Posts Tagged ‘market price’

VOLATILITY (VEGA) IMPACT IN OPTION PRICING Part 1:)

Options are non linear products, volatility being an important price determinant. Volatility can be looked at as a huge potential O reward as well as risk for the option traders. So why is volatility so important for option traders? Because, it tells the possible price changes of underlying in future. In this article we will try to understand what Vega is and how change in volatility affects the option pricing.

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Vega measures the sensitivity of an option to the Volatility of the underlying. How much option should lose/gain value with a movement in implied Volatility by 1%. To understand Vega we first need to understand Implied Volatility. Implied Volatility is the estimated or expected volatility of a security’s fair price which we derive from a model such as the Black-Scholes Model.

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In addition to required factors such as market price, expiration date, interest rate and strike price, implied volatility is also used in calculating an option’s premium. The most important factor in option trading is to manage the Vega as other factors are known to the investor/trader like time to expiry, spot and strike price and interest rate.

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It means that a call option trading @ 45 and having Vega of 0.47, if the Implied Volatility rises by 1% then the option value will be 45.47. An option price rises due to the expectation that increase in Volatility rise, with the possibility for an option to get expired in favor.

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Let’s understand Vega through simple option positions. Long Call and Put have the positive Vega whereas short Call and Put have the negative Vega. There is no Vega for the stock. Here, positive Vega means that raise in Implied Volatility favor the option. Negative Vega means that fall in Implied Volatility favor the option.

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Let’s take a simple example on S&P CNX Nifty options. In Nifty a Bear call spread for the expiry Aug2010 on 16 Aug 2010 where we short 5400 Call @ 95 whose Vegais 3.18 and Long 5500 Call @36 whose Vega is 3.38. The long call Vega is positive and short call Vega is negative. So the net Vega of this position is +0.20. If theImplied Volatility rises by 1% (keeping other factors same) the net premium of 59 will rise to 59.20 and on fall by 1% it will shed to 58.80.

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Let’s Wait for the fianl part 🙂

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INVEST IN DIVIDEND PAYING COMPANY Final Part :)

Lots of market participants, who wish for regular income by way of dividends, look for stocks which maintain a steady or an upward trend of dividend declaration.

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Here is a list of few companies.

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Ideally, a low market price when combined with high dividend payout gives high dividend yields. Dividend yield is an uncomplicated tool for investor to evaluate his investments in stocks and to choose the right portfolio depending on his priority.

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Here are two things which will be very helpful for investor:

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Dividend-capture strategy – Investors using a dividend-capture strategy will simply buy the stock prior to the ex-dividend date, and would ensure that they would receive the payment by holding the security until the ex dividend date, and then sell the security. In theory, they should be able to quickly buy and sell a number of securities near their ex dividend dates and capture numerous dividends. However, in practice the truth is that this is not always the case.

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Dividend Arbitrage – It is an options trading strategy that involves purchasing put options and an equivalent amount of underlying stock before the ex-dividend date and then exercising the put after collecting the dividend. When used on a security with low volatility (causing lower options premiums) and a high dividend, dividend arbitrage can create profits, assuming very low to no risk.

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Concluding I would like to say that all investors have mainly two objectives. First is earning from capital appreciation and the second is profits from dividends. And, it is the skill of any stock to offer both these incomes that determine its market price. Investors can increase their returns by investing in dividend-yielding stocks, especially following a continuous stream of dividends. Considering the fact that dividends are tax free, it makes all the more sense to target these stocks.

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WANT GOOD RETURN, LOW RISK – INVEST IN DIVIDEND PAYING COMPANY Part 1 :)

Dividend= Extra Income. Investing in high dividend paying companies is wise decision as dividend paid is tax free at the hand of the investors; but what should be given greater importance is “preservation of capital”. In that case investors have a fine amount of dividend-paying stocks in portfolio. The tax on dividends is rewarded by the company at the time of announcement of the dividend.

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Well, the price of dividends may differ from company to company depending on profits earned, cash flows, investment and the policies of the company. Company announces a small size of earnings as dividends. The rest is used in business to spend and generate high returns. Final dividends are also a purpose of the future cash requirements of the company.

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A dividend is always paid on face value of the company. Dividend yield is considered as the ratio of the annual dividends amount announced to the existing market price of the company’s stock. The dividend yield ratio shows what investors earn on their stock. For example, a 10 percent dividend on Rs 100 equity share means a dividend of Re 10 per share.

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Dividend yield: Dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its share price.In the absence of any capital gains, the dividend yield is the return on investment for a stock. It is often expressed as a percentage. Its reciprocal is the Price/Dividend ratio.

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To calculate dividend yield is main work to analyze the proper income from an investment. Dividend yield is a major determining factor for stock prices. Dividend yield is calculated as follows:

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It should be clear that dividend yield is not the same to the amount of dividend paid by a tax company. It is the dividend payout with reference to the market price of the company’s stock. While the dividend is received, it is computed as a percentage of the current market value of the share and is termed as the dividend yield.

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Dividend yield also specifies how an investor is prepared to pay for the predicted dividend stream generate by a single stock. Investor uses the projected dividend values over a period or past dividend values for the analysis.

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Dividend Payout Ratio The percentage of earnings paid to shareholders in dividends.

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The payout ratio provides an idea of how well earnings support the dividend payments. More mature companies tend to have a higher payout ratio. A dividend payout has a direct effect on the cash balance of a company. Some companies follow the policy of sustaining dividend payouts or gradually increasing them. These companies demand higher values in the stock markets as compared to the companies following erratic dividend payout policies.

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Preferred Dividend coverage ratio: Preferred Dividend coverage ratio is a coverage ratio that measures a company’s ability to pay off its required preferred dividend payments. A healthy company will have a high coverage ratio, indicating that it has little difficulty in paying off its preferred dividend requirements.

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This ratio gives investors an idea of a company’s ability to pay off its preferred dividend requirements, and also an idea how likely they are to be paid dividends. If the company has a hard time covering its preferred dividend requirements, common shareholders are less likely to receive a dividend payment on their holdings.

Systematic Investment Plan(SIP)..Whats That?

Systematic-Investment-Plan-SIP

Wealth creation is an art and over the years it has changed its avenues and area of interest for investors.

🙂

In this blog, we will discuss what is SIP and what are the benefits of SIP?

🙂

SIP or systematic investment plan is a simple and time honored investment strategy for creation of wealth in a disciplined manner over long term period.

🙂

It aims at a better future for investors by giving a good rate of return as compared to one time investor in volatile market by lowering the average purchase cost.

🙂

It is evident from the recent slowdown that the Mutual fund invested trough SIP route has prevented the pitfalls of equity investment and is enjoying the high returns, if compared.

🙂

So it makes all the more sense today when the stock markets are volatile.

🙂

BENEFITS of SIP.

1. Power of compounding:

If money is invested at an early age one can make money work with greater power of compounding with significant impact on wealth accumulation.

🙂

2.Rupee cost averaging:

It is not so easy to predict the movements of the market.

An automatic market timing mechanism that eliminates the need to time one’s investments is Rupee cost averaging.

Though SIP does not guarantee profit, but one can invest through it as it goes a long way in minimizing the effects of investing in volatile markets.

🙂

3. Convenience:

It is very easy and convenient to operate through SIP route as it could be done by simply providing post dated cheques with the completed enrolment form or give ECS instructions.

The cheques can be deposited on the specified dates and the units credited into the investor’s account.

The SIP facility is available in most of the categories in domestic Mutual Fund industry.

🙂

SIP features:

If one would like to earn a good return from its principal then he should have a disciplinary approach.

The disciplinary approach is a vital to earning good returns over a longer time frame.

Once invested through sip route, investors are saved from bothering to identifying the ideal entry and exit points from volatile markets.

🙂

Conclusion:

Though SIP resolves a dilemma often facing investors due to ups and downs in the market price but investor finds it difficult to decide when to invest in the equity scheme.

The success of investors SIP hinges on the performance of his/ her selected scheme.

If the investor is able to make wise decisions and make the best of the Indian volatile market, SIP is definitely a powerful tool to create wealth over time.

🙂

EQUITY UPDATE for 21st August,2009

Equity Update

POST MARKET REPORT 🙂

The BSE Sensex closed higher by 228.51 points or (1.52%) at 15,240.83 and NSE Nifty ended up by 75.35 points or (1.69%) at 4,528.8.

🙂

BSE Mid Caps and Small Caps closed with gains of 81.93 and 102.71 points at 5,559.32 and 6,462.98 respectively.

The BSE Sensex touched intraday high of 15,275.17 and intraday low of 14,835.08

🙂

Among the Sensex pack 28 stocks ended in green territory and 2 stock ended in red territory.

The market breadth indicating the overall health of the market remained positive as 1711 stocks closed in green while 958 stocks closed in red and 102 stocks remained unchanged in BSE.

🙂

The S&P CNX Nifty is up by 73.45 points or 1.65 % to 4526.90.

The NSE turnover was up Rs.14697.33 from last trading session’s Rs. 13245.55 crore.

🙂

NEWS UPDATES

– Shares of eight tea companies jumped on increase in tea prices

– Bharti Airtel rose after a newspaper report quoted Chairman Sunil Mittal as saying that the company is not looking to sweeten its deal to buy a stake in South Africa’s MTN.

– Bharat Heavy Electricals bagged an order worth Rs 2,630 crore.

– Flawless Diamond (India) s board approved a 10-for-1 stock split.

🙂

OUTLOOK

Index opened in red on the back of on mixed cues from the markets across the globe but rose steadily as the day progressed.

Technically, it managed to sustain to above 4350 levels, which triggered buying spree across the board on the last trading day of the week.

Realty & Auto counters were the major gainers in today’s trade with significant gain in Midcap & Small cap as well.

🙂

Market breadth also managed to close strongly in green resultant to spurt.

Technically, we expect that it’ll try to test higher levels in the next week but that will attract profit taking too.

🙂

Support – 4485-4450

Resistance – 4565-4600

🙂

SENTIMENT INDICATOR

PCR of index options is at 0.96 from last trading session’s 0.97

PCR of Stock options is at 0.40 from last trading session’s 0.31.

PCR of total F&O is at 0.94 from last trading session’s 0.94.

The advances are 750; declines are 336 and unchanged are 30.

The implied volatility has increased to 35.41 from last trading session’s 32.15

🙂

TABLES :

1.

Daily Equity Update

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2.

sector watch


Comment: Realty & Auto are the major gainers in day’s session 🙂

🙂




POST MARKET

The BSE Sensex closed higher by 228.51 points or (1.52%) at 15,240.83 and NSE Nifty ended up by 75.35 points or (1.69%) at 4,528.8.

BSE Mid Caps and Small Caps closed with gains of 81.93 and 102.71 points at 5,559.32 and 6,462.98 respectively.

The BSE Sensex touched intraday high of 15,275.17 and intraday low of 14,835.08

Among the Sensex pack 28 stocks ended in green territory and 2 stock ended in red territory.

The market breadth indicating the overall health of the market remained positive as 1711 stocks closed in green while 958 stocks closed in red and 102 stocks remainedunchanged in BSE.

The S&P CNX Nifty is up by 73.45 points or 1.65 % to 4526.90.

The NSE turnover was up Rs.14697.33 from last trading session’s Rs. 13245.55 crore.

NEWS UPDATES

Shares of eight tea companies jumped on increase in tea prices

Bharti Airtel rose after a newspaper report quoted Chairman Sunil Mittal as saying that the company is not looking to sweeten its deal to buy a stake in South Africa’s MTN.

Bharat Heavy Electricals bagged an order worth Rs 2,630 crore.

Flawless Diamond (India) s board approved a 10-for-1 stock split.

OUTLOOK

Index opened in red on the back of on mixed cues from the markets across the globe but rose steadily as the day progressed.

Technically, it managed to sustain to above 4350 levels, which triggered buying spree across the board on the last trading day of the week.

Realty & Auto counters were the major gainers in today’s trade with significant gain in Midcap & Small cap as well.

Market breadth also managed to close strongly in green resultant to spurt.

Technically, we expect that it’ll try to test higher levels in the next week but that will attract profit taking too.

Support – 4485-4450 Resistance – 4565-4600

SENTIMENT INDICATOR

PCR of index options is at 0.96 from last trading session’s 0.97

PCR of Stock options is at 0.40 from last trading session’s 0.31.

PCR of total F&O is at 0.94 from last trading session’s 0.94.

The advances are 750; declines are 336 and unchanged are 30.

The implied volatility has increased to 35.41 from last trading session’s

32.15

SIP – A TIME HONORED INVESTMENT STRATEGY

systematic investment plan

Wealth creation is an art and over the years it has changed its avenues and area of interest for investors.

🙂

In this blog, we will discuss what is SIP and what are the benefits of SIP?

🙂

SIP or systematic investment plan is a simple and time honored investment strategy for creation of wealth in a disciplined manner over long term period.

It aims at a better future for investors by giving a good rate of return as compared to one time investor in volatile market by lowering the average purchase cost.

🙂

It is evident from the recent slowdown that the Mutual fund invested trough SIP route has prevented the pitfalls of equity investment and is enjoying the high returns, if compared.

🙂

So it makes all the more sense today when the stock markets are volatile.

🙂

Below are some of the benefits of SIP.


Power of compounding:

If money is invested at an early age one can make money work with greater power of compounding with significant impact on wealth accumulation.

🙂

Rupee cost averaging:

It is not so easy to predict the movements of the market.

An automatic market timing mechanism that eliminates the need to time one’s investments is Rupee cost averaging.

Though SIP does not guarantee profit, but one can invest through it as it goes a long way in minimizing the effects of investing in volatile markets.

🙂

Convenience:

It is very easy and convenient to operate through SIP route as it could be done by simply providing post dated cheques with the completed enrolment form or give ECS instructions.

The cheques can be deposited on the specified dates and the units credited into the investor’s account.

The SIP facility is available in most of the categories in domestic Mutual Fund industry.

🙂

SIP features:

If one would like to earn a good return from its principal then he should have a disciplinary approach.

The disciplinary approach is a vital to earning good returns over a longer time frame.

Once invested through sip route, investors are saved from bothering to identifying the ideal entry and exit points from volatile markets.

🙂

Conclusion:

Though SIP resolves a dilemma often facing investors due to ups and downs in the market price but investor finds it difficult to decide when to invest in the equity scheme.

The success of investors SIP hinges on the performance of his/ her selected scheme.

If the investor is able to make wise decisions and make the best of the Indian volatile market, SIP is definitely a powerful tool to create wealth over time.

🙂

Wealth creation is an art and over the years it has changed its avenues and area of interest for investors.

In this article, we will discuss what is SIP and what are the benefits of SIP? SIP or systematic investment plan is a simple and time honored investment strategy for creation of wealth in a disciplined manner over long term period.

It aims at a better future for investors by giving a good rate of return as compared to one time investor in volatile market by lowering the average purchase cost. It is evident from the recent slowdown that the Mutual fund invested trough SIP route has prevented the pitfalls of equity investment and is enjoying the high returns, if compared. So it makes all the more sense today when the stock markets are volatile.

Below are some of the benefits of SIP.

Power of compounding: If money is invested at an early age one can make money work with greater power of compounding with significant impact on wealth accumulation.

Rupee cost averaging: It is not so easy to predict the movements of the market.

An automatic market timing mechanism that eliminates the need to time one’s investments is Rupee cost averaging. Though SIP does not guarantee profit, but one can invest through it as it goes a long way in minimizing the effects of investing in volatile markets.

Convenience: It is very easy and convenient to operate through SIP route as it could be done by simply providing post dated cheques with the completed enrolment form or give ECS instructions.

The cheques can be deposited on the specified dates and the units credited into the investor’s account. The SIP facility is available in most of the categories in domestic Mutual Fund industry.

SIP features: If one would like to earn a good return from its principal then he should have a disciplinary approach. The disciplinary approach is a vital to earning good returns over a longer time frame. Once invested

through sip route, investors are saved from bothering to identifying the ideal entry and exit points from volatile markets.

Conclusion: Though SIP resolves a dilemma often facing investors due to ups and downs in the market price but investor finds it difficult to decide when to invest in the equity scheme. The success of investors SIP hinges on the performance of his/ her selected scheme. If the investor is able to make wise decisions and make the best of the Indian volatile market, SIP is definitely a powerful tool to create wealth over time.

Factors that Move the Interest Rates – Part 2 (MONETARY POLICY)

Monetary Policy

In previous Blog we have discussed about the major factors responsible for the change in interest rates and price of bonds indirectly.

All those three factors like Inflation, Currency and Liquidity have been touched upon in last blog.

🙂

Now time to look into another major factor which causes  movement in the interest rate. The factor i am talking about is Monetary Policy. 🙂

Monetary Policy: The RBI controls liquidity largely through monetary policy instruments –

(i) CRR & SLR – CRR (Cash Reserve Ratio) refers to a portion of deposits (as cash) which banks have to maintain with the RBI.

Banks are also required to invest a portion of their deposits in government securities as a part of their SLR (Statutory Liquidity Ratio) requirements.

If either of these is increased, liquidity tightens and so interest rates harden (increase).:(

Recently, RBI has reduced both these rates to infuse liquidity in the system – CRR is 5% (down 250 bps from March ’08) and SLR is 24% (down 100 bps).

🙂

(ii) Reverse repo rate – it is the overnight interest rate that a bank earns for lending money to the RBI in exchange for G-Secs.

A hike in reverse repo rate increases interest rates. Currently, reverse repo rate stands at 3.25%.

🙂

(iii) Repo rate – it is the discount rate at which a central bank repurchases government securities from the commercial banks.

To temporarily expand the money supply, the central bank decreases repo rates (so that banks can swap their holdings of government securities for cash).

To contract the money supply, it increases the repo rates. The current repo rate is 4.75%.

🙂

(iv) OMO and MSS – OMOs (Open Market Operations) are outright transactions in government securities.

When the RBI buys G-Secs, it is injecting money into the system, hence, increasing liquidity, which softens (reduces) interest rates.

When the RBI sells G-Secs, it sucks out excess money from the system i.e. reduces liquidity in the system which hardens interest rates.

MSS (Market Stabilisation Scheme) is the issuance of treasury bills and dated securities by way of auction by the RBI.

This affects interest rates in the same manner as OMOs.

🙂

Having collected updates on where the above parameters stand, one can have a better understanding of why interest rates are at their current levels, as well as which direction they are expected to move in.

🙂

If most of them indicate that a rise in interest rates is expected, bond prices are likely to fall in the future.

On the contrary, an expectation of a fall in interest rates means bond prices will rise.

A word of caution here though – timing interest rate changes is difficult. This is because there is a low likelihood of being able to precisely predict the movement in the factors discussed above.

So in order to minimize interest rate risk, one should ensure that the bond portfolio is diversified across various maturities.

🙂

4 Monetary Policy: The RBI controls liquidity largely through monetary policy instruments –

(i) CRR & SLR – CRR (Cash Reserve Ratio) refers to a portion of deposits (as cash) which banks have to maintain with the RBI. Banks are also required to invest a portion of their deposits in government securities as a part of their SLR (Statutory Liquidity Ratio) requirements. If either of these is increased, liquidity tightens and so interest rates harden (increase). Recently, RBI has reduced both these rates to infuse liquidity in the system – CRR is 5% (down 250 bps from March ’08) and SLR is 24% (down 100 bps).

(ii) Reverse repo rate – it is the overnight interest rate that a bank earns for lending money to the RBI in exchange for G-Secs. A hike in reverse repo rate increases interest rates. Currently, reverse repo rate stands at 3.25%.

(iii) Repo rate – it is the discount rate at which a central bank repurchases government securities from the commercial banks. To temporarily expand the money supply, the central bank decreases repo rates (so that banks can swap their holdings of government securities for cash).

To contract the money supply, it increases the repo rates. The current repo rate is 4.75%.

(iv) OMO and MSS – OMOs (Open Market Operations) are outright transactions in government securities. When the RBI buys G-Secs, it is injecting money into the system, hence, increasing liquidity, which softens (reduces) interest rates. When the RBI sells G-Secs, it sucks out excess money from the system i.e. reduces liquidity in the system which hardens interest rates. MSS (Market Stabilisation Scheme) is the issuance of treasury bills and dated securities by way of auction by the RBI. This affects interest rates in the same manner as OMOs.

Having collected updates on where the above parameters stand, one can have a better understanding of why interest rates are at their current levels, as well as which direction they are expected to move in. If most of them indicate that a rise in interest rates is expected, bond prices are likely to fall in the future. On the contrary, an expectation of a fall in interest rates means bond prices will rise. A word of caution here though – timing interest rate changes is difficult. This is because there is a low likelihood of being able to precisely predict the movement in the factors discussed above. So in order to minimize interest rate risk, one should ensure that the bond portfolio is diversified across various maturities.