Update on Budget Strategy

If one had gone for the Put Strategy,

Morning 5800 feb put got for 24 and 5800 march put possible to sell at 75

End of day 5800 feb put fetched 109 rupees which means 87 rupees profit.

87+ 75 = 162 rupees profit so far. We are covered till 5638. 200 EMA at 5649 so a bounce on cards

Morning 5800 feb call at 60 bought and march 5800 call written at 125.

During the day I hope some money could be salvaged in 5800 call and march 5800 call at 57 so made 68 rupees.

If salvaged money Feb 5800 call at least 20-30 rupees profit.

Risk free money made.

Option Strategies for the Budget Day

It is February 28th and time for the budget. This time the budget day is unique in a way that it matches with expiry day. Let us see if we can profit from this 1 off event.

There are some strategies which come to mind and I am penning them dow here.

Rule for trading in Option: Effective Risk Management. 1 should not loose large amounts of money in a single trade. Small losses are acceptable and part of the learning process.

How will market react to the budget?
There are 3 possibilities, go up, go down or remain flat.

The volatility decreases tremendously after the event and even if market goes up or down 50 or 60 points, premium decays. The Option Writer profits.

Strategy 1:
Sell March 5800 put @ Rs 90 and buy Feb 5800 put @ Rs 43

If market goes up: Feb put value gone to 0, and March premium can be pocketed.
If market goes down sharply, Feb put will help cover losses in March put. Remember you are pocketing 90 rupees hence you will make losses below 5710 in any case.

Strategy 2:
Sell march 5800 call @ 109 and buy Feb 5800 call @ 36

If market goes up, Feb 5800call will make you money. You make losses only after 5936 in any case. The Feb 5800 call will give you money which increase the level which you make losses to above 5936.

If market goes down you pocket the difference in premiums of 73.

This strategy is only for today. It will fail if markets remain flat. Tomorrow is another day and then other dynamics will come into play which we can see tomorrow.

The trick in options is to make small profits but completely risk free. 1 should take care of all eventualities that a trade can fail.

All eyes on the Budget

The markets drifted down further by 0.6 pc to close at the critical level of 5850. The Budget is upon us. The next week has the Railway Budget, the Economic Survey and the Union Budget. Along with this we also have the Expiry on Thursday after the budget. Let us try and examine how the things will pan out.

1. The Budget going by Chidambaram track record should have something to excite the markets. This is because the Government needs a strong market to offload the PSU shares.The 1997 dream budget is a reminder how old wine can be packaged in a new bottle.

2. This is the last budget before the country goes into election mode. For all the talk of early elections, going by the Congress track record I do not believe elections will happen before April 2014. There are 3 windows to have the elections, Sept 2013, Dec 2013 and April 2014.

3. Looking at the range defined for February, it was 5850 - 6200. A further dip this month will mean that the statistical probability has been overturned which is usually very rare.

4. The announcement of a definite time frame for banking licenses means that the Government is going ahead with reforms. Ever since the change in Finance Minister in July, we have further evidence that the government is working on reforms. We have had the further Oil reforms, then banking licenses, FDI in retail and aviation. Also, the FM has confidently stated that he will meet the fiscal deficit target of 5.3 %.

5. Coming to the markets, the markets are entering a strong support zone. The markets if they break 5750-5830 will go straight to 5630. If they cross 5940-5970, they will re-test previous highs.

I am working on a few Option Strategies for the Budget Day and will upload a day before or before the Budget.

Wait and watch for the budget.

Anyone interested in Stock Picks, this is the last week they are open.

Will we have a market friendly budget?

The market is slowly drifting down. Last week, it ended the week with a drop of another 0.3 pc. The market may be at around 5900 levels but the many of the stocks are at 5500 levels. Let us try and explore what can make the markets go up.

1. One may argue that the markets have made a long-term top. What goes against this argument is there is o euphoria in the markets. Long term tops are usually characterized by news anchors beig excited on television and sharp falls in the markets.

2. This is the last real budget the government presents before the general elections. The elections are due in April 2014, the Government needs lots of cash. This can oly be got by a buoyant stock market. FIIs flows reduce the current account deficit and also offloading PSU stakes in Offers for Sales.

3. I expect a lot of market friendly measures to be introduced into the budget.

4. The fuel hike implies that the Government is serious about pruning subsidies. I have also oticed many times, just as the Givernment hikes fuel prices, crude oil makes a top. If crude prices come down from here, this will be a further relief for the Government.

5. The results are out of the way and the next major trigger is the Union budget. The markets will be rage bound till the budget and a decisive direction will be got only after the budget.

6. The budget coincides with the expiry of the Nifty. This makes for interesting times. My analysis suggests that the expiry should be around 6000 or higher.

Long Term wealth is created only by Investing. I see a good entry point at the current levels in the next 2 weeks. For those, interested, Lakshmi and myself are re-opening the subscription only till budget day. For details, please refer here.

A re-look at the Gilt funds

Gilt funds have given a return of 14 % annualized in the last 6 months and 11 pc for the full year. Let us see if there is ay merit i investing in Gilt funds.
I had written a guest post for Subhankar which can be accessed here:
http://investmentsfordummieslikeme.blogspot.in/2013/02/a-re-look-at-gilt-funds-guest-post.html

Will the pre-budget rally materialize?

The range predicted for February was 5850- 6200. We are about to test the lower end of the range. Will the markets make a new high? What will happen in the year 2013. Let us try and explore a few options.

1. The liquidity in the markets is being drained out by the Government Offers for Sale. NTPC itself was worth about 10000 crores. The Domestic Insititutions have been selling to raise funds for these offers.

2. The FIIs have bought around 5000 crores in the last few days of February. This to go with the FII buying of 19000 crores in January. The DIIs have sold about 21000 crores in the corresponding time period. The markets will rally only when the DII selling stops.

3. The Growth Rate by CSO is shown around 5 % for FY 13. Historically, the growth rate has been revised upwards by about 0.5 % seveal times and the Fiance Minister is right when he expects final figures around 5.5%.

4. The Government has shown the will to move forward with economic reforms. The GMR-Changi airports talks re-opening and the Jet-Ethihad deal are clear indications of this.

5. The crude oil prices have climbed back to 119 dollars, unless this eases up, the Indian economy faces tough times.

6. The market discounts everything 6 months in advance. The current GDP figures are all factored in. I expect the markets to rally in the first half of this year dependig on the budget.

7. The budget will be an indication of when the elections will be held. If it is not a populist budget and a reforms oriented budget then the markets will rally.

8. Technically, 5815-5900 is a strong support zone and if this range is held, then the markets can rally.

The strategy remains simple, stick to blue chip stocks, accumulate at lower levels and start part bookig of profits at levels of 6100-6400.

I do not see the markets breaking 6112 in a hurry, but for 2013, I definitely feel we will see a higher high than 6112.

How have the markets traditionally performed in February?

It is again a new month and let us try and see how markets have traditionally performed. The last month analysis was pretty spot where the range of 5880-6080 thrown up by statistical analysis held up. This month is interesting because FIIs have pumped 20000 crores of equity, DIIs have sold big ad the markets have basically gone nowhere.

1. In the previous 12 years, markets have gained in about 7 instances.The gains have been small except for the year 2002 where the markets gained about 6 pc. This translates to 6400 in an extreme scenario. This possibility comes into play only if we break the previous high of 6112.

2. The month of Feb monthly low has always been below the Jan close. This year is no different. We have already gone 0.86 below the Jan close. If we the markets have to reach 6400, the markets have to hit a low in the next week or would have already hit a low.

3. For those playing for 6400, there are 2 markers, the low should not go too below 5983 and second confirmation is basically 6112.

4. The month of Feb has seen typically lows which on average are around 4 pc below the Jan close. This projects a possible low of 5800. The range thus arrived at is a broad 5800-6400.

5. February is a month where there are typically no wide swings. The average is a flat closing and the range of closing is usually + or - 3 pc. This gives a narrower range of 5850- 6200 to play for the market.

6. Also, the month of Februrary has seen a big fall of -8.2 pc only once when the gain was 2.9 pc in 2007 which is similar to the gain of 2.2 pc this year.

What conclusions can one draw from all these numbers?

A huge gain over 6035 looks unlikely. A huge fall is also unlikely since it has happened only once. A range bound market looks likely with a range of 5850 - 6200 and a downward bias for the month.

Those looking to play for next 3-4 months could look at buying closer towards 5800 - 5900 range and look to book profits at 6400.

Buying at current levels gives limited upside.