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.