Costly Love & Killer Affection

I love risk proposition; interested to enter risk based instruments and commit money on such contract, I like speculating the things for which decision is expected. Recent such commitment was for the TRAI (Telecom Regulatory Authority of India) decision pertaining to the Number portability. Though the implementation has to be made before 31st Oct, but I’m sure that it will not go as planned. The reason for my belief is that there have been at least three occasions when the deadlines were extended and this time also it will be extended by few more months. My commitment to this contract is beyond 31st Dec-2010.

But this sort of contract, occur as a result of off the line discussion and are not sufficient for my risk appetite. In my constant hunt for the risk based instrument, I ventured into a new of kind of stock market instrument i.e. “Writing option”.

I have tried buying call and put option many a times but never tasted success, though the indices were more or less towards my opted call/put price but not enough steam left in the market to cross those strike prices with heavy margins. My diagnosis was right but the prescription went wrong. As a result of which the current prices of my call and put were trading at a lower prices as compared to purchase prices. Contract reaching the expiry added more to the losses as premium for call and put options started eroding with each passing day.

But this time I wanted to take the premium of such contracted and decided to write a call. There were some clues that market has some steam to touch new high but will end up correcting heavily. But since my purchase, a correction seems to be ruled out and premium for my call has doubled amounting to huge losses.

Call options are more In-The-Money if the stock price goes higher, and if one sell a Call option and the underlying stock price goes down below the option's strike price (the option becomes Out-Of-The-Money), the option will expire worthless. And one can pocket the profit earned by selling the option. Which is exactly what I intended to do.

However, what happed was entirely reverse, these contract are infinite risk as the call price can rise to infinite. The real danger happens when the stock price keeps climbing and if it keeps going up, it will never become worthless, and near to expiration day someone is going to exercise the option and buy the stock from the seller who has earlier sold at a cheaper price as compared to today’s price. The seller is now in a heavy loss. Unfortunately the seller was me.

In a nutshell this article and experience is worth 4,000 bucks. Anyways I’m still interested to write the same call which has doubled by this time, at the same time I also admit that My love towards risky proposition is proving to be very costly and affection towards equity instrument to be Killer.

Let see if this works as per my expectation and will pray for a steep correction in the market.

Future in futures ….

Firstly when I came across the concept of futures I was very much thrilled and excited and I was on top of world, as to purchase anything in equity or commodity I have to shell out only 6-10% margin money. I thought I can play long and short in all the futures and make quick bucks. Though my expectations from the future market were not very high (in terms of profits) and the profit margin I was targeting was hardly .15 %, the moment I had that much margin I wanted to exit my position.

Till this time it was fine and sounded interesting, but

Suddenly I have lost my hope; my faith has also been shattered.

This has happened surprisingly, for what I was never feared.

I’m left with nothing at all, my happy time ended so small.

As I did transaction based on some assumption that how the market will react, but as you know the assumptions are not always true. The same thing happened to me in all my future transactions, market reacted reverse to my assumption and as these type of trading are high risk prone and are calculated on mark to market basis I made huge losses. The losses are enough to eat up all my profits earned till day in the equity market, but this losses gave me a lesson that the future market is when you have surety of the market movement and you should have deep pockets to enter in the future market.

How short is short

The second thing that proved deadly to me is taking a short position in the market. When you take a short position you assume that the market will fall and you will purchase at lower level, but the things turned to be reversed, Instrument appreciated and I was forced to purchase them at a higher level. I was forced because the transaction has to be squared off within the same day. (Where as if you buy something and it depreciates you have an option to hold it for a long). After making some wrong transactions I learned the lesson that you should hold the instrument to play short in the market so that in case if it appreciates then you have the instrument to settle the trade.

Image source: online-stock-trading-guide.com

Interest rate Futures

You might have heard the terms speculation, hedging, spot, future etc let me elaborate those terms in my language as per my understanding.

Speculation is about profit making while hedging is protecting one’s profit by minimizing losses and hence is a defensive strategy.

Future market (Price) differs from spot market (Price) because in future market the contracts are traded for future delivery of the particular commodity. The difference between the spot price and the current contract price is called the "basis." The basis equals the cash price minus the futures price.

The future price of any commodity depends on the underlying asset, if the price of underlying asset increases the future price is bound to price.

When one wants to hedge he has two options either “Going Short” or “Going Long”

“Going Short” is opted when it is believed that the prices of the underlying assets are going to come down, so the hedger sells the contract without owing it, later when the price of contract goes down (as per his speculation) he purchases the contract and squares off his/ her position.

“Going Long” is opted when it is believed that the prices of the underlying assets are going to go Up, so the hedger buys the contract, anticipating that the contract prices will go up. When price goes up the Hedger sell the contract, book his profit and square off his/ her position.

Let’s see how it work Say suppose I have to pay 100 thousand USD to my supplier 6 months down the line but I’m not very sure that what will be the dollar price at that point of time. If the dollar / rupee is 47 then my outflow will be 4700 thousand rupees but if it is 50 then my outflow will be 5000 thousand rupees means an additional outflow of 300 thousand Indian rupee, now I want to avoid this loss.

For this I will buy dollar future contract today (say quoting at 48 Rupees) and sell the contract 6 months down the line ( say price of the contract quoting somewhere around 50) through this deal I’ll earn a profit of 200 thousand Indian rupees which will help me in minimizing the losses made if I would have not done it.

Now futures for interest rate are also available I believe it is the right time looking at a greater uncertainty in the global economy and the higher movement in interest rate levels in India also.
The contracts will be settled in March, June, September and December. The maximum maturity will be 12 months. Deliverable securities under the futures should mature between 7.5 and 15 years with minimum outstanding of Rs10,000 crore.

Commercial banks can take trading positions for themselves but not on behalf of their clients. Non-resident Indians, companies, primary dealers and foreigners can also trade in this segment. Foreign investors can trade if they have the underlying security, but not for speculative purposes.

Image source: commoditiesandfuturesguide.com