $4 as premium and sells a contract of futures at 25. Here also losses come when MSFT falls below 21 and above 29. Thus all these have the same risk profiles that make them quite dangerous when markets go up or down widely. As everybody knows volatility appears without any warning and those have the habit of executing strategies like short straddles will be caught unawares of and lose all their profits and capital at one go.

The point is that in stock markets if something can go wrong it will go wrong. It is only a matter of time that one gets caught in the tsunami. A good strategist always distances himself from potential ruin whatever thin chances that have. However advisors and analysts have no such compulsions when they suggest all sorts of strategies. Accountability is not a word in their Dictionary

STRAGLES ARE BETTER THAN STRADDLES
Straddles are very risky strategies while strangles are a bit less risky. Returns from strangles are also lesser. In our example of short straddle MSFT calls and puts at 25strike price were sold receiving $4 premium. MSFT was trading at $25 when such a strategy was executed. In the case of short strangle the speculators sells out of the money calls and puts. Here a speculator sells 21 strike price puts and 29 strike price calls instead of 25 strike call and put. His receipt is now $1.0 (0.5+0.5). Here his loses will start only when MST falls below 20 or MSFT closes above 30 on the expiration date. It can be seen that short strangle is lesser risky. But one should note that MSFT was trading at $25 when this strategy was executed. The contract period was one month with say 22 trading days. Expecting MSFT falling $5 is not be expected normally. In fact it is a 5/20*100=25% fall. Therefore loses in this strategy normally do not occur. However his profit is only $1 and for 10 contracts on MSFT he gets a maximum of $1000. What happens when abnormal things happen?

A 50% fall can wipe his capital out easily. Amateurs will say that is impossible. Well that is a foolish belief that comes out of immaturity and lack of experience. It comes many times in ones life time. Capital once gone is not going to come back unless one can print notes like the US Government. Therefore short strangle is another strategy that create dangerous out comes for those listen to brokers and derivative strategists.
Long strangle is a strategy that works well when wide variations in prices are expected. A typical example can be illustrated from India. India’s premier stock Exchange is the National Stock Exchange of India (NSE) and its index is called S&P CNX NIFTY. Election results of India were supposed to come out on a Saturday and NIFTY closed at 3683 on Friday. Till that time left parties were playing the Old Man of the Sea preventing the previous Government doing anything sensible. A hung parliament was expected after the results. No one has any idea about the out come of the results. Many smart speculators bought 3200 puts and 4000 calls paying small premiums totalling Rs40. The results were totally unexpected. Left parties were annihilated and the previous Government got a mandate to rule independently without the help of left parties. NIFTY on Monday after elections opened above 4300 levels and went for a sealing.

Every one who bought 3200 puts and 4000 calls got more than Rs260 profit per NIFTY on that day. It was like a lottery for the smart speculators. Thus buying far out of the money calls and puts on occasions like that may produce windfall gains. Such occasions like that comes once in a lifetime. Proclaiming such strategies as fool proof is beyond reason and speculator will lose in nine out of ten occasions when such wide movements do not occur.
Thus short strangles and long strangles have some minor advantages when compared straddles. But that does not qualify them as good strategies. Short straddles and short strangles are good when volatility is low. Long straddles and long strangles are good when volatility is high. But high implied volatility is appears all on a sudden with no advance knowledge. It comes as the out come of some specific news about a share or markets as a whole. In every market big gyrations appear once in a while and those who have positions at the wrong end usually end up bankrupt. But those who execute long strangles and long straddles may get some windfalls once in a while. But the cost of executing them in failed cases will be much more than what they gain in cases of success.

Therefore executing strategies like these is not advised.

THE END OF THE TUNNEL
The search for a strategy that works under all conditions of volatility has led us to the analysis of almost all text book strategies. Except for two strategies namely covered call and covered put strategies, all are found to have serious risks under high implied volatility conditions. As has been repeatedly emphasised, high volatility destroys speculators who are at the wrong end and those who execute strategies that have any chance of big losses will come across then inevitably at some point of time.

Therefore a perfect strategy must overcome big losses under any volatility conditions. In addition it should have high profit/loss ratio. The probability of profits must also be high.

There are four strategies that qualify for the above conditions. These are also text book strategies. All text books describe them as best for conditions where volatility is low. In the over all pay off analysis also they would look to be perfect under low volatility conditions. As these are complicated strategies ordinary speculators never attempt them. Therefore they are not well known and are seldom used. I will explain each of these strategies with examples and show how much risk is involved in executing them

1 Short Iron Condor
Short iron butterfly is a textbook strategy and is considered to be a very safe strategy and usually executed by experts in option strategies. However I will show that this strategy is not that safe when high volatility occurs in the markets.
A condor is a South American Vulture with a very wide wingspan. This strategy is executed with out of the money calls and puts. Suppose a speculator sells 27strike price MSFT at a premium of $1 and buys 30strike price call at 0.40. For 10 contracts he will get a profit of $600 if MSFT remains below $27 on the date of expiration. His losses will be $2400 if MSFT closes above $30. This is a short strangle with calls.
Suppose the speculator sells10 contracts of MSFT at 23strike price puts at $1 and buys 10 contracts at strike 20 puts at $0.40. His maximum profit is $600 when MSFT closes above 23 on expiration. His maximum loss is $2400 when MSFT closes below $20 on expiration date. This is a short strangle with puts.

Suppose the speculator executes both the strategies together. When he executes these together he is hedging the upsides and downsides by buying calls at 30 strike price and puts at $20 strike price. He is in receipt of $2 from calls sold at 27 strike and puts sold at $23. He loses $0.8 for the calls bought at strike $30 and puts bought at strike 20. Therefore he has a net receipt of $1.2 per MSFT. Therefore this spread is a credit spread and requires margin.The calls bought at strike price 30 will take the responsibility of the calls short at strike 27. If MSFT moves over $30, call premiums of 27 strike calls and call premiums of 30 strike calls will move up. However their rates of increase will not be equal because 27strike call is ITM (In The Money) where 30 call is only ATM. Former has a delta of 1 and latter has a delta of 0.50. But on the closing date of options closing price in the spot market is taken for the closure of futures and options in the derivative markets. If MSFT closed at 35 on the date of expiration, call at 27strike price will result in a loss of $8 and call at 30 strike price will produce a profit of 5. Put at strike 23 and 20 will expire worthless because MSFT closed above 23. Now this will result in a net loss of $3. But he has received a net premium of $0.6 from the call sold at 27strike and another $0.6 from the put sold at 23strike. Hence maximum loss from this strategy is 1.8 per share.

Now his maximum profit is $1200. This occurs when MSFT closes in between $23 and $27 on expiration date. His maximum loss is now $1800. It can be seen that profit has doubled to $1200 and loses reduced to $1800. Thus combining these two strategies has increased his profitability and reduced his losses. His loses start when MSFT closes above$28.2. Similarly his loses start when MSFT closes below $21.80. This is quite a big spread. It can be seen that profit/loss = 0.67. Also probability of profit is very high. But abnormal circumstances some times occur and then there will be big losses.

Major difficulty with this strategy is that the trader should hold the positions till expiry to get profits. Holding positions for longer times invite more risk and chance of loses is higher. It should be noted that all the options involved are far out of the money and their sensitivity to changes in spot prices is not much. In short the deltas of all options are very low. Therefore normal changes in spot prices have not much influence in the prices of options except changes due to time value. As the deltas are low, loss in time values affects all options almost equally. Therefore closing the positions with profit before expiration is difficult.

As there are calls bought to hedge the calls sold at 27 strike price, no spikes in prices in spot market will cause big losses to the speculator. Similarly there are puts bought at strike 20 to hedge against puts sold at 23 strike price, no big fall in MSFT prices can cause any big damage to the speculator. The maximum loses are already fixed.

There is a possibility of reducing the spread to say 27-29 on the upper side and 23-21 on the lower side. Instead 28-30 spread at higher end and 22-20 spread at lower end can also be tried. However, these may reduce loses. But the probability of profit will come down too.
Therefore, short iron condor is not considered a good strategy.

To be continued

CYRIAC J. KANDATHIL, Chief adviser, www.AssuredGain.com

The Silent Killers : Off Topic

vidhyaa — Sat, 04 Sep 2010 03:50:53 PDT

For all sea food lovers, there could not be a better dish than the fish curry cooked in mud pot.

But where to go for a mud pot now. Everything has become revolutionized and we live in the Hi-Tech era. One of the biggest achievement of the modern chemistry is the invention of plastics. From the feeding bottle that the mother uses to feed her child to the day you leave the world, every human being born is bound to plastic in one way or the other. Plastics more dreadful than useful. Hazards of using plastics goes far more than the imagination of anyone.

A few weeks backs, got a mail regarding these silent killers.

In ancient India, we have heard of rishis living for centuries. There is no point in bragging about the past but still amma always says, “we compare ourselves with the past and take up the good things.” I am no saint to preach everyone to meditate in the woods. But still there are a few things we could do and a fewer things we could avoid to live heathy -

1. Use as many as fine quality glass or metal crockery sets. Glass/metal utensils to cook and serve food, metal water bottles and metal/glass plates.

2. Use metal pots to store water, metal buckets or *andaas and metal mugs. * An andaa is a small metal drum with a wide mouth used to store water.

3. Avoid buying mineral water bottles as and when you travel. Instead, carry metal water bottles with the flavour of water you like.

4. Last but never the least, grow plants in all the plastic water bottles.

I found my water bottle having <1> grade plastic and I have disposed. Now I use a metal water bottle and a glass plate. Of course they are quite costly but I am okay at the cost of my life.

I will feel a mission accomplished if atleast one of you reading this blog would replace your life style to the above three pointers. Hoping to hear from all you guyz!!!!!!!

Parallel reading for the interested:

http://www.reuters.com/article/idUSLF18683220080916
http://www.mindfully.org/Plastic/Plasticizers/Out-Of-Diet-PG5nov03.htm

Extract from : GoGreenGuys
Author : Vidhya

Classical Price Breakout in Megasoft

Rajandran R — Sat, 04 Sep 2010 03:08:47 PDT

There is a classical price breakout in Megasoft software where the price has been close above the resisted line near Rs33.2 for many number of times in the last one year. And also RSI(100) is increasing and currently above 56.65 Possibly steeper trend with higer prices could come faster. Interestingly stock is also at 52 Week High

Buy and Hold could be a worst Strategy though…..
Instead its better to watch out on the perspective on short term

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E-Toro – Online Forex trading Possible in India?

Rajandran R — Thu, 02 Sep 2010 13:42:29 PDT

Last Night iam searching for the possibility of opening a Online Forex account. I enquired with E-Toro on their 24×7 online chatting platform about opening online trading in Forex, Commodities and World Indices.It seems that forex,commodities and World Indices Trading are possible in realtime. But the problem is they are not getting any Valid Identification proof to trade in their platform.

Below is the chat history with E-Toro online Support

Eugene: Welcome to eToro support ! How can I help you today?

Rajandran: Hi Eugene! Iam from India and I would like to know the process of opening the Fx account

Eugene: The link below will help you open a Real account, please follow the steps described:

Eugene: http://www.etoro.com/retailfx/real-account.aspx

Rajandran: So i can trade in Forex after Installing the Software?

Eugene: yes

Rajandran: What is the minimum fund requirement to trade?

Eugene: The minimum deposit amount is $50. eToro offers the following methods for funding the real accounts: Credit Card (Visa, Master Card and Diners Club, AMEX*), PayPal, Neteller, MoneyBookers, WebMoney.

Eugene: *AMEX can be used either directly via MoneyBookers (no MB account necessary. ), or by opening a PayPal account (subjected to their own terms) Please note – via MB there is no support for AUD deposits.

Eugene: We also offer you to fund your account via Western Union, MoneyGram and Wire Transfer with a minimum deposit of $500. You can find all necessary information about funding your account on the following link:

Eugene: http://www.etoro.com/retailfx/funding-account.aspx

Rajandran: Does Opening an account requires any Identification Proof or any other supporting documents?

Eugene: No

Rajandran: So If Iam a paypal account holder and if iam trying to withdraw my money from etoro account…. How long it takes?

Eugene: 5 business days

Rajandran: What does the software contains? Does it supports technical realtime Charts?

Eugene: it does have charts

Eugene: The link below will allow you to download the platform and to start with the eToro trading.

Eugene: http://www.etoro.com/download.aspx

Rajandran: Where to find out the brokerage details?

Eugene: www.retailfx.com

Rajandran: Is there anyAccount Suspension Policy?

Eugene: it’s a very general question

Eugene: can you be a bit more specific>

Eugene: ?

Rajandran: I mean is there any minimum margin need to be maintained in the account….? And what happens to my account if iam not trading for months?

Rajandran: will my account got banned?

Eugene: no

Eugene: and no

Rajandran: Oh Thanks! Is the software Highly Secure while transaction?

Rajandran: And where to find the list of financial Instruments that i can trade and the margin requirement details?

Rajandran: Will i get my transaction details via postal?

Eugene: You can address our website for information regarding how to start with eToro’s trading platform

Eugene: http://www.etoro.com/getting-started/your-first-trade.aspx

Eugene: If you have any further questions – please do not hesitate to contact us again and we will be happy to asisst you.

Will there be any legal issues? Kindly present your views if you have any trading experience with E-Toro.

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Yahoo Finance Chart Feed Stock Widget

Rajandran R — Thu, 02 Sep 2010 10:38:47 PDT

Here is a simple Yahoo Finance Chart Feed Widget for Nifty Stocks built using Yahoo Pipes. This widget simply automatically scrolls on the intraday yahoo finance charts of the Nifty 50 Stocks. I had added 6 Charts from Nifty 50 Pack to the Widget(ACC.NS,DLF.NS,RELIANCE.NS,RPOWER.NS,GAIL.NS,ICICIBANK.NS). If you would like to configure your own Yahoo Pipe Charting feed or to add more stocks to the widget try out the link. Sock Symbols used should be Yahoo Finance Ticker Symbols.

New to Y! Pipes. Do you want to know what Yahoo Pipes is all about then follow the below video to know more.Yahoo Pipes are not scary . If you are very new to Yahoo Pipe just Clone a pipe, substitute your own variables, Thats it you are in business.

Learn How to Build a Pipe in Just a Few Minutes @ Yahoo! Video

NMA Chart Update

Rajandran R — Wed, 01 Sep 2010 22:04:54 PDT

NMA Charts turn to sell mode on 30 Aug 2010 and still holding the sell signal with EOD Stop loss of 5512

HERE ARE OPTIONS FOR HOLDERS OF ASSETS TOO – Lies, Lies and Damn Lies -8

Rajandran R — Tue, 31 Aug 2010 06:47:12 PDT

Previous Post : Selling Call Options- Lies, Lies and Damn Lies -7

A call option is a right to buy assets at a future date. Therefore they are for potential investors. It is quite natural that there exist options for holders of assets too. All those who have bought assets for investment fear that the prices of their asset might fall in future. This fear is true and there are options to reduce this risk also. Consider an investor who has bought 1000MSFT at $25. He wants to get some protection if price of MSFT falls in future. In the derivative markets there are traders who will take this risk for a price. As the price demanded by the seller is related to his risk, amount received by the seller is in the form of a premium. The seller of this option gives the buyer a right to sell his asset at his stipulated strike price if the price of the asset falls below that contract price. In effect buyer of this option gets a right to put his shares on the seller of this option if the price falls below the strike price at which option is written. Therefore such options are called put options. Put options are derivatives because they derive their value from some other asset. In our example the asset is MSFT.

When a put option is sold the seller takes some big risks. If the price of the asset falls below the strike price on the expiration date, he will be forced to take it at the contracted price. This will result in big losses as he purchases an asset that has fallen considerably from the contracted price. Therefore seller of put options will assess his risks well and estimate the likely losses before he attempts to write a put option.

The choice of the strike price is also with the buyer of the put option. If MSFT is trading at $25 in the spot markets, many strike prices above and below 25 will be provided by the exchanges. For example our investor can buy put options at 24strike price. As the asset is trading at 25, writer of a put option at 24 has less risk writing this contract. If the investor chooses a strike price 26 the writer of the put option takes more risks because the asset is trading one dollar above the strike price. This results in more premiums.

Therefore premium of a put is related to variables like spot price, strike price, interest rates and time to expiration. Option at strike price at 25 is called ATM (At The Money). All options above 25 are called OTM (Out of The Money). Put options below 25 are called ITM (In The Money).

Put options are meant to reduce risks to holders of assets. When put options are bought by investors of assets, they transfer the risk to sellers for a fee. Most of the writers of put options are speculators. They estimate the probable level to which the asset price may fall and sell puts below that. If the asset price remains as per their expectations they get their premiums free. This is easy money. Even far out of the money put options would have some premiums. Astute option sellers write such puts every month and get interest on the money they pay to exchange as margins. This is very lucrative as long as it works. However all the profits and their capital will vanish when the share price plunges sharply. This happens at least once or twice in ones life. As the consequences are deadly writing even far out of naked puts is very risky.

Similarly speculators buy puts assuming that asset prices will fall. Here they are taking a direction to the markets. It should be noted that there are speculative buyers and sellers of puts and they can not be right at the same time. If a speculator buys puts and market goes up he loses the premium he paid. If this is repeated many times he will lose all his capital. Thus buying puts as a speculative activity is also very foolish. However brokers and advisers generally publish their achievements in taking directional calls with no accountability. Poor investors and traders naturally fall for these claims.
However, selling put options can be utilised by investors to buy their stocks at very low prices with no risk. This strategy is popularly known as covered put strategy. Suppose an investor wants buy 1000 MSFT. MSFT is trading at $25 in the spot market at that time. The investor wants to buy MSFT at a price of $23. He has money in the bank. He has two options. He can wait for MSFT to come down to 23 and buy it then and there. He may have to wait many months to get it at that price. Instead of that he could sell put options on MSFT at strike$23 getting a premium of $1. If MSFT does not close below $23 the investor gets $1 premium free. Writing of puts at $23 can be undertaken every month till MSFT closes below$23. Suppose it took ten months for MSFT to close below$ 23. By this time he would have received $10 as premium free. Then the cost of his MSFT would have fallen to $23-$10=$13. This is a highly attractive price. Had he not written puts at $23 strike price his MSFT would have cost him $23 after ten months. There is no risk in this trade because the investor is ready to buy the asset and has the funds for that. He could also have selected his price at $21 and wrote puts at strike 21. However the premium on strike$ 21 would have been very less. This strategy can be used to generate interest on margins by investors on idle money in the bank.

HEDGING STRATEGIES BY PUTS

Speculators buying puts and selling puts are usually losers because they assume a direction to the market. This assumption has only 50% chance of being correct. However there are methods to reduce the losses by using puts in such cases also. Suppose a speculator sells 1000 puts on MSFT at srike25 at a premium of $2 when its spot rate was $25. His losses can be substantial if MSFT falls considerably. Therefore he will be asked to pay a big sum as margin by the exchange. However his potential losses can be reduced and margins too brought to very small amounts by hedging his sold puts by buying puts at a lower strike price. For example the trader can buy 23 strike price puts at a premium of $1.when a speculator does this, the puts bought will take care of what ever fall MSFT makes after 23. He already has a receipt of $2 from the sale of put options. Therefore his maximum loss is now reduced to $1000 paid for the put at strike price23. Therefore his margin will also be reduced to $1000. Here the speculator assumes an upward direction to the share price. Hence this strategy is called a bull spread by puts. His maximum profit is now reduced from $2000 to$1000. It will be seen that risk reward ratio is below 1 in all such hedging strategies. Probability of getting some profit also is less than 50% in such strategies. Therefore this is not a good strategy.

In the case of speculator buying puts he will lose his premium if share remains above the strike price. He expects the share price to fall. By selling puts at a higher strike price he can reduce his losses if share price remain above his strike price. Suppose a speculator bought 1000MSFT puts at strike price 25 paying $2. His maximum loss is $2000 and occurs when MSFT remains at 25 or above 25 on expiration. This loss could be reduced by selling 1000 MSFT puts at 27 strike price receiving a premium of $1. If MSFT closes above 25 on expiration date the speculator losses $2000-$1000=$1000 from his position. By selling the puts he reduced his losses to $1000. Here also risk reward ratio is less than one and probability of profit is below0.50. Therefore this strategy is also not advised. As speculator expects the share price to fall this is called bear spread using puts.

Most speculators are quite reckless and never think of the consequences of their trading methods. Most of the them believe strongly in Technical Analysis. Some may have charting software also. Their blind faith in Technical Analysis might lead them to ruin on many occasions. These speculators buy futures in indices and single stock assuming a direction based on Technical analysis. Since trading in futures is very risky puts can be used to reduce risks in their positions. Suppose a speculator is long on 10 contracts of SPY futures at 110. If SPY goes down he loses money. There is no limit to his losses. However his losses can be reduced by buying puts on SPY. There are puts at 110 available on SPY. Suppose SPY puts at 110 strike is available at $3. If he buys 10 SPY put contracts at strike price 110 he pays $3000. If SPY goes down below 107, all loses below that will be taken up by the puts. Thus buying puts at 110 strike converted his unlimited losses to a loss of $3000. As he is long in SPY, he gets unlimited profits if SPY goes up considerably. Thus spending $3000 provides him a certain amount of insurance.

Similarly many speculators sell futures contracts based on Technical Analysis. These people also face unlimited losses if asset prices move up considerably. Suppose a speculator has shorted 10 contracts(1000) on SPY at 110. He gets unlimited profits if SPY falls considerably. He faces unlimited loses if SPY moves against him. Here the speculator can sell 10 contracts of SPY puts at strike 110 receiving$3as premium. If SPY moves up above 110 he is protected up to 113 by these puts.

There is a strategy called ratio put spread which is a modification of bull spread using puts. Here the speculator expects a limited downward direction to the market. He buys an out of the money put and sells twice or thrice the number of far out of the money puts. Suppose MSFT is trading at $25. He buys a 10 put contracts at 23 strike paying $0.75. He also sells 20 put contracts on MSFT at 21 receiving $0.5 per put as premium. Here his receipts are $1000 and payments are $750. If SPY goes up above 23 he gets $250 as profit. If SPY goes down he gets his maximum profit at 21. He receives a profit of $1250 from his 23 put and $1000 from his 21 puts. His loses start at 18.75. This strategy may look very safe as losses start only far below the current price. However the losses can be considerable if MSFT falls below 18.75. These unusual happenings are quite usual in stock markets and even a careful speculator will lose his capital when such events happen. Therefore this strategy is not advised.

To be continued
CYRIAC J. KANDATHIL, Chief adviser, www.AssuredGain.com

NMA Nifty Charts turns to sell

Rajandran R — Mon, 30 Aug 2010 06:39:15 PDT

NMA daily charts of Nifty turns to sell signal after 3 months(Approx)… with current trailing stop loss comes near 5536.

My Option Strategy at this point of time is taking a long Butterfly

A long call butterfly spread consists of three legs with a total of four options: long one call with a lower strike, short two calls with a middle strike and long one call of a higher strike. All the calls have the same expiration, and the middle strike is halfway between the lower and the higher strikes. When a butterfly spread is implemented properly, the potential gain is higher than the potential loss, but both the potential gain and loss will be limited.

Long 1 Lot of 5500 PE @ 137.50
Short 2 Lot of 5300 PE @ 63
Long 1 Lot of 5100 PE @ 27.20

Maximum loss of Rs 2000 below the break even point 5138 abd above 5463. Profits if nifty expire between 5138 and 5463 and maximum profit of Rs 8000 if nifty expire at 5303.

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