The Aisapaisa.com Angle

The Put Call Ratio (PCR) is simply the ratio of the trading volumes of put options on a particular underlying to the number of call options. This is a valuable indicator of market sentiment, for instance – a high PCR would indicate that the market is bearish since traders use put options to fix a sell price for their securities when they anticipate a fall in price thus a rise in put volumes is usually an indicator of the bearish mood in the market and vice versa. Although, it is worth noting that options traders are affected by sentiments too and are hence often go wrong, in fact data suggests that a high put call ratio usually precedes a rising market and a low ratio is followed by falling prices and this is why the PCR is more commonly employed as a tool by contrarian investors.

As a retail investor (contrarian or otherwise) it is worthwhile to observe spikes in the PCR as they precede major market movements.

This ratio is usually displayed in two formats – in terms of total traded quantity and open interest.

In the Indian context PCR as a tool is valid only for index options, given their high liquidity and not for most stock options on account of low trading volumes.

If you happen to bullish on a stock, consider buying it at a discount using options. How?

Read on…

Assuming that you feel that Aisapasia.com stock is slated to do very well in the future given its excellent management, blah, blah..and you would like to buy it now and hold it for a while – you check up its current trading price which happens to be Rs. 100, now instead of buying the stock at Rs. 100 you decide to be frugal and hence sell a Put option on Aisapaisa.com – so what happens??

A Put option gives the buyer of the Put to sell the stock at a specified price on or before the expiration date i.e. if you bought a put option on AisaKaisa stock at Rs. 50 you can have the right to sell the AisaKaisa stock prior to expiry at Rs. 50 regardless of the actual prevailing price (you earn if the actual price is less than 50 and you would not exercise the option if the price were to exceed Rs. 50). The price you pay to buy an option is only a small fraction of the intended transaction amount.

On the other hand you as a Put seller earn that small amount and are obligated to buy the stock at the specified price on or before the expiry date as and when the Put buyer decides to exercise his right. Hence if AisaKaisa’s prevailing market price is Rs. 40 and the buyer decided to exercise the contract you lose Rs. 10 – however you still receive the contract fee or ‘premium’ and in case the price is above Rs 50 you do not lose anything.

Coming back to Aisapaisa, suppose that instead of buying one share at Rs. 100 you decide to sell a put option on Aisapaisa for Rs. 95 for the next available expiry date, you could obtain a premium of about Rs. 7 for this. Now though you do not own a single Aisapaisa.com share, you do have Rs. 7 in your account and the chance of owning a share in the future. Consider the following scenarios prior to the expiry of the option:

Suppose that Aisapaisa.com falls to Rs. 90 and the option is exercised – you end up buying a share at Rs. 95, but your actual cost is 95-7 = Rs. 88, which is less than Rs. 100 you initially planned on.

In the event of Aisapaisa.com’s price going up, the option is not exercised, but you still get to pocket Rs. 7 and to continue you may even sell another put on the stock.

Hence, as we see you can create a win win situation for yourself by selling puts, but one must be cautious to apply this only to those stocks which are found to be worth owning, also, do ensure that selling the option pays you enough to make it worth the effort.

Indian Financial Markets have come a long way and a recent example of the same is the launch of the Nifty Volatility Index (VIX), which is a standard feature of mature markets worldwide.

Unless you go into the mathematics of it, volatility as a concept can be easily understood - it simply refers to the amount of uncertainty or risk about the size of changes in an asset’s value.  High volatility would mean that the changes in values could be spread out over a larger range, whereas low volatility would imply the opposite. The VIX measures the market’s expectation of Nifty/Sensex volatility over the coming 30 day period and is often termed as the ‘fear index’.  It calculates a volatility figure from the best bid-ask price of Nifty 50 Options contracts (traded on the Derivatives segment of NSE).
When  the market is going in one direction (either ways)  volatility is observed to be low and will thus be reflected in a low VIX value and  when it shows no directional trend and is not range bound volatility will be higher (reflected in a higher VIX value).
It is not necessary that an investor look at VIX figures on a particularly regular basis, but one must look out for drastic changes or spikes, as they are often found to be associated with market falls.
An investor may also use this figure to asses if the near term market fluctuations match with his/her risk appetite, it can also help in timing sell decisions better.

Furthermore the NSE will be launching products based on the VIX, which would help investors hedge against volatilty amongst other things.

Money Markets may be broadly defined as a framework within which large financial institutions fulfill their short term monetary needs by trading in fixed income securities such as government bonds, corporate bonds, fixed deposits etc.

Such instruments bear lesser risk as compared to investments in equities and pose no liquidity constraints.

Given that most money market trades take place in large denominations retail investors cannot directly participate in the same, however mutual funds in India have begun to offer schemes that invest in money market instruments, these may be employed by retail investors with equity heavy portfolios for the purpose of diversification.

Circuit Breakers are imposed by stock exchanges to stop widely volatile price movements in individual equities by freezing trading for some time. Market wide circuit breakers are imposed by SEBI.
Currently, three categories of price movements invoke circuit breakers – 2%, 5%, 10% on a single day for different equities, these are also termed as price bands.
For the market as a whole the limits stand as 10%,15%, 20% - wherein the time for which trading is stopped varies.  Even if one index reaches the circuit barrier, all bourses in the country come to a halt for a specified time period.

However, no circuit breakers are applicable to the Derivatives Segment, but a watch is maintained on their price and out of the ordinary price movements

This trading strategy involves following a pair of securities whose prices are correlated i.e. the difference in their prices is consistent (though not exactly) over a certain time period (few months or more) and selling one and buying another as soon as this price difference widens expecting that it will eventually fall back to its usual level. This may be illustrated as follows:

Suppose that Aisapaisa (AP) and Aisakaisa (AK) are two companies whose prices seem correlated, the difference in their prices generally hovers around the Rs. 100 mark but recently this difference has increased to Rs. 120, in such a scenario a pair trader would sell AP if he thinks it is a case of overpricing and/or buy AK if he thinks it is a case of underpricing. Once the difference returns to Rs 100 the trader would end up pocketing Rs. 20 on each such transaction.

Typically stocks chosen to constitute a pair happen to be fierce competitors in the same sector (with similar product profiles, operating strategy etc.), they must also have stable and similar beta values, for example Bajaj and Hero Honda.

You may check for consistency in price difference by comparing the price charts of the two stocks however one must ensure that logical reasons are attributable to the same sustaining in the medium to long term as well.

P Notes or Participatory Notes are financial instruments employed to invest in the Indian stock markets, these are issued by registered FIIs to overseas investors who want to invest in India without registering (or because they cannot register due to SEBI rules).
The mechanism entails Indian brokerages buying/selling Indian securities and issuing P Notes to foreign investors who are liable to collect all capital gains and dividends accruing on the same.  Many investors also prefer the P Note route as it offers certain tax advantages over the conventional FII route.

P Notes (often also known as Panic Notes!) are the only avenue for hedge funds to invest in the country and since they are known for causing volatility due to large and fast transactions their actions are monitored carefully by market regulators.  Even though P Notes have been bringing in money for the Indian markets they are viewed with suspicion since there is no way of ascertaining the real owner of the underlying securities, which may even include terror outfits.  Time and again restrictions have been imposed on the issuance and renewal of P Notes (October 2007 has been the latest instance).

Rupee cost averaging (RCA) is a concept that applies to Systematic Investment Plans (SIPs) offered by various mutual funds. As a strategy RCA helps you eliminate the need for deciding the right time to invest i.e. ‘time the market’ and as a result of this the average cost of a unit that you incur is always less than its average sale price, irrespective of the nature of the market (though by timing the market accurately you can make greater profits than those awarded by this scheme, but accurate timing is not everybody’s cup of tea!).

RCA can be explained as follows:

Assume that you have been investing Rs. 500/month for the last 3 months in the units of Aisapaisa SIP. The price has been falling over the mentioned period and hence you are able to buy more units each month –

Your total investment has been Rs. 1500 and the average cost per unit incurred is Rs. 15.78 (1500/20+25+50), in case you were to invest the entire Rs. 1500 in one go you are most likely to invest at the simple average price i.e. Rs. 18.33 (25+20+10/3), which will always be greater. The same would happen in case the market was rising or fluctuating.

Hence, unless you are confident of your market timing, a SIP is the safest way to go.

Fixed Maturity Plans or FMPs are a product class offered by Mutual Funds and have gained immense popularity in the last few years given their tax attractiveness vis a vis fixed deposits and the fact that they provide predictable returns very low risk.
FMPs have typical maturity periods ranging from one month to three years and invest in various types of debt instruments such as corporate bonds, government securities, commercial papers, debentures and call money thus offering enough safety for the risk averse investor, a key feature of these investments being that they are made in instruments whose maturity coincides with the time period specified by the scheme.
The tax attractiveness of FMPs derives from the fact that whereas interest accrued on fixed deposits is fully taxable, returns accrued on FMPs are subject to either dividend distribution tax/capital gains tax which are almost 10% lower than the former.
Currently more than 200 FMP schemes are active in the country.

With inflation at 12%, investments in debt instrument (bank deposits) which offer yield of around 10% no longer seem attractive. High dividend yield stocks provide both consistent cash flows as well as a potential for capital appreciation.

What is dividend yield?
Dividend Yield = annual dividend per share / stock’s price per share

This measurement gives the percentage of return paid out to the share-holders in the form of dividend. Older companies tend to have a much more higher and consistent dividend yield than smaller companies.

Dividend Yield Trap

Companies which pay high dividends are typically good long term investments. However, the investor must be display some caution and look at the company’s fundamentals before investing in the stock. Buying a company which is on a decline may not help, as it may not be able to payout the dividends in the future. Dividends are paid out of cash flows, so check if the company the company has healthy cash flows and consistent earnings and growth.

Other Factors

Removal of dividend tax also makes some of these stocks very attractive. So watch out for companies which have a high dividend yield and a low payout ratio, as this means that these companies have enough money to pay the investors as well as enough to plough-back into the business. Investment in high-dividend yield stocks is considered to be a defensive strategy as historically, these stocks have done well during market downturns. They also provide possibilities of capital appreciation during reviving markets.

Simply put, these stocks give the triple benefits of dividend income, downside risk management and scope for capital appreciation.

Electrosteel Castings, Honda Siel Power, EID Parry and Tata Investment Corporation are few stocks with a high dividend yield and low payout. Coromandel Fertilisers is another bright stock with a dividend yield as high as 8.5 per cent and a payout of 30 per cent in the past.

Others would include companies such as Castrol and Ashok Leyland.