Nifty 17196.7 (-1.18%)
Sensex 57696.46 (-1.31%)
Nifty Bank 36197.15 (-0.85%)
Nifty IT 35848.05 (-0.86%)
Nifty Financial Services 17779.5 (-1.13%)
Adani Ports 737.45 (-0.22%)
Asian Paints 3110.45 (-2.21%)
Axis Bank 673.00 (-0.46%)
B P C L 385.90 (1.86%)
Bajaj Auto 3287.85 (-1.22%)
Bajaj Finance 7069.25 (-1.55%)
Bajaj Finserv 17488.70 (-1.52%)
Bharti Airtel 718.35 (-1.94%)
Britannia Inds. 3553.75 (-0.69%)
Cipla 912.05 (-1.00%)
Coal India 159.75 (0.28%)
Divis Lab. 4757.05 (-0.42%)
Dr Reddys Labs 4596.50 (-1.42%)
Eicher Motors 2455.55 (0.16%)
Grasim Inds 1703.90 (-1.16%)
H D F C 2771.65 (-1.29%)
HCL Technologies 1171.40 (-1.12%)
HDFC Bank 1513.55 (-0.80%)
HDFC Life Insur. 690.95 (-2.03%)
Hero Motocorp 2462.45 (-0.41%)
Hind. Unilever 2343.65 (-1.66%)
Hindalco Inds. 424.65 (-1.72%)
I O C L 122.20 (1.28%)
ICICI Bank 716.30 (-0.84%)
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Infosys 1735.55 (-0.73%)
ITC 221.65 (-1.69%)
JSW Steel 644.55 (-0.34%)
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Larsen & Toubro 1801.25 (0.67%)
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St Bk of India 473.15 (-0.81%)
Sun Pharma.Inds. 751.80 (-1.89%)
Tata Consumer 774.30 (0.14%)
Tata Motors 480.10 (0.21%)
Tata Steel 1118.00 (0.50%)
TCS 3640.45 (-0.07%)
Tech Mahindra 1593.30 (-2.23%)
Titan Company 2369.25 (-0.72%)
UltraTech Cem. 7332.45 (0.13%)
UPL 712.75 (2.08%)
Wipro 640.75 (-0.94%)

Comparison Between Online And Offline Equity Brokerage

Comparison Between Online And Offline Equity Brokerage
by Nutan Gupta 08/03/2017

In the past, when traders wanted to get involved with anything from stocks to futures, they had to find a quality broker that could help them close these deals in the market. This basically meant that anyone who couldn’t reach a broker or who didn’t want to work exclusively with these professionals had little choice but to do just that. In this day and age, this has changed as now you have the option of choosing between online and offline equity brokerage.

What exactly is the difference between online and offline equity brokerage? Is one better than the other? Will choosing one of them lead to greater success in your investments?

There are certain points, on which comparison on both can be made which will enable you to understand the right choice for you:
1) Real time information
Trading needs to be done with real time information because without this, you are just trading blindly. When you opt for offline equity brokerage, you won't be able to get real time information about trade as they are posted online in real time. This can end up putting you at a disadvantage.

2)Flexibility
In offline equity brokerage, you have to call your broker every time you want to buy or sell something on the market. At times, this can be helpful in getting some valuable advice, but due to the nature of the market, you might not want to spend as much time on the phone as you would while dealing with these professionals.

3) Fees
One of the most important differences between online and offline equity brokerage is that online equity brokerage offers the best saving options while offline equity brokerage is always on the higher side. When you choose to trade through online equity brokerage, you have to pay less brokerage fees. In fact, there are companies which only charge a flat fee as low as Rs. 10.

4) Trade at any time/place:
Another great benefit of online equity brokerage is that you can trade from anywhere and at anytime; from your personal computer or your smartphone. You don't have to worry about visiting the office of your broker during his office hours. In offline equity brokerage service, you have to wait until business hours to speak to your brokers but this is not the case in online equity brokerage as you can do the trading whenever you want.

5)Fraud Prevention
As online equity service provides users with complete control over transactions, the risk of potential frauds is eliminated. There are certain instances when the brokers execute trades on behalf of their clients without receiving permission, which can cause significant losses to the users who choose offline equity brokerage option.
Apart from these, the following benefits of online brokerage lead to a simpler, hassle-free experience, giving peace of mind.
Untitled 
                            Fig 1: Benefits of online trading

If you find that you need a hands-on approach that an offline broker has to offer and that you want to spend much of your time trading in the market, you might want to opt for offline equity brokerage service. However, if you want the flexibility that comes with an online trading option, online equity brokerage might just be the right choice for you.

 

 

 

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Making Money Through Equity Investment

Making Money Through Equity Investment
by Nutan Gupta 08/03/2017

‘Equity Investment’ refers to the buying and holding of shares of public companies, such as those traded in Bombay Stock Exchange. By the action of buying ‘shares’, the investor becomes a part owner of the company. This brings a lot of benefits; and they are, voting rights to appoint the management, a share in profits and probable preference on new shares of the same company.

Equity is one of the few ways of making a big sum of money. Preferably for investors with relatively high risk appetite, equity is designed for individuals or firms who wants to play the ‘high risk, high return’ game. This is because it comes with the risk of losing the entire capital.
Investing in stocks has to be a very informed and researched decision. The price of the stock is directly linked to the performance of the company. Hence, it is important to choose the promising companies that will be consistently profitable, giving you growth through the years.

Untitled12
Fig 1: SENSEX through the years
The above graph indicates the yearly growth of SENSEX from 1981 to 2016. We can see that the index has been gradually giving great returns to the investors.

As stated before; upon purchasing a stock, an investor becomes a proportional owner of the company based on how many shares of stock have been purchased. There are 5 different ways for the investors to make money from an equity investment:

Dividend:
As an owner, the investor is entitled to a share in the profits of the company. If the company chooses to distribute these profits through dividend, the investor earns a specific amount for every share he owns.

Capital Gains:
An increase in the market price of the stock, benefits the investor since he/she can make profits from the sale of the holdings. Over the course of years, an investor may make more than 50 times of what he has invested.

Buy Back:
The company may declare to buy shares from it’s shareholders at a price higher than the market rate. Although not every investor wishes to sell shares, one can make an extra profit through the buyback window.

Rights Issue:
On the issue of new shares, the company may give a discount to its existing shareholders. The investor can make profits by purchasing shares at a discounted price and selling them at a higher market price.

Bonus Issue:
If a company is performing exceptionally well, it might give free shares to its shareholders. These additional shares soon starts trading at market prices, giving an excellent opportunity to the investor to make profits.

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Long Call Butterfly Options Strategy

Long Call Butterfly Options Strategy
by Nilesh Jain 15/03/2017

A Long Call Butterfly is implemented when the investor is expecting very little or no movement in the underlying assets. The motive behind initiating this strategy is to rightly predict the stock price till expiration and gain from time value with limited risk.

When to initiate a Long Call Butterfly?

A Long Call Butterfly spread should be initiated when you expect the underlying assets to trade in a narrow range as this strategy benefits from time decay factor. However, unlike Short Strangle or Short Straddle, the potential risk in a Long Call Butterfly is limited. Also, when the implied volatility of the underlying assets increases unexpectedly and you expect volatility to come down, then you can apply Long Call Butterfly strategy.

How to construct a Long Call Butterfly?

A Long Call Butterfly can be created by buying 1 ITM call, buying 1 OTM call and selling 2 ATM calls of the same underlying security with the same expiry. Strike price can be customized as per the convenience of the trader; however, the upper and lower strike must be equidistant from the middle strike.

Strategy Buy 1 ITM Call, Sell 2 ATM Call and Buy 1 OTM Call
Market Outlook Neutral on market direction & Bearish on volatility
Upper Breakeven Higher Strike price of buy call - Net Premium Paid
Lower Breakeven Lower Strike price of buy call + Net Premium Paid
Risk Limited to Net Premium Paid
Reward Limited (Maximum profit is achieved when market expires at middle strike)
Margin required Yes

Let’s try to understand with an example:

Nifty Current spot price (Rs) 8800
Buy 1 ITM call of strike price (Rs) 8700
Premium paid (Rs) 210
Sell 2 ATM call of strike price (Rs) 8800
Premium received (Rs) 300 (150*2)
Buy 1 OTM call of strike price (Rs) 8900
Premium paid (Rs) 105
Upper breakeven 8885
Lower breakeven 8715
Lot Size 75
Net Premium Paid (Rs) 15

Suppose Nifty is trading at 8800. An investor Mr A thinks that Nifty will not rise or fall much by expiration, so he enters a Long Call Butterfly by buying a March 8700 call strike price at Rs 210 and March 8900 call for Rs 105 and simultaneously sold 2 ATM call strike price of 8800 @150 each. The net premium paid to initiate this trade is Rs 15, which is also the maximum possible loss. This strategy is initiated with a neutral view on Nifty hence it will give the maximum profit only when there is no movement in the underlying security. Maximum profit from the above example would be Rs 6375 (85*75). The maximum profit would only occur when underlying assets expires at middle strike. Maximum loss will also be limited if it breaks the upper and lower break-even points i.e. Rs 1125 (15*75). Another way by which this strategy can give profit is when there is a decrease in implied volatility.

For the ease of understanding, we did not take in to account commission charges. Following is the payoff chart and payoff schedule assuming different scenarios of expiry.

The Payoff chart:

The Payoff Schedule:

On Expiry NIFTY closes at Net Payoff from 1 ITM Call Bought (Rs) Net Payoff from 2 ATM Calls Sold (Rs) Net Payoff from 1 OTM Call Bought (Rs) Net Payoff (Rs)
8200 -210 300 -105 -15
8300 -210 300 -105 -15
8400 -210 300 -105 -15
8500 -210 300 -105 -15
8600 -210 300 -105 -15
8700 -210 300 -105 -15
8715 -195 300 -105 0
8800 -110 300 -105 85
8885 -25 130 -105 0
8900 -10 100 -105 -15
9000 90 -100 -5 -15
9100 190 -300 95 -15
9200 290 -500 195 -15
9300 390 -700 295 -15
9400 490 -900 395 -15

Impact of Options Greeks before expiry::

Delta: The net delta of a Long Call Butterfly spread remains close to zero.

Vega: Long Call Butterfly has a negative Vega. Therefore, one should buy Long Call Butterfly spread when the volatility is high and expect to decline.

Theta: It measures how much time erosion will affect the net premium of the position. A Long Call Butterfly will benefit from theta if it expires at middle strike.

Gamma: This strategy will have a long gamma position.

How to manage Risk?

A Long Call Butterfly is exposed to limited risk, so carrying overnight position is advisable but one can keep stop loss to further limit losses.

Analysis of Long Call Butterfly strategy:

A Long Call Butterfly spread is best to use when you are confident that an underlying security will not move significantly and will stay in a range. Downside risk is limited to net debit paid, and upside reward is also limited but higher than the risk involved.

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How to make Profit in a Neutral Market: Short Straddle Option Strategy

How to make Profit in a Neutral Market: Short Straddle Option Strategy
by Nilesh Jain 16/03/2017

A Short Straddle strategy is a race between time decay and volatility. Every day that passes without movement in the underlying assets will benefit this strategy from time erosion. Volatility is a vital factor and it can adversely affect a trader’s profits in case it goes up.

When to initiate a Short Straddle Options Trading Strategy?

A short options trading straddle strategy can be used when you are very confident that the security won’t move in either direction because the potential loss can be substantial if that happens. This strategy can also be used by advanced traders when the implied volatility goes abnormally high for no obvious reason and the call and put premiums may be overvalued. After selling straddle, the idea is to wait for implied volatility to drop and close the position at a profit. Inversely, this strategy can lead to losses in case the implied volatility rises even if the stock price remains at same level.

How to Construct a Short Straddle Options Trading Strategy?

A short straddle is implemented by selling at-the-money call and put option of the same underlying security with the same expiry.

Strategy Sell ATM Call and Sell ATM Put
Market Outlook Neutral or very little volatility
Motivation Earn income from selling option premium
Upper Breakeven Strike price of short call + Net Premium received
Lower Breakeven Strike price of short call + Net Premium received
Risk Unlimited
Reward Limited to Net Premium received (when underlying assets expires exactly at the strikes price sold)
Margin required Yes

Let’s try to understand with an example:

Nifty Current spot price Rs. 8800
Sell ATM Call & Put(Strike Price) Rs 8800
Premium received (per share) Call Rs 80
Put Rs 90
Upper breakeven Rs 8970
Lower breakeven Rs 8630
Lot Size(in units) 75

Suppose, Nifty is trading at 8800. An investor, Mr. A is expecting no significant movement in the market, so he enters a Short Straddle by selling a FEB 8800 call strike at Rs 80 and FEB 8800 put for Rs 90. The net upfront premium received to initiate this trade is Rs 170, which is also the maximum possible reward. Since this strategy is initiated with a view of no movement in the underlying security, the loss can be substantial when there is significant movement in the underlying security. The maximum profit will be limited to the upfront premium received, which is around Rs 12750 (170*75) in the example cited above. Another way by which this strategy can be profitable is when the implied volatility falls.

For the ease of understanding, we did not take into account commission charges. Following is the payoff chart and payoff schedule assuming different scenarios of expiry.

The Payoff Chart:

The Payoff Schedule:

On Expiry NIFTY closes at Net Payoff from Call Sell (Rs) Net Payoff from Put Sell (Rs) Net Payoff (Rs)
8300 80 -410 -330
8400 80 -310 -230
8500 80 -210 -130
8600 80 -110 -30
8630 80 -80 -0
8700 80 10 70
8800 80 90 170
8900 -20 90 70
8970 -90 90 0
9000 -120 90 -30
9100 -220 90 -130
9200 -320 90 -230
9300 -420 90 -330

Impact of Options Greeks:

Delta: Since we are initiating ATM options position, the Delta of call and put would be around 0.50.

  • 8800 CE Delta @ 0.5, since we are short, the delta would be -0.5.

  • 8800 PE Delta @-0.5, since we are short, the delta would be +0.5.

  • Combined delta would be -0.5+0.5=0.

Delta neutral in case of Short Straddle suggests profit is capped. If the underlying assets move significantly, the losses would be substantial.

Gamma: Gamma of the overall position would be Negative.

Vega: Short Straddle Strategy has a negative Vega. Therefore, one should initiate Short Straddle only when the volatility is high and expects to fall.

Theta: Time decay is the sole beneficiary for the Short Straddle trader given that other things remain constant. It is most effective when the underlying price expires around ATM strike price.

How to manage risk?

Since this strategy is exposed to unlimited risk, it is advisable not to carry overnight positions. Also, one should always strictly adhere to Stop Loss in order to restrict losses.

Analysis of Short Straddle Option Trading Strategy:

A Short Straddle Option Trading Strategy is the combination of short call and short put and it mainly profits from Theta i.e. time decay factor if the price of the security remains relatively stable. This strategy is not recommended for amateur/beginner traders, because the potential losses can be substantial and it requires advanced knowledge of trading.

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Bearish Options Trading strategies for Falling Markets

Bearish Options Trading strategies for Falling Markets
by Nilesh Jain 21/03/2017

Bearish Option Trading strategy is best used when an options trader expects the underlying assets to fall. It is very important to determine how much the underlying price will move lower and the timeframe in which the rally will occur in order to select the best option strategy. The simplest way to make profit from falling prices using options is to buy put. However, buying put is not necessarily the best way to make money in moderately or mildly bearish markets. Following are the most popular strategies that can be used in different scenarios.

Extremely Bearish - Long Put

Moderately Bearish - Bear Put Spread

Long Put Options Trading

When should you initiate a Long Put Options Trade?

A Long Put strategy is best used when you expect the underlying asset to fall significantly in a relatively short period of time. It would still benefit if you expect the underlying asset to fall gradually. However, one should be aware of the time decay factor, because the time value of put will reduce over a period of time as you reach near expiry.

Why should you use Long Put?

This is a good strategy to use because the downside risk is limited only up to the premium/cost of the put you pay, no matter how much the underlying asset rises. It also gives you the flexibility to select the risk to reward ratio by choosing the strike price of the options contract you buy. In addition, Long Put can also be used as a hedging strategy if you want to protect an asset owned by you from a possible reduction in price.

Strategy Buy/Long Put Option
Market Outlook Extremely Bearish
Breakeven at expiry Strike price - Premium paid
Risk Limited to premium paid
Reward Unlimited
Margin required No

Let’s try to understand with an example:

Current Nifty Price Rs 8200
Strike price Rs 8200
Premium Paid (per share) Rs 60
BEP (Strike Price - Premium paid) Rs 8140
Lot size (in units) 75

Suppose Nifty is trading at Rs 8200. A put option contract with a strike price of Rs 8200 is trading at Rs 60. If you expect that the price of Nifty will fall significantly in the coming weeks, and you paid Rs 4,500 (75*60) to purchase a single put option covering 75 shares.

As per expectation, if Nifty falls to Rs 8100 on options expiration date, then you can sell immediately in the open market for Rs 100 per share. As each option contract covers 75 shares, the total amount you will receive is Rs 7,500 (100*75). Since, you had paid Rs 4,500 (60*75) to purchase the put option, your net profit for the entire trade is therefore Rs 3,000. For the ease of understanding, we did not take into account commission

How to manage risk?

A Long Put is a limited risk and unlimited reward strategy. So carrying overnight position is advisable but one can keep stop loss to restrict losses due to opposite movement in the underlying assets and also time value of money can play spoil sports if underlying assets doesn’t move at all.

Conclusion:

A Long Put is a good strategy to use when you expect the security to fall significantly and quickly. It also limits the downside risk to the premium paid, whereas the potential return is unlimited if Nifty moves lower significantly. It is perfectly suitable for traders who don’t have a huge capital to invest but could potentially make much bigger returns than investing the same amount directly in the underlying security.

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Difference Between In-The-Money (ITM), At-The-Money (ATM) And Out-The-Money (OTM) Call & Put Options?

Difference Between In-The-Money (ITM), At-The-Money (ATM) And Out-The-Money (OTM) Call & Put Options?
by Nilesh Jain 21/03/2017

An option premium consists of components, namely Intrinsic value and the Time value.

Option premium = Intrinsic value + Time value

ITM ATM OTM
INTRINSIC VALUE YES NO NO
TIME VALUE YES YES YES

Intrinsic value: The Intrinsic value is the amount by which the strike price of an option is In-the-money. The Intrinsic value for call option will be the underlying stock’s price minus its call strike price, whereas for the put option, it is the put strike price minus the underlying stock price. ATM and OTM options don’t have any Intrinsic value.

Time Value: The Time value is also referred to as the Extrinsic value. It is the excess amount over and above an option’s intrinsic value. Time value decreases to zero over time as the option moves closer to expiration. This circumstance is called as Time decay. Options premium depends on time to expiration. Options that would expire after a longer duration of time would be more expensive as compared to those expiring in the current month as the former would have more time value left, increasing the probability of trade going in your favour.

In-The-Money Call Option

An In-the-money call option is described as a call option whose strike price is less than the spot price of the underlying assets.

In the following example of Nifty, the In-the-money call option would be any strike price below Rs.8300 (spot price) of the stock (i.e. Strike price< Spot price).So, NIFTY FEB 8200 CALL would be the example of In-the-money call. An In-the-money option always has some Intrinsic value and Time value.

At-The-Money Call Option

An At-the-money call option is described as a call option whose strike price is approximately equal to spot price of the underlying assets (i.e. Strike price=Spot price). Hence, NIFTY FEB 8300 CALL would be an example of At-the-money call option, where the spot price is Rs 8300. An At-the-money call option doesn’t have any Intrinsic value and it consists of only time value.

Out-The-Money Call Option

An Out-the-money call option is described as a call option whose strike price is higher than the spot price of the underlying assets(i.e. Strike price> Spot price).Thus, an Out-the-money call option’s entire premium consists of Time value/Extrinsic value and it doesn’t have any Intrinsic value. So, NIFTY FEB 8400 CALL would be an example of Out-the-money call option, where the spot price is Rs 8300.

NIFTY (CALL OPTION) Expiry: 23FEB2017 SPOT PRICE: 8300
STRIKE PRICE STATUS OPTION PRICE INTRINSIC VALUE TIME VALUE
8000 ITM 330 300 30
8100 ITM 240 200 40
8200 ITM 160 100 60
8300 ATM 80 0 80
8400 OTM 60 0 60
8500 OTM 40 0 40
8600 OTM 30 0 30

In-the-money put option

An In-the-money put option is described as a put option whose strike price is higher than the current price of the underlying. An In-the-money option always has some Intrinsic value and Time value.

So, the In-the-money put option would be any strike price above Rs8300 (spot price) of the stock. And NIFTY FEB 8400 PUT would be the example of In-the-money put.

At-the-money put option

An At-the-money put option is described as a put option whose strike price is approximately equal to the spot price of the underlying assets. From the following example, NIFTY FEB 8300 PUT would be an example of At-the-money put option, where the spot price is Rs. 8300. An At-the-money put option doesn’t have any Intrinsic value, it consists of only time value.

Out-the-money put option

An Out-the-money put option is described as a put option whose strike price is lower than the spot price of the underlying. Thus, an Out-the-money put option’s entire premium consists of Time value / Extrinsic value and it doesn’t have any Intrinsic value. So, NIFTY FEB 8200 PUT would be an example of Out-the-money put option.

NIFTY ((PUT OPTION) Expiry: 23FEB2017 SPOT PRICE: 8300
STRIKE PRICE STATUS OPTION PRICE INTRINSIC VALUE TIME VALUE
8000 OTM 30 0 30
8100 OTM 40 0 40
8200 OTM 60 0 60
8300 ATM 80 0 80
8400 OTM 160 100 60
8500 OTM 240 200 40
8600 OTM 330 300 30

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