06 January 2012
Options Strategy:
Options Strategy (Old Article... may be useful in learning)
The success of an option strategy depends on the accuracy with which one can predict market movement. This task is not made easy by market volatility, which is defined as the variation of an asset return around its long-term average. Its two sub-phases are high and low volatility. In the January 2010 issue (The Long & Short of Straddle), we had explained how long and short straddles are effective in highly volatile and low volatile markets, respectively. In most option strategies, the losses from inexact market expectations are marginal, but in a short straddle these can be high if predictions of low market volatility are incorrect. To help limit such losses in volatile markets is a strategy called 'butterfly'.
This sophisticated strategy is so called because its pay-off, when represented graphically, resembles a butterfly (at expiration). Like straddles, butterfly has two break-even points and two legs that are useful in the two sub-states of volatility—long call butterfly for less volatile and short call butterfly for highly volatile markets. But unlike straddles, which require a combination of two options, butterfly uses a combination of four options. While it restricts losses, the strategy also curbs the gains. Here's how to set up the two legs of a butterfly:
Long call butterfly: It involves selling two ATM (at the money) call options, and buying one ITM (in the money) and one OTM (out of the money) call option. All options must have the same underlying security and expiry date. An important condition is the equidistance between strike prices. So, if two sold ATM calls have a strike price of X, the ITM call bought should have a strike price of X-a and that of OTM call bought should be X+a. To enter this strategy, the investor needs to pay a net debit. This is the maximum loss he suffers in case of unrealised expectations. The strategy is useful in markets likely to show limited volatility in the near future. The investor gains if the price of the underlying security closes at the strike price of sold calls.
Short call butterfly: It involves buying two ATM calls, and selling a lower strike ITM call and a higher strike OTM call. The options should have the same underlying security and expiry date, and must maintain equidistance in strike prices. If two ATM call options are bought at Z strike price, the ITM call sold should have a strike price of Z-b, and OTM call sold, Z+b. This strategy is useful in volatile markets. The maximum loss is if the underlying security closes at the strike price of ATM calls, and the maximum profit is if it closes at the strike prices of ITM and OTM calls. So, profit will be earned irrespective of the rise or fall of the market.
Consider an example. On March 1, Nikhil thinks the market may show limited volatility and uses the long call butterfly. The XYZ Index is trading at 4,500. Call options at strike prices of Rs 4,400, Rs 4,500 and Rs 4,600 are available at Rs 105, Rs 65 and Rs 40, respectively. Ten days later, Rohit thinks the market will be highly volatile and uses the short call butterfly. On March 10, the XYZ Index is trading at 4,600. Call options at strike prices of Rs 4,400, Rs 4,600 and Rs 4,800 are available at Rs 210, Rs 70 and Rs 55, respectively. The market lot is 50 contracts and we assume zero brokerage and commissions.
On March 1, Nikhil sells two ATM call options at a strike price of Rs 4,500 (X), and buys one ITM call option at Rs 4,400 (X-a; a=100) and an OTM call option at Rs 4,600 (X+a). The strike prices are equidistant. He gets Rs 6,500 (65 x 2 x 50) by selling two ATM call options and pays Rs 5,250 (105 x 50) and Rs 2,000 (40 x 50) to buy ITM and OTM call options, respectively. Nikhil needs to pay a net debit of Rs 750 (5,250+2,000-6,500) to enter this position. This is the maximum loss in case of unrealised expectations. The maximum profit is earned if the index closes at 4,500, the strike price of the ATM option. The lower break-even point, 4,415 is calculated by adding the net premium (Rs 15) to the strike price of the lower strike ITM call (4,400). The upper break-even point of 4,585 is calculated by subtracting the net premium from the strike price of the higher strike OTM call (4,600). For the strategy to be profitable, the XYZ Index must close within the two break-even points on the date of expiry. Even if the expectation of low volatility is incorrect, the loss will be marginal as opposed to short straddle’s unlimited losses (see Long Call Butterfly).
On March 10, Rohit buys two ATM call options at a strike price of Rs 4,600 (Z), and sells an ITM call option at Rs 4,400 (Z-b; b=200) and an OTM call option at Rs 4,800 (Z+b). The strike prices are equidistant. He pays Rs 7,000 (70 x 50 x 2) to buy two ATM options and gets Rs 10,500 (210 x 50) and Rs 2,750 (55 x 50) by selling ITM and OTM calls, respectively. He earns a net credit of Rs 6,250 (10,500+2,750-7,000), the most gain he can earn. The lower break-even point, 4,525, is calculated by adding the strike price of lower strike ITM call (4,400) and net premium received (Rs 125). The upper break-even point, 4,675, is calculated by subtracting the net premium from the higher strike OTM call (4,800). To ensure profit, the market should move beyond the break-even points. The profit potential is limited compared to an unlimited one from long straddle (see Short Call Butterfly).
src: Businesstoday
31 December 2011
2011 End Edition -1
HAAPPIIEE NEW YEAR 2012 to All.
Sensex down 25% among worst global markets in 2011
Gold heads for 11th annual gain
'Govt to be biggest trigger for market in 2012'
Rupee falls 16% in first annual loss since 2008
Top 20 large cap & mid cap stocks to buy in 2012
young entrepreneurs
Top fund managers on stocks which could be tomorrow’s winners & sectors to watch out for in 2012
10 companies that will gain from rupee's slide and economic slowdown
Stock market ends 2011 with 25% loss; second-worst annual performance
http://economictimes.indiatimes.com/features/investors-guide/fastest-growing-small-companies-that-could-be-future-giants/articleshow/10531665.cms
Gold's "death cross" signals more losses coming
2011 report card: Mixed bag, yet eventful year for MFs
Refresh your portfolio: Stock ideas by Tulsian for 2012
22 December 2011
21 December 2011
News Corner:
Announcing: The Pluggd.in Forum [Knowledgebase + Community]
Aakash Tablet Sold out, UbiSlate Scheduled for January Launch
Frrole Creates a Social Newspaper out of Twitter Noise
Ten Indians in Forbes '30 under 30' list
The 30 highest paid CEOs in the US
Top 5 touch-and-type phones under Rs 10,000
src: rediff, staruplogic.com, pluggd.in
28 September 2011
Top 12 Mobile Handset manufacturers of the world. Micromax enters
Top 12 Mobile Handset manufacturers of the world. Micromax enters
Global mobile phone shipments for the second quarter of 2011 have reached 361 million, of which 110 million are smartphones. While the feature phone is slowly becoming a dying breed, it is what is keeping Nokia on top of the heap. Nokia has shipped 88.5 million phones in Q2 2011 followed by Samsung’s 74 M phones. The gap between Nokia and Samsung is narrowing done. However the gap between Samsung and LG is very wide. LG has shipped 24.8 million phones. Apple which sells just smartphones (iPhones) has occupied the fourth position with 20.3 million phones.
Apple rules the smartphones
Apple is now the top smartphone vendor followed by Samsung and Nokia. The top 10 positions are occupied by the usual suspects with few manufacturers swapping places. The action or rather upsets are happening outside the top 10 positions. These are the manufacturers which the analytic firms called microvendors. Now these microvendors are threatening the handset makers in the top 10 positions.
Top top global mobile handset manufacturers in Q2 2011 :
- Nokia (88.5 M)
- Samsung (74M)
- LG (24.8)
- Apple (20.3M)
- ZTE ( 18 M)
- RIM
- HTC (12.1M)
- Motorola (11 M)
- Huawei (9 M) :
- Sony Ericsson (8 M)
- Alacatel
- Micromax (4 M)
Micromax enters the big league
Micromax, which is considered as a microvendor, has shipped 4M phones in Q2 2011 and has occupied 12th position. Micromax has surpassed Lenovo (2.8M), Sharp and NEC in the mobile handset shipments. Micromax’s nearest competitor is Sony Ericsson which shipped 8M phones.
Micromax entering the big league and eyeing a spot in the top 10 is a remarkable achievement. Micromax is a India based company which started its operations by selling mobile phones in India. Micromax has entered a very crowded market segment and offered variations in its product category by carefully studying the market. The limelight which Micromax now enjoys can be attributed to innovative products, dual SIM phones, and attractive advertising campaigns
Micromax isn’t content with local play. It is continuing to expand across the world and is following the Think global, act local strategy. For example, given the large coastline of Sri Lanka, Micromax has exclusively targeted fishermen in the island nation and came up with a water proof phone. I’m sure Micromax will have similar strategies in Brazil, Africa and the Middle East.
Micromax which predominantly sells feature phones is making slow progression to smartphones. It has launched 3 Android phones which now make up 15% of Micromax’s sales. Last week, there was a leak about a possible high-end Android phone from Micromax. Though it is a re-branded phone, Micromax A85 comes with a dual-core nVIDIA processor and competes with the likes of Samsung Galaxy S2 and HTC Sensation.
Like I have argued here, Micromax still has to battle with the perception of it being perceived as a value-for-money phone maker. It has to start at sometime. Micromax felt the time is now and why not.
How long before Micromax actually enters the top 10 list?
Note : Alcatel is speculated to be in position 11. The number of phones shipped by Alcatel in Q2 2011 isn’t readily available. The post will be updated with RIM and Alcatel numbers. The data is originated from Strategy Analytics, but it is not in a one single list. The data is gathered through various press releases across the web
Micromax A85 Android phone : First look
Src: A 2 week old article from Gadgetfan.
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