Ideas: Playing in the derivative jungle

Event Based Strategy: Buy or Sell based on where the event may seem to bend the situation, but cover the position with 60:40 ratio.

Daily Strategy: Sharekhan Derivative research, way2wealth, microsec

Event Based Strategies

Events are the best time to cash in the derivative market as volatility will be very high. Some examples are as follows:

When the government cancelled the mines allocated to JSPL, the stock tanked 15% whereas the puts went up by a whopping 400%. This was very easy to cash in as a single sided strategy as well as a hedged one if one wanted to minimize risk and compromise on profit. But it was a really nice time to cash in the news.

Similarly when the Supreme Court deallocated the coal mines, the stocks of all the companies except coal india tanked heavily. That was very much a predictable event that could be cashed in but opportunity missed is an opportunity lost.

Another event was the allocation of Spectrum to telecom companies, now the telecom companies would go into huge debts if the final payment is done. So their stocks tanked down.

Few lessons learnt the hard way:

Playing daily by expert opinions, one should keep the target to 3-4% if he/she is not able to sense any logic for the move.

An event having a particular impact on a company need not mean that it will impact the whole index. Rather the index depends on the general mood of the market, if majority is in a mood to sell even after some big event the index will fall heavily and vice versa.

“As per mechanism approved in October 2014, price of domestically produced natural gas were to be revised every six month using weighted average price at Henry Hub of US, National Balancing Point of UK, rates in Alberta (Canada) and Russia with a lag of one quarter. So, rate for April 1 to September 30 would be based on average price at the international hubs during January to December 2014. “

So the price was coming out to be equal to $ 4.56 per mmBTU but the government has made it equal to $ 5.01 from $ 5.5 for the public.

Reducing the prices by this way hurt the companies such as Reliance Industries and ONGC.

This can be used as an important parameter for future predictions.

Lesson: While playing in options keep strict stop losses say 0.6 times the value of the contract, but on the target side buy even lots everytime and for a 2.5 times the cost sell odd number of lots and leave the rest odd to go to hero or zero.

Busting Myths

Myth 1 : Prices of Indian securities will be a reflection of the previous night ADRs in US, rather it is completely opposite….Learnt the hard way

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