Bull Call Spread : Options Strategy

Bull Call Spread is the strategy you can use to profit from moderate rise in profit of underlying security.

What you do here is that you buy  1 Call Option and also sell a higher value Put Option

Example lets say current value of nifty is 5000 and lot size is 50. If the nifty call option is available for Rs 70 for the strike price of 5000 and sell call option position of 5200 for Rs 40.

Net money taken initially would be 70-40 = Rs 30*50.

A person will profit if Nifty stays between 5070 and 5160.

Maximum profit will be Difference in strike price - Amount paid = 200-30 = 170*50

Maximum loss will be amount paid = Rs 30*50.

ON the expiry if nifty is at 5120 then first contract will give profit of 120*50 = 6000 and second contract will become worth less = 40*50 = 2000, so the net profit will be 4000.

Both the contract should have same lot size and should expire in the same series.

This strategy was buying ans selling Call Options if the same thing is done with Put options then it is called Bull Put Spread.

Equity SIP New Buzzword

SIP Systematic Investment Plan was already famous and proven in Mutual Fund context but now SIP has also come directly into Equity Stocks which is essentially Individual Stocks. 

Equity SIP is a new facility through which you can buy a script for a regular interval over a period of time for  specified amount or for a specified quantity.

Amount based Equity SIP

 Amount based Equity SIP is a SIP type wherein a fixed amount (or approximately the same) is invested in your desired scrip at each frequency

Quantity based Equity SIP 

Quantity based Equity SIP is a SIP type wherein a fixed quantity of shares of your desired scrip is purchased at each frequency.  

Currently few online brokers are providing this facility on select stocks. ICICI Direct is one of them.

Benefits of investing in Equity SIP are 

•     It is a disciplined investments approach
•     Accumulates wealth by investing smalls sums regularly
•     Spreads and averages your cost of purchase (by buying in both ups and downs)
•     Removes the risk of timing the market
•     Reduces the risk of market volatility
   

Profit Booking Time : Year End Coming

Stock Market rose quite a lot this year from last March to this March.
You would have made lot of money but if you were also invested in sectors which didn't perform or were laggards you would be sitting at some loss in those sectors like Telecom or recent IPOs like NHPC which are below initial offering.

To reduce tax liability this is the time to book losses in them to offset the profit made this year.

Others will start doing it or has already started and stock market also has peaked so this is the time to cut off the laggard stock from the portfolio and clean it up along with reducing the tax liability.

Primary Market and Secondary Market

In Primary Market securities are offered to public for raising capital also called IPO(Initial Public offering). The proceeds from the issue goes to the issuer of the paper.

In Secondary Market securities already offered are traded in the market. Most of the trades happen in secondary market.

2 years back Primary Market was a good place for small investor to make handsome profits. Just the luck of getting allotment confirmed the profits you are going to make.
Some people use to take loans to apply for an IPO also probably through multiple accounts.
20-100% return in short period of time and relatively risk free was a good proposition.

Things have turned now. After nearly dead primary market for 1-1.5 years, they are back and people had high hopes with them. Adani Power, NHPC , Oil India,Mahindra Holidays raised hopes that IPO option will be available again to make money. Adani Power dashed off all the hopes with listing almost around the upper band and no margin left for the investor to make money. Those you have bought money to apply (basically HNIs) would have burnt fingers because even getting back interest money would have been difficult.

Looking at the market condition Grey market premium for NHPC is also down to 4-5 Rs from Rs 10-12. If market is in bad shape on the day of list, you wont see any premium on that day. BRLM suggested Rs24-30 as price band but govt became greedy looking at the rise in the market and fixed Rs30-36 not leaving anything for the investor.

I guess applying to an IPO locking the money for it(even if it is ASBA) doesn't make sense if it gives return of 2-4%( if you are investing 1 lac) there will be many more opportunity in the secondary market to make more than that.

If you really want to invest in the company for long term you can buy the share on the listing day. Only drawback would be that you have to pay the brokerage which you don't have to pay if you apply through IPO, but who knows you might get cheaper than the price band :-)

Stock Option Trading Myths Debunked

I have explained what are derivatives (futures and options) in my previous posts.

My previous posts on derivatives :-

Futures or Options

Derivatives Basics

Y Derivatives?

I was going to start writing an article discussing various option strategies soon.I found this cool video which clears all the myths around option trading.
It would be good to watch and understand before going deep into various strategies like straddle, collar, cover put, married put etc.

Various myths covered are Complexities around optioms, assumption that it is hard to learn and master, it is time consuming, losses are huge , its high risk and investor always loses money and so on and on ...

Before you take a dive into options have a look at this video.

Credit Crisis explained in short simple story

I found a nice video which explains Credit Crisis in a very easy way.


The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

Hope you enjoy this video and understand the crisis through a video rather than reading a verbose theory.

FMP(Fixed Maturity Plan) Vs FD(Fixed Deposits)

FMPs are great investment options in times of volatility. FMPs primarily invest in fixed return investments like government bonds and money market instruments which are very short-term fixed return investments.

FMPs are not open ended funds that allows you to exit so invest money you are sure you don't need.

The volatility is reduced because these products invest in instruments upto maturity so that returns are predictable.

FMPs are better than FDs when it comes to tax savings. Interest earned in FDs are taxed at personal interest rates. In FMP there is no personal Taxes there is only dividend declaration Tax to be given by fund house which is at 14.5 % so effective post - tax return is higher in FMP considering similar returns to start with. FMPs also have the benefit of Indexing when kept for more than year to gain long term capital gains.



FMPs might not give higher returns than FDs often but they do tell you the indicative returns at the time of NFO(New fund offer)

It is also different that income fund which doesnot have fixed tenure. Given fixed tenure helps fund manager to invest in instruments having similar maturity period.

Maturity periods can vary from 30,90,141,180 or even an year.

Good Riddance

Good Riddance - Time of your life

"Time grabs you by the wrist, directs you where to go
So make the best of this test, and don't ask why
It's not a question, but a lesson learned in time"

Recent turmoil in the equity market has given us lot of valuable lessons though at a heavy price ;-)

Unpredictability , irrationality , greed are all part of this market.....Time and Price correction were both required..

Its very important to find the right value for everything then only we can identify whether it is cheap of expensive...

Earlier we were buying not because it is cheap ( stock might be horribly expensive) but is still going to rise more.....targets were set and nobody wants to miss out the joy ride.....

now all this seems to be a dizzying rollercoaster.......

Be patient and don't sell it at a loss, for long term investor some more downside should not be a dampner. Recession or slowdown from now on slowly and steadily we can start putting small amount of money in the markets.

Remember 50% downside will bring 100% profits
90% downside will bring 1000% if the stocks are retraced to their original levels...

Many stocks are already beaten down 80-90% and they don't have much to loose......

Finally...

It's something unpredictable, but in the end it's right.
I hope you had the time of your life.

Timing Matters in Stock Market

A very good article by Arun the stock guru

Timing is everything for investors

Go and enjoy reading it....

Oil Marketing Companies

Price Hike!! Price Hike!! Price Hike!!

No decision yet taken by the government readying itself for upcoming elections. These companies have already taken huge losses.

We have seen strength in these companies last 1-2 weeks in hope of price hike.

I wonder how much these companies can gain given the fact that hike will only reduce their losses but not make them profitable. Gods knowns what will happen to already incurred loss.

Oils bonds are helping them partially but thats a sad story for common man because these bonds are just postponing the disaster.

Lessons learned

Current market turmoil as given lot of lesson to the investors new to the market.
People who were used to get returns just by investing blindly in the market past year have burnt their fingers recently.
Now people should stick to stocks which are fundamentally strong and should stay away from momentum stocks.
Fundamentally strong company can loose a little value in this kind of blood bath but they still retain their inherent value and will have premium in good markets.
We now have huge interest rate differential with US which is around 4.75%. We have to see its impact on capital inflow, dollar depreciation , industries affected, inflation because of inflows and RBI moves because of all these events.

Status quo by RBI recently has not been favorably received by most of the industry.

Indian stock market is at attractive levels now and should do well in coming years based on the growth estimates. Investors have to settle for lesser returns from past years but still it will be better than the traditional saving instruments.

The most important lesson which I have learnt is we always need to keep certain amount of cash aside. When market falls money not invested retains it value and gives you huge leverage when you can buy stocks when they are available at throw away prices.

If you are always 100% invested with all the money you have then when market falls you don't have dough/capital to use the opportunity knocking your door.

It can make huge difference if you buy in the depressed market condition.Though everyone is panicking , if you can hold your sentiments and invest wisely you can gain immensely.

1. Keep at least 15% of liquid cash to cash in on the market opportunities.
2. Buy and increase your holding in value stocks.
3. Always book profit in momentum stocks when market peaks and show sign of weakness.
4. Don't play on margins when market is in turmoil.
5. Don't over leverage.
6. Play only on cash. Don't risk more than you can afford.
7. Buy tax saving instruments when markets are on high and you don't have any alternative. Don't wait for January or February.
8. Buy equity when markets are at there lows.
9. Don't gamble play informed.
10. Don't panic and never loose. Don't convert winning stock into a loosing one.

Keep Calm

TRANQUILITY

This picture is exact opposite of what is happening in financial markets recently.

Are you still feeling jitters?? I think we should stay calm and do not panic. If you are in market for a long term then what happened currently is mostly notional loss from notional profits. Panic can make you take decisions which you might not otherwise. If you are staring at your losses then don't worry everyone else has lost too....

You are not alone and misery likes company.....

If you were trading on margins or were in derivatives trade. I must say beware and hold your hands for sometime till the market rationalize because as we have the famous saying....

"Markets can remain irrational longer than you can remain solvent"

Yes I didn't post anything for past 2 days and that was purposeful. I don't think anyone was interested in hearing any gyan :-) and even I was confused what to write :D

The stocks which everyone was recommending when indexes were at 21000( and I am talking about pure fundamental stocks and not the momentum plays...) still remains a good buy.

Yes there will be some moderation in gains but there will be gains. Fundamentally nothing has changed.
India is growing and it will be reflected in the companies which are working to make that happen.
Various central banks are coming out to help the markets. Fed has already cut rate by 75bps.

I am no one to advice but I think sticking with frontline large caps will be best bet.

And as a closing statement I would like to quote Mr Warren Buffet who says

"Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years"

If you think for few minutes you would certain find few gems in the market which falls into that category.

Mutual Fund Investment Options

In the previous article we discussed about the basics of mutual fund and the types of mutual fund available.


Here we will discuss about the investment options available while buying a particular mutual funds.

Once you have decided on which fund to buy, you may have the option to choose between the following options

• Growth
• Dividend
• Dividend Reinvestment.

Sometimes people ignore the importance of choosing right kind of option and choose arbitrarily any one of them.

So now question comes as to which options is best to invest in...Frankly there is no fixed answer. Because choosing the correct option is based on the individual needs and also on the prevailing tax laws in the country.

Growth Option -Under this option no dividend is declared and your investment change according to the change in NAV. You will be taxed on the gain based on when you sell your units. If you sell your units after 1 year no tax is cut. Otherwise you have to pay short term capital gains tax.

Dividend Option- Under this option fund sometime declare dividend when they have surplus money.
This dividend is totally tax free whether given after 1 year or within 1 year. So returns on your investment within 1 year also becomes totally tax free. When dividend is provided NAV of the fund falls in equivalent amount.
Since there is regular payout, it can be considered as regular profit booking to reduce impact of market fluctuations.

Dividend Reinvestment Option - Tax free dividend declared by the fund is reinvested in the same fund or different fund of same AMC on a particular day set. Timing of the market may not be always favorable.


Current Scenario ..
-->Debt Funds currently attracts Dividend Distribution tax and Equity Funds are exempted currently.
-->Long term capital gain(Sale after 1 year) is fully exempted for growth schemes.
-->Short term capital gain is taxed.
--> Currently in absence of dividend distribution tax on equity-based funds and no long-term capital gains tax, there is absolutely no difference between the Growth option and the Dividend Reinvestment option

Impact of Tax Changes ...
--> If dividend distribution tax is reintroduced then growth option would be better than dividend reinvestment.
--> If Long term capital gain tax is introduced then dividend reinvestment would prove better than growth option.

Hope after reading this you will have better understanding of which option to choose according to your needs and prevailing tax laws.

This article was part II of the previous article posted on mutual fund...Read previous article here....

To know more in details about these options read the following 2 articles which explains in detail about these options.

Growth or Dividend - How to make the right choice?

Dividend Reinvestment v/s Growth – Let your taxes decide

Mutual Funds Demystified...

A mutual fund is a professionally-managed form of collective investments that pools money from many investors and invests it in stocks, bonds, short-term money market instruments, and/or other securities. In a mutual fund, the fund manager, who is also known as the portfolio manager, trades the fund's underlying securities, realizing capital gains or losses, and collects the dividend or interest income.

The investment proceeds are then passed along to the individual investors. The value of a share of the mutual fund, known as the net asset value per share (NAV), is calculated daily based on the total value of the fund divided by the number of shares currently issued and outstanding.
[source: wikipedia]


Mutual Funds come in various hues and colors. They can be catorized on various basis.

Mutual Funds can be categorized by their structure.

• Open Ended
• Closed Ended
• Interval

They can be categorized by their investment objective.

• Equity Scheme
• Debt Schemes
• Growth Scheme
• Balanced Scheme
• Income Scheme
• Money Market Scheme
• Tax-Saving Scheme
• Sectoral(Industry Specific) or Thematic Scheme
• Index Scheme
• and so on to list a few.......

and they can also be categorized into investment options

• Growth
• Bonus
• Dividend
• Dividend Reinvestment

We will discuss each one of them so that it helps you in choosing and picking right fund according to your investment objective.
-----------------------------------------------------------------------------------------------------------
1. By Structure

Open Ended Scheme doesn't have a fixed maturity and are available for sale and repurchase on any business day. These schemes are highly liquid and have become very popular.

Closed Ended Schemes comes with a fixed maturity period and are launched with an Initial Pulbic Offer(or New Fund Offer), Investor can buy and sell once they are listed.
Closed-ended schemes are usually more illiquid as compared to open-ended schemes and hence trade at a discount to the NAV. This discount tends towards the NAV closer to the maturity date of the scheme.

Interval Schemes are combination of open and closed schemes, they can be traded or might be open for sale or repurchase.
---------------------------------------------------------------------------------------------------------
So now we can discuss the schemes with their
2. Investment objectives

Equity Schemes are also known as growth schemes and aims to provide capital appreciation over a period of time. These schemes invest majority of their funds in Equity and small portion in debt or money market instruments. These schemes are not for investor seeking regular income.
They are ideal for investors who have a long-term investment horizon.


Balanced Schemes are for the investor seeking both income and moderate growth. They invest both in shares and fixed income securities. They regularly distribute part of their income and capital gains. They are safe from huge market fluctuation because part money is invested in fixed income, so when market rise they don't rise as much, but when market fall it protects you from steep fall.

Tax Saving Schemes also known ELSS ( Equity Linked Saving Schemes) comes with a lock in period of 3 years where units purchased cannot be assigned / transferred/ pledged / redeemed / switched. These schemes are promoted to encourage individuals to save and invest in equities. They offer tax rebates and are good for investor seeking tax exemption under section 88.


Sectoral or thematic funds invest in a particular sector as defined in their investment objective. They tend to outperform if the sector is showing relative growth than the overall market. But these products are also risky because they are not diversified and weightage is given on a particular sector or industry. Recently Infrastructure, power and real estate funds have become very popular.

Index Schemes are schemes which aims to provide the returns equivalent of a particular index of an exchange. Some investors are interested in getting returns equivalent of the market and not of an particular sectors.
Index schemes are some times unmanaged schemes as they don't churn their portfolio and just try to perform equivalent to the index.

Money Market Schemes are for investors who wants to park their surplus money for a short period of time. These schemes provide moderate income with safety of invested capital. These schemes invest in gilts, inter bank call money, deposit certificate, commercial papers etc...
----------------------------------------------------------------------------------------------------------------

Next we need to discuss the schemes based on investment options. This can be a bit interesting topic because investor normally spend lot of time selecting a particular fund house and then a particular scheme in it, but once they have decided on the fund, they tend to ignore the investment option or sometime it is totally arbitrary or on the whims of the agent.

So I will take up the discussion on the mutual fund investment option in the part II of this article which will be published soon.

Double Edged Sword

The current turmoil in the dalal street is attributed to various factors acting in the stock market.

• Global slowdown theory.
• FII pulling out the money.
• Liquidity crunch due to huge IPOs and oversubscription on top of it.
• Valuations over stretched, with long bull market.

Historically good month for the market "January" has not been so good this time.

Currently on Retail participants are allowed to short sell. The market regulator SEBI( The Securities and Exchange Board of India) had banned short selling by institutional investors in 2001 following a stock scam. Till now, only retail investors are allowed to sell short, which means selling securities that the seller does not hold at the time of trade.

Earlier RBI has allowed foreign institutional investor to short sell and now SEBI will allow all categories of investors be it FII, Local Institutional Investors, Mutual Funds,Retail to short sell.
Short sell allows price discovery of a stock. Though this is a positive move and will add to the liquidity and depth of the market, it is yet to be seen whether it will tame the irrational rise/fall in the market.

Investors should be ready for this double edged sword, one the existing global and local scenarios and another the short selling which will unravel itself from 1st of February.

ULIP Vs Mutual Fund

If you thought Unit Linked Insurance Policies are similar to Mutual Funds and are alternative investment oppurtunities. You may be wrong.

Mutual Fund : - Pure investment.

ULIP :- Investment + Insurance.

Investors in ULIPs are allotted units by the insurance company and a net asset value (NAV) is declared for the same on a daily basis.

ULIPs are good only for people ready to invest for a longer period of time.

Normally mutual funds have 2.5% entry load, but fund charges are huge in case of ULIPs in initial years.

Eg :- LIC Money PLus takes 25-26% as expenses in the first year. This percentage starts reducing as years passes.

Note also that ULIPs generally remove your units as their Annual management charge and monthly charges. Mutual funds account for those in the NAV itself. Therefore, for the same dates, your real return on the ULIP would be lower than the figures mentioned, but on the Mutual funds would be the same

Personally I feel that if someone needs both insurance and investment.

Then he/she should take the combination of Term Insurance(pure insurance) + Mutual Funds instead of going through ULIP route.

Term insurance are quite cheap compared to other insurance in terms of benefit amount.
The money saved on premium can be invested in high growth mutual fund.

Similar post : FMP Vs FD

Financial Resolution for next year!!

Its year end and time has come again to have one or more new year resolutions.
Whats your new year resolution?




If financial independence is one of them , then following questions will be of your interest.

Are you saving enough for your retirement.?
Have you planned for an Life insurance?
Do you have medical/health cover?
Do you plan to buy a car/house.?
Do you plan to marry in few years? Or children if already married :-)
What is your current investment in debt/equity.?
Do you think you can maintain or improve your current lifestyle?
Does your current investment will help you in achiving your financial goal?

For each of the above you need to plan and save/invest regularly.

Some of the goals can be short term so money need to be in liquid instruments instead of locked-in long term instruments.

Sit back and analyze how your investment faired in the current year and what can be done to improve financial health.

You can ask yourself each of these questions and answers to them will automatically come and if you are not on the right track you will get your new year financial resolution.

"Instead of spending less than you earn, Earn more than you spend"

Money As Debt

Watch this video learning the mysteries around money.

Debt-government, corporate and household has reached astronomical proportions.

Where does all this money come from?

How could there BE that money to lend?

The answer is there isn't. Today money IS debt.

If there were no debt there would be no money

If this is puzzling to you. you are not alone. Very few people understand, even though all of us are affected.

You should see this either you are a chomskyan anarchist or an 80's Wall Street guy

Wanna Multibaggars in your portfolio??

Do you always wish to buy a stock which is going to be a multibaggar.??

Here is how you can go about selecting your dream stock.

-->Buy stock which is currently undervalued relative to its peers.
--> I am saying relative because it might be the situation that whole industry has lower PE, that doesn't mean that a particular stock is cheap.

-->Buy a stock which is trading below its book value.

-->Buy stock of the industry which is going to flourish atleast for next 3-4 years.

--> Buy stock where earnings are expected to grow atleast by 50% CAGR for next 2-3 years.

--> Buy stocks of a company which is going for huge Capital Expenditure. This signifies higher earning potential in the future and expansion is good for future unless it is going to create over capacity.

-->Hold on to the stocks once you have identified and bought. If you sell after some small profits then that stock will be never a multibaggar for you :-D

Happy Investing !!

Seamless Pipes Global Industry Scenario

Stocks in this industry : Jindal Saw,Maharashtra Seamless, Welspun gujrat, man industries etc....

Source Excerpted From: ICICI Direct. Article from StockIdeas.org

Growing oil and gas demand across the world and the zeal with which oil companies are investing on adding pipeline infrastructure promise higher revenues for Indian steel pipes makers.

• Global demand-supply scenario favours Indian manufacturers

• Depleting crude reserves stimulating demand for seamless pipes

• Global demand – supply set to remain in favor of India…

• Depleting reserves stimulating seamless pipes’ demand …

• Booming oil economy to boost pipe demand
  

• US to be the largest consumer

• Asia to lead pipe demand with strong growth in energy consumption

• Middle East – an important destination for Indian players

• Gas transportation pipelines – a major boost

• Water resources management – another key area

• India set to benefit from global demand supply imbalance

Source Excerpted From: ICICI Direct. Article from StockIdeas.org