September 24, 2009

life in financial markets: good future for options

Equity derivatives has its utility for long-term/short-term investors, day/week traders/speculators & arbitrageurs.

Derivatives involves futures and options. Which among the two are better -- futures or options? If you are 100% confident of a price movement in a particular, either up or down, direction then futures are better. If you are somewhat confident but fear a potential opposite movement then buying options is better. Buying and selling options are different from buying and selling futures. The latter is similar to buying and selling shares from the cash market.

Options, when bought, give the buyer a right but not an obligation, to buy (as in a Call option) or sell (as in a Put option) the underlying. The buyer pays a premium, determined and traded in the exchange, which he never gets back, no matter what. When sold, options oblige the seller to sell (as in a Call option) or buy (as in a Put option) if the buyer exercises the option. The seller receives the premium that is her's for keeps.

So, buying options entail keeping all profits and limiting the maximum loss to the amount of premium paid in buying the option. Selling options entail taking unlimited risk of loss and getting to keep a maximum profit of the amount of premium received in selling the option.

So, why will anyone sell options? Generally, sellers of options do not sell options only to take a view on the movement of the underlying. Their option sale is a part of a strategy (strangle, calender spread, and many more) that involves another/multiple trade/s in cash market, futures or other tenure/strike price options contract.

There is perhaps only one condition under which you could have just an option sale and nothing else. Say, you are looking at Nifty 29Oct09 Call Options prices right now (11 am) and you see if you sell it you will get around Rs 175. The underlying Nifty is quoting at 4907 in the spot market right now. On selling this call, you will lose money if Nifty stays above 4900 on any date before 29 October when you want to square off or on 29 October, expiry date, when the trade is automatically squared off. You will gain if Nifty stays below 4900. Now, you could have sold Nifty 29Oct09 futures at 4907 instead of selling a Call option. But if Nifty is at, say, 4850, on expiry or on any day when you want to square off. You profit only Rs 50 whereas you have already profited Rs 175 by selling the Call option. The flip side is that if Nifty falls to, say, 4600, then a sold futures trade would profit Rs 300 whereas your maximum profit in the Call option sale is Rs 175.

Also, if Nifty goes up to, say, 5000 then the futures trade would have given you a net loss of Rs 100, whereas in your Call option sale trade you have lost Rs 100 in the option trade but you have already received Rs 175 as premium when you sold the Call option. So, while your profits are limited to the premium you received in your Call options sale trade your losses, though unlimited, are also less by the premium amount. In Futures sale trade you gain unlimited but the quantum of your unlimited potential loss is more as compared to the loss in Call options sale.

Anyway, I spotted a trend in Indian equity derivatives market where trading turnover in in options trades are rising to match that in futures trades. I wrote about it last month in the magazine I work for currently.

Here it is:

Refuge option

For the first time ever, options trading in equity derivatives is playing a prominent role compared to futures.The risk appetite of investors in domestic and global equity markets might have gone up with regard to making investments in the cash market from a short-term, or long-term, perspective. But the unprecedented intra-day volatility in the domestic equity market is causing those investors and traders who play the equity derivatives market on an intra-day, or inter-day weekly, basis to tweak their investing style so far.

They are increasingly dabbling in options trades on the National Stock Exchange (NSE), particularly options on the S&P CNX Nifty. From 1 July to 18 August, the options' traded value (notional) has crossed that of the futures on NSE's derivatives trading segment a higher number of times, 9 out of 35 trading sessions, than ever before.

Since their advent, the Indian equity derivatives market's trading trends has deviated from those in overseas developed derivatives markets where options trading dominates. For many years, the futures on Nifty and stocks traded much more than options on Nifty and stocks. "This began changing, and one saw trading volume in options rise rapidly, after the markets crashed during 2008 and investors' risk appetite came down sharply," says Sandeep Nayak, senior vice-president and head of private client group at Kotak Securities, a NSE-cum-BSE broker.

Aggregated for financial year, 2008-09, options trades contributed to a healthy 35.9% of all equity derivatives trades on the NSE. The current financial year's aggregate figures so far, till 17 August, has seen options' contribution to total has become even healthier at 42.2%.

Day traders, ultra short-term investors and foreign institutional investors (FIIs) are driving the change from futures to options. "Earlier, a typical day trader client of ours would trade in 20 Nifty futures contracts in the derivatives segment, but now the same guy is trading in 15 Nifty options contracts and just 5 Nifty futures contracts," says Mrugank Sanghvi, a dealer in Jagvin Investments, a NSE broker.

(click on image below to see it enlarged & clear)

The FIIs who, unlike domestic institutional investors, are allowed to speculate freely in equity derivatives, are doing alike. In recent months, of the total trades in equity derivatives, FIIs' trades make up for between 10 and 20 per cent on an average.

As per FIIs' derivatives trading data, released by the Securities and Exchange Board of India, for the first time, FIIs' aggregate trades (sum of purchases and sales) in options in August, upto the 17th, were more than their trades in futures, amounting to 56% of their total derivatives trading value. In June and July, their options trades' proportion was 41% and 49% respectively.

More than 90% of options trades are taking place in index options, primarily in Nifty options, and the balance in stock options. In futures trades, the spoils are shared roughly equally by index futures and stock futures. "The high liquidity in Nifty options is a major attracting factor for traders," says Sanghvi. "This was earlier limited only to Nifty futures and futures in select stocks."

The shift in trader preferences from futures to options, according to Kotak's Nayak, is on account of convenient trading strategies in options and synthetic stop loss trades through a combination of options and futures. The high volatility in Nifty was resulting in top loss trades (stops) in naked Nifty futures positions get triggered too often. The stops do not get triggered when done through a synthetic stop using options.

"When it comes to FIIs, we are seeing some of them sell call or put options of various strike prices and buy or sell futures to make it a delta neutral position," says Nayak. Traders, including FIIs, with views are getting hit by new information much more often in the recent weeks' dynamically shifting undercurrents in the stock market. Options contracts, therefore, acts a refuge for such times.

Whether the new trend will sustain or not is not certain, given the propensity for most brokerage firms to give to their retail investor clients recommendations on derivatives strategies involving only stock and Nifty futures. "But the phenomenon of high options trading volume is here to stay," says Nayak. Investors will be glad if Nayak is right.

September 20, 2009

life in general: india needs to face china with courage

I would prefer not to look at human relations from the prism of nation-states. But given the unfortunate state of reality on Mother Earth that we have nation-states I have little choice but to succumb to the fact that militaries would be required to defend the borders and lands of nation-states.

In this context, last week, tensions have risen along India-China border. The media have been forthright in reporting on China's more-than-normal military incursions and firings on Indian soil (read here and here). But Indian governmental spokespersons and military spokespersons have been shamelessly playing it down by potraying it as a routine thing and not to be bothered about. The same, however, if were to be happening along India-Pakistan border strong words would already have been used by them.

In this newsreport, India's Chief of Army Staff, General Deepak Kapoor, claims Chinese military exercises are not signficant enough to be concerned about and that media is unfair in writing about the incidents (the newsreport stated 'The General dismissed media perception that the Chinese incursions were a sign of muscle-flexing by Beijing. “I do not share that at all... that is why I say at times the press has not been fair in reporting this very accurately,” he said.).

This is sad but not unexpected. With regard to China, India always has been weak-kneed. The religious zealots that would raise a hue and cry at every single opportunity against Pakistan go silent when it comes to Chinese malfeasance.

I do not think that the people of China are against the people of India or vice-versa. But China's government and military can never, I repeat never, be relied upon to be fair. Not that India has treated the people of its states on the north-eastern part like Arunachal Pradesh, Mizoram, etc with respect. On the contrary, several Indian central governments have been least concered with obscene violations of human rights in those states by Indian security forces.

But China can't be relied upon to maintain peace. Absolutely not. It is well known that it claims Arunachal Pradesh to be Chinese territory. As and when it wants to fight a war against India for whatever reasons it will use Arunachal as the starting point.

I have culled out from wikimapia the section of the India-China border and marked the hotspots. See the image below (click on it to see it enlarged & clear).

September 17, 2009

life in general: citizens in zimbabwe denied basic rights

About last two years Zimbabwe (in Africa, in the southern part) been off and on reported up by conventional media guys. The situation there however warrants some attention from us.

Here is a Human Rights Watch press release issued recently:

SADC: Press Zimbabwe to Implement Rights Reforms
Southern African Leaders Should Urge End to Politically Motivated Abuses
August 31, 2009
Southern African leaders should stop looking at Zimbabwe through rose-colored glasses. The region's leaders need to press Zimbabwe openly and publicly for human rights reforms to prevent the country from backsliding into state-sponsored violence and chaos.
Georgette Gagnon, Africa director
(Johannesburg) - Southern African leaders should press Zimbabwe's power-sharing government to end ongoing human rights violations and to implement legal reforms, Human Rights Watch said in a report released today. Heads of state from members of the Southern African Development Community (SADC) are holding a summit meeting in Kinshasa, Democratic Republic of Congo, on September 7 and 8, 2009.
The 20-page report, "False Dawn: The Zimbabwe Power-Sharing Government's Failure to Deliver Human Rights Improvements," highlights the transitional government's lack of progress in rights reforms in the six months since it was created. The former ruling party, Zimbabwe Africa National Union - Patriotic Front (ZANU-PF), has demonstrated a lack of political will to effect change and wields more power than the Movement for Democratic Change (MDC), the former opposition party and now a partner in government. Police, state prosecutors, and court officials aligned to ZANU-PF conduct politically motivated prosecutions of MDC legislators and activists, and fail to ensure justice for victims of abuses or to hold perpetrators of human rights violations to account.
"Southern African leaders should stop looking at Zimbabwe through rose-colored glasses," said Georgette Gagnon, Africa director at Human Rights Watch. "The region's leaders need to press Zimbabwe openly and publicly for human rights reforms to prevent the country from backsliding into state-sponsored violence and chaos."
At the summit meeting, heads of state are expected to assess Zimbabwe's compliance with a number of rulings by the SADC Tribunal on illegal land seizures in Zimbabwe. President Jacob Zuma of South Africa, the organization's current chairman, is also expected to brief leaders on the progress made by Zimbabwe's power-sharing government, which has been in place since February. The government was created by a SADC-brokered September 2008 agreement, which followed a period when ZANU-PF and its allies unleashed a campaign of violence to prevent an MDC electoral win.
In its new report, Human Rights Watch urged Southern African leaders to extract concrete commitments on human rights from the government of Zimbabwe and to tie them to specific benchmarks for progress within a clear time frame. The summit meeting's participants were also urged to raise concerns about Zimbabwe's failure to enact basic institutional and legislative reforms that would guarantee the rule of law as well as fundamental rights for Zimbabweans.
"SADC leaders should stand with the people of Zimbabwe by calling for urgent reforms to address the country's political and human rights crisis," said Gagnon. "Without these necessary changes, Zimbabwe's inclusive government will continue to be built on sand."

September 15, 2009

life in financial markets: how currencies are faring against the US dollar

I have just done some quick number crunching on the interplay between different currencies against the US dollar from 2006 onwards.

See the graph image below (click on it to see it clear and enlarged).

During the last 3 years, the Indian rupee has depreciated against the US dollar when many others have appreciated against the US dollar. What story does it tell? Anyone?

September 09, 2009

life in financial markets: why not ask for a level playing field in this as well?

One often hears/reads/sees a corporate CEO or an industrialist talking of level playing field. Depending on what it pertains to, such a thing can be considered valid or not. I think barring a very few genuine cases most of them are frivolous and unfair. But on the surface they look very apt and fair. Dig a little deeper and you realise the dirty game being played.

Anyway, I was reading this newsreport on how the fraud-affected and in-prison Satyam Computer's former chief, Ramalinga Raju, is receiving excessive soft treatment. Read the entire text of the newsreport below. Now, I was wondering, whether corporate India would also seek a level playing field in the treatement given to corporate CEOs when they land in prison due to fraud. Would it not be fair for corporate India to seek that Satyam's Raju be treated like any other undertrial-prisoner in the country?

Even hardened criminals-cum-politicians receive the kind of treatment that Satyam's former chief is receiving now. When such politicians are from states such as Bihar, Jharkhand and Uttar Pradesh, many in corporate India (and I have personally experienced this) mock, and make derogatory remarks on, the favoritism accorded to these states' politicans. But, pray, tell me, what is the difference between a powerful criminal in such a state and Satyam's Raju?

Coming to the status of the cases against Satyam's former bosses, I am not surprised by the slow pace of investigations to arrive at a final conclusion in the Satyam fraud case that involved, among other things, artificially jacking up profits and siphoning off company funds for personal benefit by the company bosses. But I am apalled by the fact that even Sebi, under the chairmanship of a supposedly-tough C.B.Bhave, has been extremely slow to bring to justice the Satyam offenders under the wide ranging powers available to Sebi under the various regulations and Acts.

When Bhave was the chief of NSDL (National Securities Depository) his company was unfairly targeted by former Sebi chief, Damodaran, during the IPO scam blowout. While merchant bankers (lead managers to the IPOs) were being allowed to go scot free, Damodaran was going after the two depositories. But I did notice at that time that NSDL, under Bhave, never took any action against Karvy Stock Broking that was a DP in NSDL and which had opened over 40,000 fake demat accounts. NSDL, under its various rules and regulations, could have levied a hefty penalty on Karvy. But it never did. Of course, neither did CDSL penalise its DPs that were involved in the scam. But I expected differently from Bhave and NSDL.

Now, here is the twist. Karvy's headquarters are in Hyderabad in Andhra Pradesh. So is Satyam Computer's. Though the matters are serious I can not help but find some humour in the fact that Hyderabadis are exposing chinks in Bhave's strengths.

Here, then is the newsreport. Its shocking: Raju is 'raja' in hospitalTNN 9 September 2009, 02:02am IST
HYDERABAD: If Ramalinga Raju was the rare undertrial playing badminton in Chanchalguda prison, he now holds the
distinction of being the first prisoner to enjoy the comforts of the only VIP room in the NIMS ICCU where he is currently recuperating.
The former Satyam boss was admitted to NIMS after he complained of chest pain on Monday evening. Medical reports
stated that he was suffering from Hepatitis C and hypertension.
While the other patients' beds are divided by curtains, Raju has a separate room to himself which staffers refer to
as the 'VIP section'. The room has an attached bathroom with round the clock attention from doctors.
With his wife Nandini Raju on his side along with a few other family members since he was admitted to the hospital
on Monday night, it appears that the Raju family is having a reunion of sorts. Raju's elder son, Teja Raju, visited
his father on Monday night. There are five policemen outside his room keeping a vigil.
Raju's aides were seen hanging around the ICCU on Tuesday and even entering to meet him with the help of hospital
staff. The medical superintendent N Satyanarayana mentioned during a brief press briefing that Raju had the company
of his personal assistant in the ICCU.
At about 1.15 pm a Raju aide was seen entering the ward with two oversized basket like bags carrying food, clothes
and other items. The aide was accompanied with Raju’s counsel S Bharath Kumar’s junior who was taking in some
documents inside for Raju.
"He (Bharath Kumar) wanted Raju to go through these documents," the lawyer said. Sources said that his father-in-law
visited Raju in the morning, apart from the other visitors, later in the day, on Tuesday.
The hospital authorities even blocked an entrance which leads to the in-patient ward of the hospital on Tuesday. At
the other entry points, the security guards kept a close watch ensuring that nobody went inside without a pass, as
against the normal days when they are usually lax. Those who did not have a pass, were denied entry.

September 06, 2009

life in general: oh gujarat!

The tragedy that has engulfed the state of Gujarat in India since March 2002 is of unprecedented proportions.

Here is Harsh Mander in Hindustan Times a few days back:

Closure, yet so far

Of the many failures that characterise the polity and society in contemporary Gujarat, probably the most dangerous is the unprecedented extent of the arrest and collapse of processes of authentic reconciliation, because of which wounds refuse to heal. People of diverse faiths live side by side or in segregated ghettoes but in an uneasy, warped, brittle truce, without the restoration of genuine trust and normal social and economic intercourse.

The State remains openly hostile to a segment of citizens only because they belong to a different faith from the majority, reflected in raucous and openly prejudiced sectarian taunts in speeches of senior elected public leaders. They cast aspersions on the patriotism of Muslim citizens, parody their supposedly pervasive practices of polygamy and breeding large families, decry the alleged slaughter of the cow despite deep reverence towards her by Hindus, and claim their wide sympathies with terrorist violence.

Muslim ghettoes are routinely discriminated in public services, Muslim youth are picked up almost randomly on charges of terrorism and their deaths in ‘encounters’ or extra-judicial killings are explained away by State authorities with rarely even the fa├žade of any credible evidence of their terrorist links and the circumstances in which it became necessary for the latter to take their lives without the due process of law. Their Muslim identity is accepted as reason enough to believe that they must have been terrorists, and terrorists do not deserve the protection of law.

There are few organised social and political spaces — official or non-official — in Gujarat today, for fostering forgiveness and compassion. There is instead a frightening communal chasm, accepted or actively fostered by the powerful political, administrative, business and media establishments. This engineered divide is growing exponentially between people of different religious persuasions. An ominous subtext characterises re-engineered social relations: new realities of settled hate, settled fear and settled despair in all villages and urban settlements that were torn apart by the gruesome mass violence of 2002. Gujarat continues to be a society bitterly, and some now grimly fear, permanently divided.

After the communal bloodbath that accompanied the vivisection of the country as it seized its independence, leaving a million people dead, there have been thousands of riots, or episodes of mass clashes between people of Hindu and Muslim faith, and pogroms, resulting in the loss, according to one painstaking estimate, of at least 256,28 lives (including 1,005 in police firings). It is remarkable that despite this recurring communal bloodletting during and after the traumatic partition of the country, there has been no systematic structured official (or even significant non-official) processes of ‘truth and reconciliation’, to help perpetrators and survivors of hate violence come together; to see and speak to each other; acknowledge their crimes and failings, their hate and fear, their grievances and suspicions; to seek and offer forgiveness, trust and goodwill; and ultimately help bring closure and eventual healing.

Given the enormity of contemporary threats posed by a deliberately fostered communal divide and violence to the very survival of secular democracy in India, fuelled further by the manufactured global ‘war on terror’, it is imperative today more than ever that systematic, sustained processes of reconciliation and justice in communal relations between sporadically embattled people of diverse faiths and ethnicities in India are established.

The Indian people have arguably had more experience than most through millennia of living with diversity. Therefore, even without organised processes of reconciliation, there are usually natural spontaneous processes of reaching out and healing that follow bouts of sectarian violence. There may be debates about whether without structured modes of facilitating reconciliation for survivors of the cataclysmic Partition violence of 1947, there has been adequate closure for families that experienced the agony and permanent uprootment from and the irreparable loss of their loved ones and homeland.

My own parents and their extended families lost their homes amidst hate, slaughter and arson in a region of the country that became a part of Pakistan in 1947, and their grief of loss remains dormant more than 60 years later, just below the surface. Perhaps we needed much earlier to bring together people who lived with the violence from both sides of the border, to share truth, discover their common burdens of suffering and privation, and thereby find the spaces for individual and collective forgiveness.

In other communal conflagrations that I have witnessed and handled in small district towns as a district administrator, I have observed that within days of such mass sectarian upheavals, persons of goodwill and compassion reach out from each community and others grasp their outstretched hands gratefully. There are spontaneous individual and collective expressions of remorse and grief at the loss suffered by the other community, and of compassion, through which processes of social and personal healing set in.

By contrast, the defining feature of Gujarat after the 2002 massacre is its frozen compassion. It is the determined absence of remorse both by the State and among many segments of the people, the conspicuous absence of social and political processes of reconciliation, and a resultant persisting bitterly unreconciled divide and distrust between the estranged communities. It is not surprising, therefore, more than seven years later, that what is most scarce in the parched earth of allegedly vibrant Gujarat is reconciliation and empathy.

Excerpted from Fear and Forgiveness: The Aftermath of Massacre (Penguin)

Harsh Mander is Convenor, Aman Biradari. The views expressed by the author are personal.

September 05, 2009

life in general: unknown urbanites' good deeds

Some urbanites can do very good deeds. A story in today's Hindustan Times illustrates a few of them from Bombay.

Here (click on the image to see it enlarged and clear; the full text of the story is also given below the image):

Every slum child cannot be a millionaire but they can certainly lead a decent and respectable life, feels Ranjit Singh (52), a lab attendant in Mithibai College.
He, in his own little ways to empower them, teaches children from Nehru Nagar slum, Vile Parle every evening.
That's not all. He has to gather the crowd himself -- eight of them who are under his tutelage currently.
He has been doing it since 25 years.
"I have seen my father toiling hard so that I could study till higher secondary level. I try to help these children till they are in Class seven," he added.
Singh's main aim is to stop children from dropping out, which is a menace in the coun, try. "I may not be able to pro- vide them with the best of facil ities but if I can do anything to prevent them from dropping out of schools, I will have served a purpose in my life," he said.
Invoking interest in studies through live experimentations and innovations is what Purushottam Kale (54) believes in.
A post graduate teacher in Jhunjhunwala College, Ghatkopar, he is trying to educate students by taking them out on excursions, organising games, quizzes and power point presentations.
"Children learn much more outside the classrooms," he said.
He is a director of an NGO called Vanaparva in Ratnagiri where he focuses on helping students earn while they learn.
He hires students from financially weaker backgrounds as clerical staff in the college to assist him on his research projects and pays them for their work.
Smita Kulkarni, who teaches Marathi IES's Modern English School in Dadar hails from a small village in Raigad district.
Kulkarni, who has been helping children in the interior parts of the state, has set up a distance-learning center called Tilak Maharashtra Vidyapeth in Lonavla from where around 25 students graduate every year.
She has also started a project called Deepastambh, which finds people to sponsor higher education of those who cannot afford it.
For Dr Nandini Deshmukh (55), who has been teaching since 25 years, inspiring talented students is the motto. A zoology teacher at Kirti College, she not only distributes encyclopedias to children in villages but also takes street children to planetarium and science centres.
"I gifted a computer to a bright student who has now topped his BSc and MSc exam.
He could have probably bought one on his own in a few years.
But he needed it the most while he studied," she said.