11.02.2008 was historic day, when the largest IPO from ADAG "Reliance Power" which attracted record breaking subscription and interest was listed on indian bourses. As many feared, it traded below the issue price offered at 5% discount to retail investors, and all retail and HNIs have dumped the stock, to get out of the troubled boat, at the first instance, since many must have subscribed to the IPO with borrowed funds, where they had the double whammy of apart from capital loss, interest burden worsened the situation further.
Quite naturally, panic striken players of the bourses, sold everything whatever they can sell, which brought the indices to February lows, and the indices below 200DSMA too at the end of the session. The after effects continued on 12.02.2008 too, and markets turned very volatile, as the tug of war between bears and bulls continued to rest the 200DSMA as base line for gaining control of the markets in 2008. With Reliance Power touching 25% discount to issue price of 450 offered to general public, buying support emerged from long term fresh investors, as well as people who are stuck at higher levels in IPO, and indices staged smart recovery on Thursday, and inspite of petroleum price hike of Rs.2/- on petrol and Re.1/- Diesel, and weak global cues, our markets posted gains on the friday too, ending the 4 week negative closings.
In technical parlance, the lows made on January 2008, are held so far, and indices have recovered from sub 200DSMA levels to breach 20DSMA too at the end of week on friday, gives some comfort, but the time wise correction shall continue, giving rise to huge volatility for some more weeks, if not months. The mood of FIIs and DIIs shall decide the intraday, short term trend till 15.03.2008; and our markets shall price in the earnings forecast for 2009 from then onwards based on the advance tax payments by corporates, and also getting fair view on US economy and response from regulators all over the world.
Strategy for the Week: Buy blue chip stocks on any weakness in the markets to build long term portfolio.
Derivatives Strategy1: Buy a straddle of 5300 strike price of February Series, and hold till expiry.
6 comments:
Dear Mr. Rao,
Do you actually trade your own money on your strategies?
regards
Ashok
Your recent strategies haven't been doing too well. But, if I am correct, bets on many of the strategies would be smaller (Risk Management).
So, though percentage wise on a strategy, you might be up 60% or down 40%, portfolio wise you are only down 1%or up 2%.
Vinay
Well,
Vinay the strategies for February are suggested for holding till expiry of the series...28.02.2008;
Alternatively, based on technical analysis, I may suggest for booking profit or close the entire strategy may be even at minimal loss some times.
There are no strategies which give assured positive returns only always.
One has to have his own analysis and follow the strategies suggested.
vrkrao
Dear vinay,
Considering almost all the options books recommend buy high IV and sell low IV would it not be better to use sell strategies at a time like this when IV is so high?
Regarding Mr. Rao's Feb strategy number 1 I thought he should have squared off a long time ago as there is hardly any hope of profitably now. The first rule of successful trading is to cut your losses short. Personally in futures trading I cut my losses immediately the very first day if its anything over 0.5% what tomorrow may hold doesn't interest me at all no matter how bright the prospects may be.
I would like to suggest the same to Mr. Rao if at all he trades his strategies.
Warm regards,
Ashok
Dear Mr.Ashok,
Thank you for your views. I am not a day trader or intra minute / hourly trader!
Well Options are to be used as hedge against the portfolio one has, considering the short term view on the markets taking into volatility too.
When one trades in naked options, he will either make substantial gains, or loose the premium invested. Where one has to cut loss is dependent on one's risk perception and emotional intelligence.
vrkrao
Hello Ashok,
I tend to agree with Mr. Rao. Your IV Models would nevertheless suggest Buy and Sell decisions accurately only if there is a consistent spike in IV's for a continuous period of time.
Examples I could think of Indian Equities is IFCI (initial moves), RNRL, RPL. But, on an index the volatility is much more subdued than your individual stocks.
My understanding is once you have formulated a view, you should continuously update your view and not take any rash decisions.
Also, one more thing you have to note is the risk difference between Futures and Options. You have unlimited downside risk, whereas for a Long Option, the downside is known.
Vinay
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