Tag - speculation

September 2012

July 2012

August 2010

Stock Watch – Aban Offshore – Jul2010


Aban Offshore price movement is explosive in both the directions and thus it is considered a traders delight. Observe the price movement in Mid May 2010 all the way down from 1170 levels to 650 odd levels. The action was swift , and violent. Reason, One of the premier rigs had sunk in the Caribbean Sea.

Minor upmove started from around 740 levels……

Now 3 months later, reverse upward move is unfolding again with good volume action. And Stock is above 850 levels…. Reason, News is out again that the re insurer is covering almost all the claims of the company.  This was always to happen !!! A company of size of Aban Offshore is supposed to have it’s bases covered before venturing out in deep sea’s…. isn’t it?

Results announced a day later reflected the one time write off for the sunken Rig.

Anyways… what will be interesting is to observe the price movement in next few days with the possibility of reaching the Gap Zone level of around 1000 odd levels quickly and maybe some more over the next few months.

Investors of Aban invested at 3000-4000 odd levels of 2007/2008 are still waiting for what seems to be eternity now…..

If you follow short term, trend-lines, probability and price-volume action ,then this is one stock to be on watch for now.

Selling Options : Sometimes it can be made to good use.

Selling Options , Calls, Puts, Tutorials, Options Strategies, Butterfly, Straddle, Strangle,  What Investors should know.

Options, by definition, are a wasting asset. The time decay, declining volatility etc. eat away into the premiums of the options.

Many option buyers learn this fact the hard way by watching their option contracts expire worthless many times. The majority of options expire worthless (estimates are somewhere > 80%). Given that the majority of option buy positions are worthless at the time of expiration, some investors decide that they will sell options and collect the premium. Prima Facie, this sounds like an easy way to make money.

However, there is no free lunch in the investment field as well. There are stories of how some of the brightest people in the world have blown up their accounts while selling ‘Naked’ options. Selling options, when there are no underlying holdings to support in case of adverse move is known as ‘Naked’ Selling.

Nevertheless, Options selling, when used intelligently, can be used to complement/protect your portfolio holdings to a certain extent and also make income in return.

Investors earn a premium for every put and call option which they sell. This premium is paid by Option Buyers.

Selling Short

When you sell shares of a company which you do not own, then it is called short selling. Selling a stock short is taking a view that the shares will keep going down. One way of doing this is by selling Futures. And another way of doing this is by selling Call Options.

In a short sale you have to buy back the shares at some point. And thus, short selling exposes you to unlimited risk, if the price of the stock starts to increase.

There are numerous strategies in Options. I will present just one example of how the selling of call options can be used by investors :

 

Covered Call Strategy

A covered call strategy is strategy for bullish investors to make some money and benefit from a stock that will move little over the short term.

This is often employed when an investor has a short-term neutral view on a stock or when the Stock has made a decent up move in a relative short period of time, and is expected to be range bound in the near term.

Let us take the example of Larsen and Toubro (LNT) recent price action again.

Assume, Investors bought the stock @ 1400 or Traders bought it at the breakout above 1660 in early June. Next, the stock made a decent up move in a month’s time frame and touched almost 1900. Investors could have written an options contract selling one call option of LNT Jul 2010 strike price 1900 at Rs 40. (However, Remember that one call option gives an investor the right to buy 125 shares).

You would earn income because the buyer of the call option has to pay you a premium for the option. If the stock’s price drops stays below the strike price (In this case , LNT did close well below Rs 1900 by Jul end) , the call buyer will never exercise the contract and the entire premium is yours to keep (Remember one lot of LNT is 125 and that makes the premium monies Rs 125 * 40 = Rs 5000).

If the stock’s price increases above the strike price, the call buyer may choose to exercise the contract. You would then either have to buy shares on the open market or deliver your shares to the buyer.

This is one of the common ways in which large institutional players generate income on the basis of their large holdings which they can always use to hedge in case of any adverse move against their options position.

Again, the intention of this article is to arouse interest and make aware of Options Selling. It does not advocate that you start selling options. Please understand, when selling options, remember that although your profit potential is limited to the amount of the premium that you receive, your losses can be rather large.

Also, My personal view is that selling PUT Options carries higher risk than Selling CALL options. This is because , in general, stocks generally use the stairs when going up (Sellers of Call Options can manage risk here ….) , But Jump out of the window when coming down. (Sellers of Put options can run out of exit options or get trapped …)

LNT has indeed made a good move from 1660 to 1900 and which I have been tracking since Early June …

You might be interested to know about Buying Options here…

July 2010

Buying Options : What Investors should know

“The greatest ignorance is to reject something you know nothing about”

If you are invested in Equity Markets or Mutual Funds, it is wise to be AWARE of the derivative product called ‘Options’.

Buying Options , Calls, Puts, Tutorials, Options Strategies, Butterfly, Straddle, Strangle,  What Investors should know

Options have seen increase in popularity over the past few years. Television shows like CNBC, NDTV Profit, ET Now etc devote a significant amount of time discussing option strategies for investors. Investors and traders are attracted to options due to the low cost involved. There is a possibility of high return potential in case of options trading as well. However there is an equal or more probability of downside of trading in options which needs to be understood as well.

Let us take a look at a few of the more popular strategies for buying options.

Types of Options

Call Options

Call options give an investor the right to buy shares at an agreed upon price. Investors that buy calls are not obligated to ever exercise the option. Call options can be owned for as short as a few days or long as a year. Investors that purchase call options are bullish on a particular stock.

Put Options

Put options are just like call options except they give investors the right to sell shares of a stock. Bearish investors buy put options so that they can benefit from a stock that they expect to decline. Watching the activity in put options is a great way of judging when investor sentiment is turning bearish.

Buying call options are cheaper than buying shares of stock.

Call options allow investors to buy shares of a company for a much cheaper price than buying the actual shares themselves. For example, say you wanted to buy 125 shares of LNT (Larsen and Toubro) at 1700. Your total cost would be Rs 2,12,500. I have taken the figure of 125 shares because lot size of LNT is 125. (Pls note that futures and options are bought in lots)

A cheaper option would be to buy call options. You could buy one CALL option of Jul 2010 series , strike price 1700 (lot size 125) for Rs 50. Your total cost would be Rs 6,250 (125 shares x Rs50). You would only pay Rs 6,250. If shares of LNT are higher than 1750 (Strike price + cost of purchase Rs 50) by series end, you could exercise the option and make a profit. If not then you can just let the option expire. Your total risk is only Rs 6,250. For this investment you could control 125 shares of LNT.

Buying put options can limit your downside risk.

Buying a put option is a great way for investors to limit their downside risk. It is like taking insurance against your assets.

Let’s say you already owned 125 shares of LNT and the stock is currently at Rs 1700. Let us assume that you are sitting in good profits, you are afraid that the stock is going to decline, and at the same time you do not want to sell your shares.

You could protect your profits by buying a put option.

You could buy one PUT option of Jul 2010 series, strike price 1650 (lot size 125) for Rs 50. . If shares of LNT are lower than 1650 (Strike price – cost of purchase Rs 50) by series end, you would exercise the option and make a profit. By doing this, you have unlimited profit potential on downside and at the same time have limited your losses (which is depreciation of holdings of LNT against profits made by the PUT option.)

This strategy is known as a protective put strategy. If the stock drops substantially, you can always exercise your put option. If shares rise you can do nothing and just let the option expire.

Put investors can also employ a married put strategy. A married put strategy is when an investor buys shares of a stock and buys a put option on the same shares at the exact same times. The stock and option are considered married since they were both purchased at the same time.

If used properly, options can cost less, limit risk, and have the potential for higher returns.

Many investors are completely unaware about options. The intention behind this article is to make aware of the basics of options. Nevertheless, One should definitely understand the implications and understand the risks involved before buying or trading in options.

ps: I have used the example of LNT (Larsen and Toubro), because it has been on my radar since it broke out of 1700 range earlier this month. More here …..

I will cover selling options and implications later sometime.

The Simple rules to Successful Investing – Part 1

The Simple rules to Successful Investing , Understanding Investing, Stocks, Mutual Funds, Tax, Insurance, Estate, Wills.

“No amount of talking or reading can teach you swimming. You will have to get in the water.”

There are these little general rules which are applicable and useful for decision making and taking actions. And these simple rules are applicable in so many aspects of life, they are just some small reminders, some common-sense stuff which are really useful.

And yes most of them are applicable in investment planning as well.

a. Perfect Plan – Forget it.There is no such thing as a perfect investment plan and no such thing as a perfect time. The right time is now. Tomorrow is and always will be uncertain. Perfectionism is the enemy of action. Do not let perfect investment plan or a perfect time to invest stop you from starting.

b. Analysis Paralysis – Too much thinking will often result in getting stuck.Some thinking is good — it’s good to have a clear picture of where you’re going or why you’re doing this — but don’t get stuck thinking. Just do.

c. Get the Broad Picture and Start. You need to get the broad picture in your mind. You need to understand your future requirements or what do you want to achieve (goals). You need to know the time you have to meet those requirements. And, then you should have the broad plan to meet the goals. Once you have the broad picture. Get going.
All the planning will take you nowhere unless you take that first step, no matter how small it is.

d. Keep things Simple and take Small Steps. Small steps always work. Little tiny blows can break down that mountain. And then each step counts. Keep the big picture in mind, but start by taking small steps.

Understand the advantage of Investing Early here.

The Little Rules to successful action To be contd … Part 2.

ICICIdirect’s trading site crashes; customers trapped and helpless

The online trading system as well as the phone-order service of ICICIdirect broke down today leaving numerous customers feeling completely helpless. However, the company is keeping mum so far

icici-direct-trading

ICICIdirect.com, ICICI Securities Ltd’s retail trading and investment services portal crashed today due to technical glitches. This has put all of its customers in deep trouble. Till writing the story, the trading or customer login page on icicidirect.com was showing an error message saying:”Dear Customer, Our website ICICIdirect.com is not available today due to technical issues. We truly regret the inconvenience caused to you.”

ICICIdirect.com was down since morning with a message that the services will be resumed at 8.55am, the time when trading commences on bourses. However, throughout the day, customers were not able to log in or do any online trading. Even its CallNtrade facility used for placing orders through a phone was not working.

More here at moneylife ………

It is surprising that there was no backup planned for such an event and no trading could be conducted by ICICIdirect customers. Wonder whatever happened to people who speculate in Derivatives and wanted to square positions.  Markets gapped up and stayed positive throughout ……

Welcome to the secure world of technology , security and finance…….

March 2010

Costly Investment Mistakes to avoid at all costs – Part III

Costly Investment mistakes Part 3, Investment Planning, Financial Planning, Stocks, Mutual Funds Investing, Life Planning, Goal Oriented Planning.

In the process of investing, one often makes mistakes.

Here are some of the most common investing mistakes which investors generally make and some of which even I had made in the earlier part of my investment years

Of course, learning from the mistakes, continually, the investing experience has truly been rewarding experience.

You can also cultivate good habits of investing by avoiding the following mistakes.

This series is in continuation to the earlier 2 posts which contains the first 5 common mistakes committed by investors. You can read posts here at ( Part I and Part II )

This post ( Part III )  will throw light on the following common mistakes generally committed by investors:

#6. Having Unrealistic Expectations from Investments & Wrong understanding of Risk

Indexes (Sensex and Nifty) have gained more than 85% returns from the lows of March 2009. All the TV channels and newspaper headlines have started to focus on this aspect a lot andfuel greedin common people. Similarly just 2 months earlier to March 2009, or so,  when there seemed no end to the global markets falling down, were down more than -ve 50% , the same TV channels and newspapers were fueling fearsinto the minds of the people.

Expecting similar returns consistently from the stock markets is one of the common mistakes. This happens when expectations from the market are unrealistic (like doubling money in 1 year. etc).

The other side is when there is fear in the markets there perception that markets are extremely risky and all investments should be moved to safe instruments like FD’s etc.

Point is :

Markets test patience and reward conviction.

1. Equity Markets cannot keep rising 100% year on year every year & cannot keep falling 50% year on year every year.

2. There are various phases to the markets, long periods of range bounded ness, sudden spurts either up or down due to sentiments, global factors etc.  All this causes violent moves in the markets in short term. In the long run or long periods of time 5yr, 10yr, 15yr the ups and downs and returns from the marketseven outtoyield mean (or average) realistic returns. Being aware of this point is important.

3.Riskin equity marketsappears very highin short period of time. HoweverRisk in Equity markets is reduced significantly when investments are spread over long periods of time.

4. Risk and Returns are inseparable. Once the objective is clear which is get better returns over a period of time, then you must be willing to invest in instruments which carry more risk, intelligently. And marry the risk with passage of time to yield good returns.

#7. Leaving Investments in Auto Mode – No Periodic Assessment, No periodic Re balancing

You do periodic health checkup with the objective of finding if there is any need to take preventive measures to keep the body in good shape. If you are gaining weight and becoming overweight, you need to start taking steps to cut down on the weight. Similarly, if you are losing weight and have become underweight, you need to start taking steps to regain health.

Similarly, periodic assessment of portfolio (once a quarter, every 6 months at least) is necessary. This has to be done with the similar objective of taking preventive measures (if at all required) to keep the portfolio in good shape. Portfolio rebalancing has to be done as per asset allocation.

However, many investors make mistake of leaving the portfolio in auto mode once the investments have been made. Investments is indeed a long term process, but If some investment goes sour, and it is not acted upon in a timely manner,  it probably becomes too late / or too costly to get the portfolio back on track , if preventive measures are not planned and executed.

Final Part to be contd…… You can read the final installment here at Part IV

Costly Investment mistakes to avoid at all costs – Part I

Costly Investment mistakes to avoid at all costs , Investment Planning Tips, Financial Planning, Stocks, Mutual Funds Investing, Life Planning, Goal Oriented Planning.

Life can only be understood backwards; but it must be lived forwards.

In the process of investing, one often makes mistakes. There is nothing wrong in it. However, repeating the same mistakes should be avoided. This is so much easier said then done. Never-the-less, we can always try. So, Here are some of the most common investing mistakes which investors generally make and some of which even I had made in the earlier part of my investment years.

I have been investing since 1997. Earlier part of the investment was when I was in US and then later after moving to India in 2005. I have been investing in both shares and real estate.

Of course, learning from the mistakes, continually, the investing experience has truly been rewarding experience. You can also cultivate good habits of investing by avoiding the following most common mistakes.

So here goes……..

#1. Investing without a Goal

If one does not know to which port he is sailing, no wind is favorable.

Beginning investors often begin by Casual Investing without any goals. This quite often leads to pain and heartburn because, without any goals, investments are treated as speculation instruments solely aimed at making more money in a shorter span of time, by chasing market performance and acting on market swings, something similar to get-rich-quick scheme. (Speculation is a different ball game and of course, many people do succeed at it. However as in Investments, there are different set of rules, full time efforts, and a different mind set and discipline which needs to be followed.).

Different goals require different strategies. Broadly goals can be divided into three types according to time frames.

Long term Goals– typically 7+ years (e.g.: retirement corpus, child education, child marriage etc.) should invest in Long term high risk/high return growth investment assets.

Medium term goal– typically 2 – 7 yrs (e.g.: deposit on house, planning a sabbatical from work etc.)  Require balanced risk investment strategy,

Short term goals– typically less than 2 yrs (e.g.: overseas holiday, purchase of car, any major house improvement expense etc) require conservative investment strategy.

So, Some of the following questions have to worked upon and answered to full satisfaction before setting out for investment: What am I investing for (Goal)? How much do I need for the goal to be met? What is the time frame of the investment going to be? Where do I need to invest? Should I do lump sum investment or Periodic investment? And so on…

Remember, failing to plan is planning to fail

#2. Not Starting to invest Early enough

This is one of the most common mistakes made by investors. Most of us keep waiting for the right time, or the right price, or the right time to begin investing. Remember, Time in the market and not timing the market is the simple way to success in investing. Please read my earlier post on Invest early, Invest Wise, Utilize the power of compounding.

#3. Emotional Investing , being short -sighted, falling to greed and fear, Not following the Investment Plan

A wise man should have money in his head, but not in his heart. –Jonathan Swift

Investing is a long term deliberate process. Long term investment strategy may not make you super rich overnight, but it will not make you a pauper either.

Getting emotionally involved with the portfolio movement is another mistake committed by many. Becoming greedy when markets rise or fearful when markets drop.Paper Money plays on emotions. Investors begin to time the market. Emotional buying and selling of shares based on sentiments often leads to selling low when market sentiments are bearish OR buying high when market sentiments are bullish.

This often results in additional costs, lost opportunities. And of course, if at all the investment was to meet some goals, and then all of that goes for a toss.

To be contd………. Part II. You can read Part II of this series here. (Costly Investment mistakes to avoid at all costs – Part II)