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PRESENTATION ON DERIVATIVES AND TECHNICAL ANALYSIS By Adhvith Dhuddu Friday, 27th November, 2009 SRN Adarsh College
QUESTION 1 BOOK PRIZE: One up on Wall Street
WHICH IS THE LARGEST CORPORATION IN TERMS OF MARKET CAPITALIZATION IN THE WORLD? Exxon Mobile, PetroChina or Industrial and Commercial Bank of China (ICBC). Top 3, always switching places. www.AdhvithDhuddu.com
QUESTION 2 BOOK PRIZE: Political Economy of the Global Financial Crisis
THE WORLD’S MOST RENOWNED AND RESPECTED INVESTOR SAID SOMETHING VERY SHOCKING AND STARTLING ABOUT DERIVATIVES. WHO IS IT AND WHAT DID HE/SHE SAY? www.AdhvithDhuddu.com
QUESTION 3 BOOK PRIZE: Options and Futures - An Indian Perspective
CAN ANYONE TELL ME WHAT IS THE MEANING OF COUNTERPARTY RISK? www.AdhvithDhuddu.com
DERIVATIVES BASICS A derivative is a financial instrument which DERIVES its value from another financial product (underlying asset) There are derivative instruments available which derive their value from: INDICES INTEREST RATES CURRENCY
COMMODITIES CREDIT EQUITIES/STOCK www.AdhvithDhuddu.com
DERIVATIVE INSTRUMENTS: OPTIONS AND FUTURES TEXT BOOK DEFINITION FOR OPTIONS
AN OPTION CONTRACT GIVES THE BUYER THE RIGHT, BUT NOT THE OBLIGATION, TO BUY OR SELL A CERTAIN NUMBER OF SHARES AT A FIXED PRICE, ON OR BEFORE A FIXED DATE: WHAT A CONFUSING DEFINITION!! AS COMPLICATED AND TORTUOUS AS POSSIBLE!!! TEXT BOOK DEFINITION FOR FUTURE
FUTURES CONSIST OF CONTRACTS TO BUY OR SELL A SPECIFIC UNDERLYING INSTRUMENT (STOCK/INDEX) AT A SPECIFIC TIME IN THE FUTURE FOR A SPECIFIC PRICE. www.AdhvithDhuddu.com
OPTIONS BASICS If you BUY the option contract for the book, you have the RIGHT to purchase that book at the agreed price from the seller (with whom you entered the contract with), but you don’t have to buy it from the seller (i.e. not obligated). If you choose to buy it from the seller, the seller HAS TO SELL IT TO YOU at the agreed contract price. THE RIGHT: To buy or sell 100, 500, 2400 (depends on the market lot) shares of a specific stock or index. THE EXPIRATION DATE: The date that your right ends or expires THE EXERCISE PRICE: The price at which you can buy or sell THE OPTION PRICE (or option premium): The price you paid for the right. www.AdhvithDhuddu.com
OPTIONS BASICS CONTINUED Based on Right to Exercise Call options and put options CALL OPTION PUT OPTION
BUYER Right to buy Right to sell
SELLER Obligation to sell Obligation to buy
Based on Time to Exercise American Options: Can be exercised any time up to maturity date European options: Can be exercised only on maturity date
www.AdhvithDhuddu.com
OPTIONS BASICS CONTINUED VALUING EQUITY OPTIONS • THE OPTION PREMIUM IS HOW MUCH YOU PAY TO PURCHASE THE OPTION, OR HOW MUCH YOU RECEIVE TO SELL THE OPTION. • Option Premium can be divided into two components: the ‘INTRINSIC VALUE’, and the ‘TIME VALUE’. OPTION PREMIUM = INTRINSIC VALUE + TIME VALUE • The intrinsic value is the value by which an option is in the money. It is the difference of stock price & strike price. • Intrinsic value of a call = max (0, Stock – Strike Price) • Intrinsic value of a put = max (0, Strike Price – Stock) www.AdhvithDhuddu.com
HOW DO I USE DERIVATIVES IN MY PORTFOLIO AND INVESTMENTS? YOU CAN USE DERIVATIVES FOR 1. Hedging Risk and protection 2. Speculation and trading 3. Exploit arbitrage opportunities
STEP 1: Determine your market outlook STEP 2: Choose a corresponding strategy STEP 3: Follow up on the strategy www.AdhvithDhuddu.com
STRATEGY MATRIX View Bullish
Strongly
Strategy Buy futures Buy out of the money call Sell deep in money put Sell call deep in money and buy more nos. of higher strike calls
Moderately
Buy at the money call Sell at the money put Buy low strike price call and sell high strike price call Buy low strike price put and sell high strike price put Buy spot /futures and sell high strike price call Buy spot/ futures and buy put
Mildly
Buy deep in money call Sell out of the money put Buy spot /futures and sell at the money /high strike price call
www.AdhvithDhuddu.com
STRATEGY MATRIX…CONTINUED View Bearish
Strongly
Strategy Sell futures Sell deep in money call Buy out of the money put Sell put at higher strike price and buy more nos. of puts at lower price
Moderately
Sell at the money call Buy at the money put Buy high strike price call/put and sell low strike price call/put
Mildly
Sell out of the money call Buy deep in money put Buy spot/ futures and buy put
www.AdhvithDhuddu.com
STRATEGY MATRIX…CONTINUED View Stable
Strategy Sell near month call/put and buy far month call/put with same strike price and at the money options Sell one call and one put at the same strike price Sell one call and one put different strike prices (out of the money) Buy one call at P1 and one call at P3 and sell two call at P2 (where P1
Uncertain but
Buy one call and one put at the same strike price
volatile
Buy one call and one put at different strike price
www.AdhvithDhuddu.com
Strategy 1 Market Outlook:
Bullish
Strategy:
LONG (Buy) CALL
EXAMPLE: View: Spot Price: Strategy: Result:
Initiated on 24th Jan Bullish on Infosys Tech Rs .2230/Bought INFOSYSTECH 2250 Feb CA @ Rs.45 (Lot size = 100) In about a weeks’ time, the call option appreciated to Rs.70 as the stock price rose and we sold off the position resulting in a profit. A graphical representation of this option position is given in the next slide
www.AdhvithDhuddu.com
Payoff Profile
Profit/Loss
Payoff Profile 14,000 00 12,000 00 10,000 00 8,000 00 6,000 00 4,000 00 2,000 00 0 00 -2,000 00 -4,000 00 -6,000 00
2,065
2,100
2,135
2,170
2,205
2,240
2,275
2,310
2,345
2,380
2,415
Infosys Tech at Expiry
BREAK EVEN POINT: MAXIMUM PROFIT:
Rs.2295, i.e., strike price + premium paid Unlimited
MAXIMUM LOSS:
Rs.4500 per lot
www.AdhvithDhuddu.com
Strategy 2 Market Outlook:
Bearish to stagnant
Strategy:
SHORT (Sell) CALL
EXAMPLE: View: Spot Price: Strategy: Result:
Bearish on ACC and other cement stocks Bearish on cement stocks Rs .1020/Sold ACC 1050 Feb CA @ Rs.20 (Lot size = 375) Our conviction was right and cement stocks trended downwards. We therefore kept the premium that we collected which was our net profit. A graphical representation of this option position is given in the next slide.
www.AdhvithDhuddu.com
Payoff Profile Payoff Profile 10,000 00 5,000 00 Profit/Loss
0 00 -5,000 00
975
990
1,005
1,020
1,035
1,050
1,065
1,080
1,095
1,110
1,125
-10,000 00 -15,000 00 -20,000 00 -25,000 00 ACC at Expiry
BREAK EVEN POINT: MAXIMUM PROFIT:
Rs.1070, i.e., strike price + premium received Premium received
MAXIMUM LOSS:
Unlimited www.AdhvithDhuddu.com
Strategy 3 Market Outlook:
Bearish
Strategy:
LONG (Buy) PUT
EXAMPLE: View: Spot value: Strategy: Result:
Initiated on 23rd February Bearish on the NIFTY index 3930 levels Bought NIFTY 3900 Feb PA @ Rs.120 (Lot size = 50) The put option appreciated to Rs.134 as the index fell and we sold off the position resulting in a profit. A graphical representation of this option position is given in the next slide.
www.AdhvithDhuddu.com
Payoff Profile Payoff Profile 4,000 00
Profit/Loss
2,000 00 0 00 -2,000 00
3,700
3,750
3,800
3,850
3,900
3,950 4,000
4,050
4,100
4,150
4,200
-4,000 00 -6,000 00 -8,000 00 Nifty at Expiry
BREAK EVEN POINT: MAXIMUM PROFIT:
3780, i.e., strike price - premium paid Unlimited
MAXIMUM LOSS:
Rs.6000 per lot www.AdhvithDhuddu.com
Strategy 4 Market Outlook:
Bullish to Stagnant
Strategy:
SHORT (Sell) PUT
EXAMPLE: View: Spot Price: Strategy: Result:
Initiated on 9th Feb Bullish on SAIL Rs .114/Sold SAIL 110 Feb PA @ Rs. 2.50 (Lot size = 2700) This is one example where our strategy resulted in a loss. Our outlook was wrong and SAIL stock fell along with the general market. We had to buy back our put at a higher price (at Rs.3.90) as the stock went down and this resulted in a loss of Rs.1.40 per lot. A graphical representation of this option position is given in the next slide
www.AdhvithDhuddu.com
Payoff Profile Payoff Profile 8,000.00 6,000.00 Profit/Loss
4,000.00 2,000.00 0.00 -2,000.00
105
106
107
108
109
110
111
112
113
114
115
-4,000.00 -6,000.00 -8,000.00 SAIL at Expiry
BREAK EVEN POINT: MAXIMUM PROFIT: MAXIMUM LOSS:
Rs. 107.50, Strike price - Premium received Premium received Unlimited
www.AdhvithDhuddu.com
Strategy 5 Market Outlook:
Moderately Bullish
Strategy:
BULL SPREAD (Buy a call and sell a call at a higher strike
EXAMPLE: View: Spot Price: Strategy: Result:
OR buy a put and sell a put at a higher strike) Initiated on 31st Jan Bullish on SBI Rs .1140/Buy SBI 1140 Feb CA @ Rs.42 (Lot size = 250) Sell SBI 1230 Feb CA @ Rs.10 (Lot size = 250) After executing this strategy, SBI rallied higher and we realized a net profit in this strategy. We sold the 1140 call for Rs.85 and bought back the 1230 call for Rs.32, hence resulting in a net profit of Rs.21 per lot. A graphical representation of this option position is given in the next slide.
www.AdhvithDhuddu.com
Payoff Profile Payoff Profile 20,000 00
Profit/Loss
15,000 00 10,000 00 5,000 00 0 00 -5,000 00
890
940
990
1,040
1,090
1,140
1,190
1,240
1,290
1,340
1,390
-10,000 00 SBI at Expiry
BREAK EVEN POINT: MAXIMUM PROFIT:
Rs.1172 Rs.14,500 per lot (250 x 58)
MAXIMUM LOSS:
Rs.8000 per lot (250 x 32) www.AdhvithDhuddu.com
Strategy 6 Market Outlook:
Moderately Bearish
Strategy:
BEAR SPREAD (Buy a put and sell a put at a lower strike OR buy a call and sell a call at a lower strike)
EXAMPLE: View: Spot Value: Strategy: Result:
Initiated on 12th Feb Bearish on NIFTY 4100 levels Buy NIFTY Feb 4100 PE @ Rs.52 (Lot size = 50) Sell NIFTY Feb 4000 PE @ Rs.28 (Lot size = 50) Nifty headed lower after this strategy and the puts increased in value. We sold the 4100 put for Rs.104 and bought back the 4000 put for Rs.51, resulting in a net profit of Rs.29 per lot. A graphical representation of this option position is given in the next slide.
www.AdhvithDhuddu.com
Payoff Profile Payoff Profile 5,000.00 4,000.00 Profit/Loss
3,000.00 2,000.00 1,000.00 0.00 -1,000.00
3,850
3,900
3,950
4,000
4,050
4,100
4,150
4,200
4,250
4,300
4,350
-2,000.00 Nifty at Expiry
BREAK EVEN POINT: MAXIMUM PROFIT:
Rs.4076 Rs.3800 per lot (50 x 76), Nifty below 4000
MAXIMUM LOSS:
Rs.1200 per lot (50 x 24), Nifty above 4100 www.AdhvithDhuddu.com
Strategy 7 Market Outlook:
Highly Volatile
Strategy:
LONG (Buy) STRANGLE (Buy an equal number of calls and puts at different strike prices and same expiry)
EXAMPLE: View:
Spot Price: Strategy: Result:
Initiated on 9th April INFOSYSTECH is reporting its earnings on Friday, 13th April. A significant move to the up or downside depending upon the results could occur. Therefore one can enter a strangle position. 2040 levels Buy INFOSYSTECH Apr 2100 CA @ Rs.42 (Lot size = 100) Buy INFOSYSTECH Apr 1920 PA @ Rs.34 (Lot size = 100) This strategy was initiated on Monday and both the legs are still open as the result is due tomorrow. If a good move occurs in any one direction, the strategy should span out well. The initial outflow for this strategy was Rs.8000.
www.AdhvithDhuddu.com
Payoff Profile Payoff Profile 25,000.00 20,000.00 Profit/Loss
15,000.00 10,000.00 5,000.00 0.00 -5,000.00
1,610 1,688 1,766 1,844 1,922 2,000 2,078 2,156 2,234 2,312 2,390
-10,000.00 INFOSYSTECH at Expiry
BREAK EVEN POINTS: MAXIMUM PROFIT:
2176, i.e., upper strike price + premiums paid 1844, i.e., lower strike price – premiums paid Unlimited
MAXIMUM LOSS:
Total premium amount paid www.AdhvithDhuddu.com
Strategy 8 Market Outlook:
Stagnant to range-bound
Strategy:
SHORT (Sell) STRANGLE (Sell an equal number of calls and puts at different strike prices and same expiry)
EXAMPLE: View: Spot Price: Strategy: Result:
ITC Range bound 170 levels Sell ITC 180 Mar CA @ Rs.4 (Lot size = 675) Sell ITC 160 Mar PA @ Rs.7 (Lot size = 675) ITC remained range-bound and the premiums collected were realized as net profit.
www.AdhvithDhuddu.com
Payoff Profile Payoff Profile 20,000.00
Profit/Loss
10,000.00 0.00 -10,000.00
120
130
140
150
160
170
180
190
200
210
220
-20,000.00 -30,000.00 -40,000.00 ITC at Expiry
BREAK EVEN POINTS: MAXIMUM PROFIT:
191, i.e., upper strike price + premiums received 149, i.e., lower strike price – premiums received Limited to the premiums received
MAXIMUM LOSS:
Unlimited www.AdhvithDhuddu.com
More Strategies 1. 2. 3. 4. 5.
Covered Call: Own stock/futures, sell a higher call Protective Put: Own stock/futures, buy a put option Ratio Call Spread: Buy a call, sell two higher strike calls Ratio Put Spread: Buy a put, sell two lower strike puts Long Straddle: Buy a call and a put for the same strike price and expiry. 6. Short Straddle: Sell a call and a put for the same strike price and expiry.
DEMO IN optionsXpress
www.AdhvithDhuddu.com
TECHNICAL ANALYSIS BASICS VARIOUS INDICATORS, TECHNIQUES AND MECHANISMS TO MEASURE MARKET SENTIMENT IN THE BEST POSSIBLE WAY All technical analysis indicators are derived from ONLY FIVE DATA POINTS. They are: OPENING PRICE, CLOSING PRICE, HIGH PRICE, LOW PRICE AND VOLUME
BECAUSE FOR ANY GIVEN PERIOD, THE A STOCK GIVES ONLY FIVE DATA POINTS www.AdhvithDhuddu.com
TECHNICAL ANALYSIS BASICS The way I look at technical analysis is simple: It’s going from a 50:50 chance of picking the right stock to 60:40 then 70:30 then 80:20 by adding indicators…But you can NEVER be 100 percent sure about the move a stock will make. TECHNICIAL ANALYSIS IS ADVISALBE FOR 1. Day trading and swing trading 2. Deciding exit and entry points 3. Helping gauge the stock’s or the market’s short-medium term sentiment 4. Combining with derivative strategy making process 5. NOT ADVISABLE for long term investors and buy-and-holders www.AdhvithDhuddu.com
TECHNICAL ANALYSIS: BASIC INDICATORS SOME BASIC TECHNICAL ANALYSIS INDICATORS
(I) Chart Formations 1. 2. 3. 4. 5. 6. 7. 8.
Support Level Resistance Level Channel formation Upward or downward channel Double top formation Double bottom formation Ascending Triangle Descending Triangle
DEMO IN THINKORSWIM SOFTWARE AND FINVIZ
www.AdhvithDhuddu.com
TECHNICAL ANALYSIS: BASIC INDICATORS SOME BASIC TECHNICAL ANALYSIS INDICATORS
(II) Momentum Indicators 1. Stochastic Indicator 2. Relative Strength Indicator or RSI 3. More indicators will be shown in the demo.
DEMO IN THINKORSWIM SOFTWARE AND FINVIZ
www.AdhvithDhuddu.com
DERIVATIVES IN THE NEWS RECENTLY The leverage factor and the financial crisis OTC derivatives and normal derivatives Lehman Brothers and Bear Stearns John Paulson and the $20 billion dollar trade: Article in the Wall Street Journal • “Over the counter, out of sight” --- An incredible article in The Economist about how derivatives aggravated the financial crisis and what’s being done about it.
• • • •
www.AdhvithDhuddu.com
THANK YOU
ADHVITH DHUDDU Website: www.AdhvithDhuddu.com www.AliveNow.in E-mail: [email protected] or [email protected] Phone: +91-9740247446
www.AdhvithDhuddu.com
QUESTION 1 BOOK PRIZE: One up on Wall Street
WHICH IS THE LARGEST CORPORATION IN TERMS OF MARKET CAPITALIZATION IN THE WORLD? Exxon Mobile, PetroChina or Industrial and Commercial Bank of China (ICBC). Top 3, always switching places. www.AdhvithDhuddu.com
QUESTION 2 BOOK PRIZE: Political Economy of the Global Financial Crisis
THE WORLD’S MOST RENOWNED AND RESPECTED INVESTOR SAID SOMETHING VERY SHOCKING AND STARTLING ABOUT DERIVATIVES. WHO IS IT AND WHAT DID HE/SHE SAY? www.AdhvithDhuddu.com
QUESTION 3 BOOK PRIZE: Options and Futures - An Indian Perspective
CAN ANYONE TELL ME WHAT IS THE MEANING OF COUNTERPARTY RISK? www.AdhvithDhuddu.com
DERIVATIVES BASICS A derivative is a financial instrument which DERIVES its value from another financial product (underlying asset) There are derivative instruments available which derive their value from: INDICES INTEREST RATES CURRENCY
COMMODITIES CREDIT EQUITIES/STOCK www.AdhvithDhuddu.com
DERIVATIVE INSTRUMENTS: OPTIONS AND FUTURES TEXT BOOK DEFINITION FOR OPTIONS
AN OPTION CONTRACT GIVES THE BUYER THE RIGHT, BUT NOT THE OBLIGATION, TO BUY OR SELL A CERTAIN NUMBER OF SHARES AT A FIXED PRICE, ON OR BEFORE A FIXED DATE: WHAT A CONFUSING DEFINITION!! AS COMPLICATED AND TORTUOUS AS POSSIBLE!!! TEXT BOOK DEFINITION FOR FUTURE
FUTURES CONSIST OF CONTRACTS TO BUY OR SELL A SPECIFIC UNDERLYING INSTRUMENT (STOCK/INDEX) AT A SPECIFIC TIME IN THE FUTURE FOR A SPECIFIC PRICE. www.AdhvithDhuddu.com
OPTIONS BASICS If you BUY the option contract for the book, you have the RIGHT to purchase that book at the agreed price from the seller (with whom you entered the contract with), but you don’t have to buy it from the seller (i.e. not obligated). If you choose to buy it from the seller, the seller HAS TO SELL IT TO YOU at the agreed contract price. THE RIGHT: To buy or sell 100, 500, 2400 (depends on the market lot) shares of a specific stock or index. THE EXPIRATION DATE: The date that your right ends or expires THE EXERCISE PRICE: The price at which you can buy or sell THE OPTION PRICE (or option premium): The price you paid for the right. www.AdhvithDhuddu.com
OPTIONS BASICS CONTINUED Based on Right to Exercise Call options and put options CALL OPTION PUT OPTION
BUYER Right to buy Right to sell
SELLER Obligation to sell Obligation to buy
Based on Time to Exercise American Options: Can be exercised any time up to maturity date European options: Can be exercised only on maturity date
www.AdhvithDhuddu.com
OPTIONS BASICS CONTINUED VALUING EQUITY OPTIONS • THE OPTION PREMIUM IS HOW MUCH YOU PAY TO PURCHASE THE OPTION, OR HOW MUCH YOU RECEIVE TO SELL THE OPTION. • Option Premium can be divided into two components: the ‘INTRINSIC VALUE’, and the ‘TIME VALUE’. OPTION PREMIUM = INTRINSIC VALUE + TIME VALUE • The intrinsic value is the value by which an option is in the money. It is the difference of stock price & strike price. • Intrinsic value of a call = max (0, Stock – Strike Price) • Intrinsic value of a put = max (0, Strike Price – Stock) www.AdhvithDhuddu.com
HOW DO I USE DERIVATIVES IN MY PORTFOLIO AND INVESTMENTS? YOU CAN USE DERIVATIVES FOR 1. Hedging Risk and protection 2. Speculation and trading 3. Exploit arbitrage opportunities
STEP 1: Determine your market outlook STEP 2: Choose a corresponding strategy STEP 3: Follow up on the strategy www.AdhvithDhuddu.com
STRATEGY MATRIX View Bullish
Strongly
Strategy Buy futures Buy out of the money call Sell deep in money put Sell call deep in money and buy more nos. of higher strike calls
Moderately
Buy at the money call Sell at the money put Buy low strike price call and sell high strike price call Buy low strike price put and sell high strike price put Buy spot /futures and sell high strike price call Buy spot/ futures and buy put
Mildly
Buy deep in money call Sell out of the money put Buy spot /futures and sell at the money /high strike price call
www.AdhvithDhuddu.com
STRATEGY MATRIX…CONTINUED View Bearish
Strongly
Strategy Sell futures Sell deep in money call Buy out of the money put Sell put at higher strike price and buy more nos. of puts at lower price
Moderately
Sell at the money call Buy at the money put Buy high strike price call/put and sell low strike price call/put
Mildly
Sell out of the money call Buy deep in money put Buy spot/ futures and buy put
www.AdhvithDhuddu.com
STRATEGY MATRIX…CONTINUED View Stable
Strategy Sell near month call/put and buy far month call/put with same strike price and at the money options Sell one call and one put at the same strike price Sell one call and one put different strike prices (out of the money) Buy one call at P1 and one call at P3 and sell two call at P2 (where P1
Uncertain but
Buy one call and one put at the same strike price
volatile
Buy one call and one put at different strike price
www.AdhvithDhuddu.com
Strategy 1 Market Outlook:
Bullish
Strategy:
LONG (Buy) CALL
EXAMPLE: View: Spot Price: Strategy: Result:
Initiated on 24th Jan Bullish on Infosys Tech Rs .2230/Bought INFOSYSTECH 2250 Feb CA @ Rs.45 (Lot size = 100) In about a weeks’ time, the call option appreciated to Rs.70 as the stock price rose and we sold off the position resulting in a profit. A graphical representation of this option position is given in the next slide
www.AdhvithDhuddu.com
Payoff Profile
Profit/Loss
Payoff Profile 14,000 00 12,000 00 10,000 00 8,000 00 6,000 00 4,000 00 2,000 00 0 00 -2,000 00 -4,000 00 -6,000 00
2,065
2,100
2,135
2,170
2,205
2,240
2,275
2,310
2,345
2,380
2,415
Infosys Tech at Expiry
BREAK EVEN POINT: MAXIMUM PROFIT:
Rs.2295, i.e., strike price + premium paid Unlimited
MAXIMUM LOSS:
Rs.4500 per lot
www.AdhvithDhuddu.com
Strategy 2 Market Outlook:
Bearish to stagnant
Strategy:
SHORT (Sell) CALL
EXAMPLE: View: Spot Price: Strategy: Result:
Bearish on ACC and other cement stocks Bearish on cement stocks Rs .1020/Sold ACC 1050 Feb CA @ Rs.20 (Lot size = 375) Our conviction was right and cement stocks trended downwards. We therefore kept the premium that we collected which was our net profit. A graphical representation of this option position is given in the next slide.
www.AdhvithDhuddu.com
Payoff Profile Payoff Profile 10,000 00 5,000 00 Profit/Loss
0 00 -5,000 00
975
990
1,005
1,020
1,035
1,050
1,065
1,080
1,095
1,110
1,125
-10,000 00 -15,000 00 -20,000 00 -25,000 00 ACC at Expiry
BREAK EVEN POINT: MAXIMUM PROFIT:
Rs.1070, i.e., strike price + premium received Premium received
MAXIMUM LOSS:
Unlimited www.AdhvithDhuddu.com
Strategy 3 Market Outlook:
Bearish
Strategy:
LONG (Buy) PUT
EXAMPLE: View: Spot value: Strategy: Result:
Initiated on 23rd February Bearish on the NIFTY index 3930 levels Bought NIFTY 3900 Feb PA @ Rs.120 (Lot size = 50) The put option appreciated to Rs.134 as the index fell and we sold off the position resulting in a profit. A graphical representation of this option position is given in the next slide.
www.AdhvithDhuddu.com
Payoff Profile Payoff Profile 4,000 00
Profit/Loss
2,000 00 0 00 -2,000 00
3,700
3,750
3,800
3,850
3,900
3,950 4,000
4,050
4,100
4,150
4,200
-4,000 00 -6,000 00 -8,000 00 Nifty at Expiry
BREAK EVEN POINT: MAXIMUM PROFIT:
3780, i.e., strike price - premium paid Unlimited
MAXIMUM LOSS:
Rs.6000 per lot www.AdhvithDhuddu.com
Strategy 4 Market Outlook:
Bullish to Stagnant
Strategy:
SHORT (Sell) PUT
EXAMPLE: View: Spot Price: Strategy: Result:
Initiated on 9th Feb Bullish on SAIL Rs .114/Sold SAIL 110 Feb PA @ Rs. 2.50 (Lot size = 2700) This is one example where our strategy resulted in a loss. Our outlook was wrong and SAIL stock fell along with the general market. We had to buy back our put at a higher price (at Rs.3.90) as the stock went down and this resulted in a loss of Rs.1.40 per lot. A graphical representation of this option position is given in the next slide
www.AdhvithDhuddu.com
Payoff Profile Payoff Profile 8,000.00 6,000.00 Profit/Loss
4,000.00 2,000.00 0.00 -2,000.00
105
106
107
108
109
110
111
112
113
114
115
-4,000.00 -6,000.00 -8,000.00 SAIL at Expiry
BREAK EVEN POINT: MAXIMUM PROFIT: MAXIMUM LOSS:
Rs. 107.50, Strike price - Premium received Premium received Unlimited
www.AdhvithDhuddu.com
Strategy 5 Market Outlook:
Moderately Bullish
Strategy:
BULL SPREAD (Buy a call and sell a call at a higher strike
EXAMPLE: View: Spot Price: Strategy: Result:
OR buy a put and sell a put at a higher strike) Initiated on 31st Jan Bullish on SBI Rs .1140/Buy SBI 1140 Feb CA @ Rs.42 (Lot size = 250) Sell SBI 1230 Feb CA @ Rs.10 (Lot size = 250) After executing this strategy, SBI rallied higher and we realized a net profit in this strategy. We sold the 1140 call for Rs.85 and bought back the 1230 call for Rs.32, hence resulting in a net profit of Rs.21 per lot. A graphical representation of this option position is given in the next slide.
www.AdhvithDhuddu.com
Payoff Profile Payoff Profile 20,000 00
Profit/Loss
15,000 00 10,000 00 5,000 00 0 00 -5,000 00
890
940
990
1,040
1,090
1,140
1,190
1,240
1,290
1,340
1,390
-10,000 00 SBI at Expiry
BREAK EVEN POINT: MAXIMUM PROFIT:
Rs.1172 Rs.14,500 per lot (250 x 58)
MAXIMUM LOSS:
Rs.8000 per lot (250 x 32) www.AdhvithDhuddu.com
Strategy 6 Market Outlook:
Moderately Bearish
Strategy:
BEAR SPREAD (Buy a put and sell a put at a lower strike OR buy a call and sell a call at a lower strike)
EXAMPLE: View: Spot Value: Strategy: Result:
Initiated on 12th Feb Bearish on NIFTY 4100 levels Buy NIFTY Feb 4100 PE @ Rs.52 (Lot size = 50) Sell NIFTY Feb 4000 PE @ Rs.28 (Lot size = 50) Nifty headed lower after this strategy and the puts increased in value. We sold the 4100 put for Rs.104 and bought back the 4000 put for Rs.51, resulting in a net profit of Rs.29 per lot. A graphical representation of this option position is given in the next slide.
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Payoff Profile Payoff Profile 5,000.00 4,000.00 Profit/Loss
3,000.00 2,000.00 1,000.00 0.00 -1,000.00
3,850
3,900
3,950
4,000
4,050
4,100
4,150
4,200
4,250
4,300
4,350
-2,000.00 Nifty at Expiry
BREAK EVEN POINT: MAXIMUM PROFIT:
Rs.4076 Rs.3800 per lot (50 x 76), Nifty below 4000
MAXIMUM LOSS:
Rs.1200 per lot (50 x 24), Nifty above 4100 www.AdhvithDhuddu.com
Strategy 7 Market Outlook:
Highly Volatile
Strategy:
LONG (Buy) STRANGLE (Buy an equal number of calls and puts at different strike prices and same expiry)
EXAMPLE: View:
Spot Price: Strategy: Result:
Initiated on 9th April INFOSYSTECH is reporting its earnings on Friday, 13th April. A significant move to the up or downside depending upon the results could occur. Therefore one can enter a strangle position. 2040 levels Buy INFOSYSTECH Apr 2100 CA @ Rs.42 (Lot size = 100) Buy INFOSYSTECH Apr 1920 PA @ Rs.34 (Lot size = 100) This strategy was initiated on Monday and both the legs are still open as the result is due tomorrow. If a good move occurs in any one direction, the strategy should span out well. The initial outflow for this strategy was Rs.8000.
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Payoff Profile Payoff Profile 25,000.00 20,000.00 Profit/Loss
15,000.00 10,000.00 5,000.00 0.00 -5,000.00
1,610 1,688 1,766 1,844 1,922 2,000 2,078 2,156 2,234 2,312 2,390
-10,000.00 INFOSYSTECH at Expiry
BREAK EVEN POINTS: MAXIMUM PROFIT:
2176, i.e., upper strike price + premiums paid 1844, i.e., lower strike price – premiums paid Unlimited
MAXIMUM LOSS:
Total premium amount paid www.AdhvithDhuddu.com
Strategy 8 Market Outlook:
Stagnant to range-bound
Strategy:
SHORT (Sell) STRANGLE (Sell an equal number of calls and puts at different strike prices and same expiry)
EXAMPLE: View: Spot Price: Strategy: Result:
ITC Range bound 170 levels Sell ITC 180 Mar CA @ Rs.4 (Lot size = 675) Sell ITC 160 Mar PA @ Rs.7 (Lot size = 675) ITC remained range-bound and the premiums collected were realized as net profit.
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Payoff Profile Payoff Profile 20,000.00
Profit/Loss
10,000.00 0.00 -10,000.00
120
130
140
150
160
170
180
190
200
210
220
-20,000.00 -30,000.00 -40,000.00 ITC at Expiry
BREAK EVEN POINTS: MAXIMUM PROFIT:
191, i.e., upper strike price + premiums received 149, i.e., lower strike price – premiums received Limited to the premiums received
MAXIMUM LOSS:
Unlimited www.AdhvithDhuddu.com
More Strategies 1. 2. 3. 4. 5.
Covered Call: Own stock/futures, sell a higher call Protective Put: Own stock/futures, buy a put option Ratio Call Spread: Buy a call, sell two higher strike calls Ratio Put Spread: Buy a put, sell two lower strike puts Long Straddle: Buy a call and a put for the same strike price and expiry. 6. Short Straddle: Sell a call and a put for the same strike price and expiry.
DEMO IN optionsXpress
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TECHNICAL ANALYSIS BASICS VARIOUS INDICATORS, TECHNIQUES AND MECHANISMS TO MEASURE MARKET SENTIMENT IN THE BEST POSSIBLE WAY All technical analysis indicators are derived from ONLY FIVE DATA POINTS. They are: OPENING PRICE, CLOSING PRICE, HIGH PRICE, LOW PRICE AND VOLUME
BECAUSE FOR ANY GIVEN PERIOD, THE A STOCK GIVES ONLY FIVE DATA POINTS www.AdhvithDhuddu.com
TECHNICAL ANALYSIS BASICS The way I look at technical analysis is simple: It’s going from a 50:50 chance of picking the right stock to 60:40 then 70:30 then 80:20 by adding indicators…But you can NEVER be 100 percent sure about the move a stock will make. TECHNICIAL ANALYSIS IS ADVISALBE FOR 1. Day trading and swing trading 2. Deciding exit and entry points 3. Helping gauge the stock’s or the market’s short-medium term sentiment 4. Combining with derivative strategy making process 5. NOT ADVISABLE for long term investors and buy-and-holders www.AdhvithDhuddu.com
TECHNICAL ANALYSIS: BASIC INDICATORS SOME BASIC TECHNICAL ANALYSIS INDICATORS
(I) Chart Formations 1. 2. 3. 4. 5. 6. 7. 8.
Support Level Resistance Level Channel formation Upward or downward channel Double top formation Double bottom formation Ascending Triangle Descending Triangle
DEMO IN THINKORSWIM SOFTWARE AND FINVIZ
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TECHNICAL ANALYSIS: BASIC INDICATORS SOME BASIC TECHNICAL ANALYSIS INDICATORS
(II) Momentum Indicators 1. Stochastic Indicator 2. Relative Strength Indicator or RSI 3. More indicators will be shown in the demo.
DEMO IN THINKORSWIM SOFTWARE AND FINVIZ
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DERIVATIVES IN THE NEWS RECENTLY The leverage factor and the financial crisis OTC derivatives and normal derivatives Lehman Brothers and Bear Stearns John Paulson and the $20 billion dollar trade: Article in the Wall Street Journal • “Over the counter, out of sight” --- An incredible article in The Economist about how derivatives aggravated the financial crisis and what’s being done about it.
• • • •
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THANK YOU
ADHVITH DHUDDU Website: www.AdhvithDhuddu.com www.AliveNow.in E-mail: [email protected] or [email protected] Phone: +91-9740247446
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