Archive for the ‘online trading’ Category

Weekly Update 23rd – 27th August 2010

The buying continued in the Indian markets and helped broader indices to surge to two and a half year highs. While negative sentiments in the global markets led to profit booking with major markets closing in the negative on weekly basis. The Federal Reserve Bank of Philadelphia’s general economic index dropped to the lowest reading since July 2009 to minus 7.7 this month, signaling contraction in the area covering eastern Pennsylvania, southern New Jersey and Delaware.

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The unemployment claims unexpectedly shot up by 12,000 to 500,000 last week more than the economist estimates. U.S. recovery is fading and European governments would struggle to reduce their deficits are the worrisome factors that are lingering on in the investors mind. The producer price index in U.S. increased 0.2 percent following a 0.5 percent drop in June.

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Excluding food and energy costs it climbed 0.3 percent signaling that world’s largest economy may not face deflation moving with slower growth. China, the Emerging Market frontier that saw an unparallel growth in the past is facing threats of faltering demand for exports as U.S. and European consumers are cutting spending, rising wages and the risk of bad loans from record lending by banks in the past. Japan Economy saw an expansion of an annualized 0.4 percent in the quarter ending June pushing it into third place behind the U.S. and China.

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In India, with good monsoon season the prospects of harvest have improved and now it is widely believed that inflation would come down by the end of this quarter. The primary articles index rose 14.85% in the year to 7 August 2010, lower than previous week’s annual rise of 15.66%. The food price index rose 10.35%, lower than previous week’s annual rise of 11.4%, as prices of vegetables, potatoes and onions fell.

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Going forward the domestic market is expected to remain firm with the support of foreign investment.

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However, investors will continuously monitor the global developments after some of the recent disappointing data coming from U.S.markets. Trend of Indian Stock Markets is up though other world markets are coming under pressure especially the European and US markets. Dollar index is showing some strength which is giving jitters to commodities. But till the trend of our stock markets is up, one should be playing on the long side with a cautious approach. Nifty has support between 5400-5350 and Sensex between 18000-17800 levels.

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Gold has benefited from last few weeks as investors are escalating the insurance like metals in their portfolio. However, gold silver ratio is rising once again as silver is moving in a range due to falling base metals. With the looming weakness in various economies, gold may invite bulls further. After touching many week highs, base metals washed off their previous gain on unexpected drop in Philadelphia Fed survey and bad employment data. Now the pulse of base metals is likely to be guided by the outcome of housing and durable goods data of US this week. Weakness in equity market, swelling inventories, slow recovery may weigh on the crude prices further, which already hit six week low last week. Dollar gain against euro is dampening the commodities demand, compelling CRB index to trade range bound with bearish bias.

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Nevertheless, lower level buying cannot be denied in between.

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UNDERSTANDING BUSINESSES…….

While analyzing different companies, investors do easily get trapped in the details like figures, various stock valuation ratios tools to measure their performance while forgetting a more basic question that is “How does the company actually make money?”

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“BUSINESS MODEL” is the buzzword that gives the answer to the above question. In simple words, one can understand Business Model as “The strategic business plan that generates revenue and makes profit from the operations.” It defines the sequence how the business delivers value to customers, entices customers to pay for value, and converts those payments to profit. It reflects the management’s hypothesis about what customers needs, how they want it, and how an enterprise can meet those needs, get paid for doing so in terms of profit. It draws on the multitude of business subjects including entrepreneurship, strategy, economics, finance, operations, and marketing.

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When a business is set to establish, it entails a particular business model that shows the design or blueprint of the value creation, delivery, and mechanisms employed by the enterprise. An enterprise business formally can be described in four building blocks with nine basic elements as:

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1) Infrastructure

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Core Capabilities: A group or area of business competency where the business must excel in order for this business model to be successful. These are the key activities necessary for value proposition of the business. It includes the resources those are necessary to create value for the customer and drives revenue streams. This part in fact forces the need for specific business capabilities to perform at higher than average levels of effectiveness and efficiency. It describes how a company attempts to develop a sustainable competitive advantage and use it to improve its competitive position in the market.

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Value Configuration: Outlining the basic concept of a business model, this element describes how the business, through its activities, adds value to the consumer or marketplace. It binds together the conception of customer want, requisite core competencies, flow of revenue and various business alliances.

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It also identifies the resources that are necessary to create value for the customer.

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Partner Network: Partnership element describes the connection that the business has with other business entities, including suppliers, vendors, sales partners, service providers, and value-added resellers. These connections can define success for a business by allowing for specific efficiencies of capital, resources, and shared risk.

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2) Offering

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Value Proposition: What is being offered to the customer to drive revenue is being answered by this element i.e the products or services a business offers. It gives an overall view of products that represent value for a specific customer segment. It describes the customer problem, how the enterprise differentiates its offerings from its competitors and is the reason why customers prefer buying from certain enterprise over other. It is a solution that addresses the customer problem and describes the value of this solution from the customer perspective.

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3) Customers

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Customer Segments: The target market segment for a business’ products and services. It aims to recognize and focus the different needs and strategies to design the product, services for them and the way to reach them. Distribution Channels: This element presents the mechanisms of how the company’s product or service reaches the customer. In case of product manufacturing, the distribution channels element describes the flow of goods from manufacturing to market, including inventory and retailing however for service enterprise, this explains the location, management, and provisioning of service resources to the customers on an as and when required basis. Customer Relationship: It is the link a company establishes between itself and its different customer segments. It describes the motivations that lead customers to buy products and services from the business, and how the business nurtures those motivations through marketing and support activities. Various after sales services and the customer care support form part of it that helps management to get the responses of the users. It also helps in knowing the preferences of the consumer so as to keep the company aligned with changing environment.

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4) Finances

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Cost Structure: It accounts to the aggregate estimation of each resource being deployed that results to output in the form of product/services in the monetary terms. There are different strategies to determine the price of the product like Cost plus pricing, Competition based pricing, Target pricing, Dynamic Pricing etc. Revenue Streams: It’s not enough only to have an idea of what a business create value. A business operation has to be cognizant of where, and when, money flows into and out of the business. How money flows to the company through various products and segments of the business determines the revenue stream of the company.

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After analyzing the above nine elements one can simply get to know that how a business positions itself within the value chain of its industry and how it aims to sustain itself to generate revenue. So it’s not enough to say that a company sells mobiles or burgers. One needs to go deeper and understand the logic sequence of how the rupees are expected to earn and grow in future.

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We can take an example of shaving industry. Gillette sells the handle of its razor at cost, or even lower, because with this the company can sell razor refills, over and again. The company’s business model rests on giving away the razor’s handle along with blade as it actually generates profits not from the handle but from the sales stream driven by high-margin razor blade.

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Conclusion: Business model is considered to be the concrete foundation for a successful enterprise. In order to differentiate the companies from the losers, investors should know how to evaluate companies’ business models for perspective investment. Business model converts innovation to economic value for the business. When evaluating a company as a possible investment, one should be able to get how the company makes its money.Think on the lines as how attractive and profitable that business model is. Although, the business model doesn’t explains everything regarding the prospects of a company, but investor keeping a business model frame in mind can make better sense of the financial and business information. It eases the job of recognizing the companies that could be proved as the best investments.

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Weekly Update 9th – 13th August

The last week saw good amount of buying in U.S and other markets as the companies reported better numbers than the expectations in the result season. However the concerns remain over the U.S. recovery as the consumer spending, pending home sales and factory orders were all weaker than projected in June indicating moderation in the second half of the calendar year.

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In China, banking regulator has asked the lenders to conduct a stress test including worst case scenarios of prices dropping 50 percent to 60 percent in cities where they have risen excessively. The test highlights the government concern over the health of property market even after the regulator has tightened the real estate lending to crack down on speculation since mid April.

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Huge foreign money inflow, strong auto sales and manufacturing data together with good monsoon especially in the fortnight ending 4th August 2010 kept the markets on upbeat note. Life Insurance Corporation said that it plans to invest `2 trillion stocks and bonds in the current fiscal year. So far the Insurance major has invested 390 billion in the first quarter including 100 billion in equities.

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Approximately 2080 companies that have announced numbers have shown a mixed picture. The combined net profit of all companies fell 9.2% to 57,560 crore on 20.7% rise in sales to 7,07,925 crore in Q1 June 2010 over Q1 June 2009.

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Stock specific movement in market is likely to continue as some of the major companies like Bharti Airtel, State Bank, Reliance Communication, Suzlon, etc. are coming out with the results in the coming week.

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Pranab Mukherjee has already expressed concerns over the aggressive interest increase as it may moderate the economic growth. The Index of Industrial Production that saw some moderation in growth in May and also revised downward for the month of April is further expected to show some moderation in the month of June. Six core industries having weight of 26.68 percent in IIP have experienced a 3.4 percent expansion in June compared to 6.3 percent in the prior month. The data scheduled to be released on 12th August is likely to influence the markets and may help in gauging the central bank move in the coming months.

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Overall trend of world markets is up. Volatility indicators near lows are a sign of concern as it reflects that investors are not worried at all in taking positions. But till the trend of stock market is up, one should be playing on the long side only. US dollar index fall in last 3 months has also contributed to the rise of various asset classes. Nifty has support between 5350-5300 levels and Sensex between 17800-17600 levels.

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It appears that bulls are dominating bears in commodities. Market is looking very enthusiastic on the back of better results together with buoyant equity market. It is evident by the increased volume of commodity bourses across the globe. Noteworthy decline in dollar index has also supported buying in commodities.

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However, 80 is very good support for dollar index. The week is full of event risk. Traders may refrain to take large position in bullions before FOMC rate decision meeting. CPI and advance retail sales data of US will provide further direction to the base metals. Ongoing hurricane season is likely to keep crude oil in upper range. Severe drought and the decision to halt the export from 15th August to 31st December have stimulated fresh buying in grains and they are continuously moving up. Oil seeds and edible oil complex is looking promising and investors should utilized every dip as buying opportunity.

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Weekly Update 12th – 16th July

Stocks in world markets saw huge gains as investors viewed that the recent correction out of fear of double-dip recession in advanced economies has actually overlooked improving outlook for the company’s earnings. Investors sitting on the sidelines bought stocks with the upward revision in earnings estimates for U.S. companies. The gains in markets got a further boost after China said that it will keep a moderately loose policy and South Korea raised interest rates.

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Belief of Asian and Emerging nations will be able to withstand the storm coming from advanced economies rose with the interest rate increases in India, South Korea, Taiwan and Malaysia. The European Central Bank left interest rates unchanged as the sovereign debt crisis are still posing a serious threat to regions recovery.

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The IMF raised its forecast for global growth to 4.6 percent in 2010, the biggest gain since 2007, compared with an April projection of 4.2 percent reflecting a stronger than expected recovery in first half and at the same time giving warning that financial market turmoil has increased the risks to the recovery. However, IMF has not revised the next year growth projections of 4.3 percent. The IMF urged developed economies governments to commit to implementing “credible” plans to lower their deficits over the medium term, including the adoption of binding, multiyear targets and said that they don’t need to start fiscal tightening before 2011. It said that monetary policy in advanced economies can remain “highly accommodative for the foreseeable future,” because inflation is expected to remain “subdued,” helping mitigate the effects of fiscal consolidation on growth. The growth forecast for emerging markets was raised to 6.8 percent, from 6.3 percent in April.

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The fastest growth rate will be China’s 10.5 percent, followed by India’s 9.4 percent and Brazil’s 7.1 percent, the fund said. On the domestic front with the recent improved outlook in the monsoon situation and expectation of strong double digit gain in Index of Industrial production would keep the markets on a upbeat note. The result season that is going to start in the coming week and guidance by the companies for the rest of the year is further expected to set the momentum of the markets.

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Indian stock markets are in a clear uptrend though other world markets which were in a downtrend took a sharp counter rally from lower levels. We will have to wait and watch whether the rally which has started in other markets can sustain or not..

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Nifty has support between 5250-5200 levels and Sensex between 17500-17300 levels.

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Volatility is spreading in entire commodity complex and thus investors are keeping a tight vigil on relative changes to find the best value. Fundamentals of Asian countries are still constructive but it is Euro zone which is still giving red signals. For the time being, commodities should move in a range. Later half of the week is full of event risk as some important data’s from US, UK, Japan etc. can speak about the health of economy, which may provide some much needed direction to the commodities. In NCDEX, volume of July contract is shifting towards August contract, hence some volatility in premium is expected in near term.
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Commitment of Trader’s Report……. Cracking “Da – Futures – Code” Part 1 :)

Years passing by and with the increased vagaries of world economies whether it be Greece, Italy, Hungry in Euro zone or high jobless claims, lower housing starts in U.s, Currencies, other macro factors like monsoon , a typical speculative fever is getting over the commodities futures market these days and has become a ubiquitous headline.

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So, it is very important for an investor to know the market sentiment whether it is bullish, bearish or plain neutral. Understanding the same one can handle its position tactfully and also profit from it by simply looking at the bigger picture and not get drifted away. So, now the question is ” How do you gauge the market sentiment?”

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THE COMMON MAN’S LAW

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Before finding the answer to this question, let’s understand  the common thought that when prices go up, investors want to buy more contacts and producer want to sell more of what they are trading and vice versa.

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The traditional commercial consumer/ producer cares about the prices. A producer has a cost involved in production and if the price drops below that production cost, they are going to lose money. So they hedge around that production cost. An enterprise on the other hand obviously needs the commodity for their business; if prices move higher, they will increase their hedging to protect themselves. This is an important law of world we live in.

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TRACKING CHANGES

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Many commodities groups like oilseeds complex, base metals, bullions on the national bourse, etc. track the price movements on the international exchanges. The data provided by the exchange on daily basis daily includes lots of information as amount of future contracts outstanding, volumes traded, their strike price and date of maturity. This is useful as far as it goes, but the data sheet has its own limitations. As we all know that all futures contracts have two sides- a long and short. Now, this is where the The Commitment of  Traders (COT) report released weekly by the commodity futures trading commission (CFTC) in the US is useful because it tell us much about whether speculators are long or short..

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The C.O.T report is released weekly-every friday afternoon. The report has three categories of market-user: commercials, non commercials and non reportable.

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  • Commercial Hedgers: Traditionally, as the commercials”the big guys” (like farmers, miners, international businesses and processors) are seen as entities using the market for hedging business risks. They are generally believed to have the best fundamental supply and demand information on their markets, and thus position their trades accordingly. The high large-speculative position denotes a real commitment to the trend.

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  • Non- Commercials: The non-commercials are assumed to represent speculative interest. An example of a large speculative account might be a large commodity pool (a fund) that trades futures for speculative profit.

Stay Tuned for the final part 🙂

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Weekly Update 5th – 9th July 2010

The global markets fell in the week gone by as the manufacturing growth exhibited weakness from China to U.S. The investor’s across the globe became nervous with the fading signs of global recovery. G20 leaders said that the limited demand in advanced economies has left the world reliant on emerging markets, led by China, to drive a recovery is “uneven and fragile.”

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China’s manufacturing growth slowed more than expected in June adding to the concerns that the fastest- growing major economy is cooling. The government’s Purchasing Managers’ Index declined to 52.1 from 53.9 in May. In the U.S., manufacturing slowed in June with the cooling demand from rest of the world.

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The Institute for Supply Management’s gauge of manufacturing fell to 56.2 from 59.7 a month earlier.

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As anticipated in our last two editions, RBI raised the policy rates i.e. Repurchase and Reverse Repurchase rate by 25 bps taking it to 5.50 percent and 4 percent respectively as a part of the calibrated exit from the expansionary monetary policy. The strong growth shown by manufacturing sector especially capital goods sector, acceleration in credit growth and the widening current account deficit helped RBI to take such a step in order to anchor inflationary expectations going forward. In order to address the liquidity situation which is currently in deficit mode under LAF operations, RBI allowed banks to borrow to 0.5 per cent of their net demand and time liabilities (NDTL) even in case of a shortfall in maintenance of statutory liquidity ratio (SLR) till July 16, 2010.

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The expectation of hike in policy rates by RBI was very much priced in and will not have any bearing effect on the stock markets. However expecting good monsoon, the market was in the belief that inflation will come down in the months to come. But the recent numbers from IMD suggests a relook as so far the monsoon was 16 percent below normal in June 2010.

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Indian stock markets were holding on when all the world stock markets are falling but one should be very cautious when world markets are falling so much as Banking and IT sector are showing some weakness. Nifty has support between 5200-5100 levels and Sensex between 17300-17000 levels.

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Gone was wholly a brutal week for commodities. After the fourth quarter of 2008, first time commodities witnessed quarterly decline. Even the topmost hot favorite of investors gold and dollar index toppled down as money manager’s shifted their attentions towards euro, which saw a decent rise last week. Poor economic data’s in a row further pave the path for selling. At present one should wait for the clear trend. Base metals and energy have already seen a steep decline, may trade in a range for the time being. Similar story is of gold and silver.

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Weekly Update 21st – 25th June

Global markets saw synchronized gains of more than two percent this week except China’s Shanghai Composite Index which closed in the negative. The recent measures that were taken in China to cool down the economy like larger down payment for home buyers and increase in reserve requirements for banks seems to have started showing its effects as reflected by the weakening demand for construction metals like Nickel pig iron. Asset price bubble concerns rose after property prices in China rose by 12.4 percent in May.

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China Banking Regulatory Commission said that risks associated with home mortgages are growing and a “chain effect” may reappear in real-estate development loans. The economic restructuring in China has raised the possibility of resurgence in credit risks. The index of leading indicators in US, a gauge of the outlook for growth over the next three to six months, climbed 0.4 percent in May. It is viewed that the largest economy will continue expanding though at a moderate pace in the second half of the year without stoking inflation & creating fewer jobs. This would help the Federal Reserve in continuing with low interest policy for longer time. The European Union’s decision to publish the results of stress tests came after more than a year when U.S. published the results of stress tests on 19 financial institutions. The details of the tests including whether they include a sovereign debt restructuring is not yet disclosed by the European Union. However the step is welcomed by the investors as it will reveal the soundness of the European financial system.

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Coming back at home, as mentioned last week the possibility of hike in policy rates by RBI is gaining strength after Inflation accelerated to 10.16 percent in May giving concerns of generalized Inflation in the economy. Demand side pressures are quite evident now with the encouraging growth in Industrial production together with healthy growth in Exports and Imports. The European concerns that may have a bearing effect on the India’s trade and temporary liquidity squeeze in the Banking system has so far refrained the Banking regulator to continue its exit from an expansionary policy in a calibrated manner.

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Indian Stock Markets went up sharply last week and are looking much better but the problem it seems is with other world markets. It has to be seen whether the Indian markets are able to pull the other markets up or the weaker markets pull down India. Base metal commodities are not doing well though precious metals are all looking good. It seems volatility is likely to continue in such a scenario.

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Nifty has support between 5200-5100 levels and Sensex between 17300-17000 levels.

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Market players were enthralled with the captivating movements commodities noticed last week. Base metals and energy touched multi months low in the beginning of the week while second half of the week witnessed steep profit booking. Sideways congestion may be witnessed in commodities this week, as investors are endeavoring to figure out the next direction in commodities.

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However, the week is full of event risk and may trigger volatility in between.

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Many meets and high importance economic releases from US, UK and other nations are scheduled this week. Traders may refrain to create large position before FOMC meeting, which is scheduled on Wednesday.

CHANGE IS FOR BETTER

With great pleasure we announce that we have changed our online trading portal to http://www.smctradeonline.com for better. Experience a new level of online trading with more information, better aesthetics, advanced technology, world class financial tools & user friendly console on our new broking site.

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Come june 22nd and http://www.smcindiaonline.com , our corporate site will also come in its new avatar providing detailed information about SMC Group & its wide array of financial services.

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For any query, email us at brand@smcindiaonline.com

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VOLATILITY IN OPTION TRADING Final Part

Volatility Skew

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If we try to compute the volatility of an underlying by feeding in the required variables and the market prices of the options into the Black Scholes option pricing model, theoretically, options with same expiration date should have same implied volatility regardless of the strike prices we input.

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But in reality, the implied volatility we get across various strikes is different. This difference in volatilities across its respective strikes is known as volatility skew. When implied volatility is plotted against its respective strike price, the resulting graph can be a U-shaped or downward sloping.

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Volatility Smile, Reverse Skew, Forward Skew

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If the plotted graph is a U-shaped curve, as shown in Figure 1.1 below, this volatility skew pattern is also referred to as a volatility smile as it resembles a smile.

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The U-shaped volatility smile skew pattern is common for equity options which are near-term and options in the forex market. Volatility smile indicates that the demand is greater for options that are in-the-money or out-of-the-money.

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But, for longer term equity options and index options the reverse skew patterns are typical (Figure 1.2). In the reverse skew pattern, the implied volatility of options at the lower strikes is higher than the implied volatility at higher strikes.

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This reverse skew pattern implies that in-the money calls and out-of-the-money puts are more expensive and more in demand as compared to out-of-the-money calls and in-the-money puts.

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This pattern can arise in two cases; either, when the investors are worried about market falls, so they hedge their positions by buying puts for protection, or the other explanation can be, that in-the-money calls have become alternatives to outright stock purchases as they offer leverage and hence increased return on investment. In both cases greater demand is created for in-the-money calls and therefore it results in increased implied volatility at the lower strikes.

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As against reverse skew, forward skew is another type of the volatility smirk (Fig. 1.3), where, the implied volatility for options at the lower strikes is lower than the implied volatility at higher strikes.

In this case, the out-of-the-money calls and in the-money puts are in greater demand as compared to in-the-money calls and out-of-the money puts. The forward skew pattern is common for options in the commodities market where there can be a supply crunch, business houses would be ready to pay higher prices to secure supply than to risk supply disruption.

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Concluding, for option traders the best market direction assessment and option price evaluations can only be drawn by inter comparison of implied volatility with historical, current and forecasted volatilities, by assessing if they are over or under priced.

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This is the Volatility Smile of Nifty as on at the market closing of 11th June 2010. As mentioned above it is a typical long term index option, with the reverse skew pattern.

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VOLATILITY IN OPTION TRADING Part 1 :)

We calculate an option’s theoretical value by using option pricing models, two of the primary, well know models are the ‘Black-Scholes Model’ and the ‘Binomial Model’. To compute the value minimum five of the option and its underlying’s related variables are required to be fed in these models; these five necessary inputs are the option’s exercise price, the time remaining to expiration, the current price of the underlying, the risk free interest rate over the life of an option and the volatility of the underlying.

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Out of the above mentioned inputs, volatility plays an important role in actual trading situations. Volatility is a statistical measurement of the degree of fluctuation of a market or security. Volatility is computed as the annualized standard deviation of daily percentage price changes of the security and is expressed as a percentage. Changes in our assumptions and marketplace assessments about volatility can have significant effect on an option’s value.

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Though the option traders are affected by the direction of the market, they are extremely sensitive to the speed of the market. This speed of the market is measured through volatility. In low volatility markets, the market of the underlying fails to move at a sufficient speed, and therefore, the options on that underlying will have lesser probability to achieve the option’s exercise price or the strike price within its expiry. But in markets which move quickly or in other words, in high volatility markets the market of the underlying is likely to move at sufficient speed and accordingly options on that underlying will have greater probability to achieve the option’s exercise price within expiry.

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Every Option trader is well acquainted with three types of volatilities- Historical Volatility, Forecast Volatility and Implied Volatility (IV). Historical volatility measures how volatile the security has been in the past. We compute historical volatility over a defined historical period, which is usually a twenty day period as it approximates the number of trading days in a month. Forecast volatility is an attempt to forecast directional moves in the price of the underlying, i.e. future volatility; it is usually calculated using time-series methods.

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Finally, implied volatility of an option contract is the volatility implied by the market price of the option derived from an option pricing model. In other words, it is the volatility that, when fed in a particular pricing model, yields a theoretical value for the option equal to the current market price of that option. This means it is possible to have a unique implied volatility for each given market price of an option. This implied volatility is best regarded as a rescaling of option prices which makes doing comparisons between different strikes, expirations, and underlyings easier and more spontaneous.

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