How Should One Invest In Nifty?

How Should One Invest In Nifty?
by Nutan Gupta 31/07/2017

The Nifty is NSE’s (National Stock Exchange) benchmark of stock market index for Indian equity market. It makes up for about 50% of the total trade stock in NSE. It is a barometer of the performance of NSE, and hence an indicator of the Indian economy. If Nifty goes up, it means that the entire market is going up and vice versa. 
 

how to invest in nifty 50

As one can see in the above figure, Nifty is made up of the top 50 listed companies on the National Stock Exchange. The companies, selected from different sectors, are the leading companies in the country.
Investing in Nifty is different from investing in NSE. By investing in the index (Nifty), you reap in the growth from the entire diversified portfolio of 50 stocks. If you wish to invest in Nifty, there are several ways to do so:

Spot Trading:

The simplest way of investing in Nifty is through purchasing the Nifty script which is similar to purchasing equity shares of listed companies. Once you purchase the stock, you’re eligible to benefit from the capital gains arising out of the price movement of the index.

Derivative Trading:

Derivatives are financial contracts that derive their value from an underlying asset. These could be stocks, indices, commodities, currencies, etc. Here, the parties agree to settle the contract on a future date and make profit by wagering on the future value of the underlying asset. For trading in Nifty index directly, you have two derivative instruments:  

Nifty Futures:

A future contract is an agreement between the buyer and the seller for buying and selling of Nifty on a future date. During the contract period, if the price goes up, you can sell them and earn the difference; and if the index goes down you can wait till the settlement date.

Nifty Option:

In a option contract, the contract is between the buyer and the seller for buying and selling stock of Nifty on a future date and at a specific price. The buyer of the option contract pays a premium and obtains the legal right, but not the obligation to purchase/sell Nifty in the future if the price is to his advantage.

Index Funds

It is a type of mutual fund with a portfolio (stocks, bonds, indices, currencies, etc.) constructed to match or track the components of market index (stocks and their price fluctuation) which provides broad market exposure. Such funds invest in various indices, including Nifty.

The growth of Nifty index in recent years have attracted retail investors, institutional investors and foreign investors to invest in Nifty either directly or through the index funds. Therefore, Nifty is a profitable investment proposition for any investor who is looking forward to invest in the index.

About 5paisa:- 5paisa is an online discount stock broker that is a member of NSE, BSE, MCX and MCX-SX. Since its inception in 2016, 5paisa has always promoted the idea of self-investment and has ensured that 100% operations are executed digitally with minimal to no human interventions. 

Our all-in-one Demat account makes investment hassle free for everyone, be it an individual newly venturing into the investment market or a pro investor. Headquartered in Mumbai, 5paisa.com - a subsidiary of IIFL Holdings Ltd (formerly India Infoline Limited), is the first Indian public listed fintech company.

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Complete Guide to Put/Call Ratio

Complete Guide to Put/Call Ratio
by Jayesh Bhanushali 31/07/2017

What is Put/Call Ratio?

Put/Call ratio (PCR) is a popular derivative indicator, specifically designed to help traders gauge the overall sentiment(mood) of the market. The ratio is calculated either on the basis of options trading volumes or on the basis of the open interest for a particular period.  If the ratio is more than 1, it means that more puts have been traded during the day and if it is less than 1 it means more calls have been traded. The PCR can be calculated for the option segment as a whole which includes individual stocks as well as indices. 

How to Interpret Put/Call ratio

The Put/Call ratio is mainly used as a contrarian indicator. Markets in the short-term are driven more by the emotions than fundamentals. Times of greed and fear in the market are reflected by significantly high or low PCR. Contrarians say, PCR is usually headed in the wrong direction. In an oversold market, puts will be high; as everyone expects the market to fall more. But for contrarian trader, it suggests that the market may soon bottom out. Conversely, in an overbought market, the number of calls traded will be high expecting the market to trend higher but for contrarians, it would suggest that market top is in the making. 

There is no fixed range that indicates that the market has created a bottom or a top, but generally traders will anticipate this by looking for spikes in the ratio or for when the ratio reaches levels that are outside of the normal trading range.

If options were held only to make directional bets, this analysis would have held true, however traders trade options for reasons other than making directional bet. Traders could buy options to hedge their existing position as well as to create income generation strategies. So with a combination of speculation and hedging activities, relying solely in terms of higher or lower number of Put Call ratio may not be fruitful.

Let’s see how vague PCR can be, if used in isolation.

Bank Nifty futures vis-à-vis Bank Nifty PCR

In the above example of Bank Nifty, we had witnessed a steady increase in PCR from May 2016 to 15th July 2016. Con-currently we saw a rise in price of Bank Nifty as well. In Dec 2016 Bank Nifty resumed its fresh uptrend but PCR fell sharply. This contradicts with the relations experienced earlier. From May 2017 till July 2017, PCR has once again moved in tandem with Bank Nifty. PCR as an indicator on its own has flaws. PCR levels in a highly volatile market can be misleading as typically, during such times; traders tend to sell puts instead of buying calls. So, analyzing put call ratio based only on high or low PCR numbers could prove costly. Thus it is important to use Put Call ratio in sync with other trading activities.

PCR Analysis

Let’s see how PCR analysis can be interpreted taking option sellers into consideration who are the major players in the market as compared to the retail public who are usually on the buying side of the trade.    

 


Put / Call Ratio

 Interpretation

If put call ratio increases as minor dips getting bought in during an up trending market

Bullish Indication. It means the put writers are aggressively writing at dips expecting the uptrend to continue

If put call ratio decreases while markets testing the resistance levels

Bearish Indication. It means call writers are building fresh positions, expecting a limited upside or a correction in the market.

If put call ratio decreases during down trending market

Bearish indication. It means option writers are aggressively selling the call option strikes.

Traders can combine options data including the Put Call ratio with implied volatility to gauge if long or short positions have been created in the market.

1) Build-up in options along with increase in IV’s (Implied Volatility) suggests long formation

2) Build-up in options along with fall in IV’s (Implied Volatility) suggests short formation
Types of View based on Open Interest, Implied Volatility and Put Call Ratio:


Sr. No

O.I (Open Interest)

IV

PCR

Position Indication

View

1

Increase in Put O.I

Increases

Increases

Buying of Put Option

Bearish

2

Increase in Put O.I

Decreases

Increases

Writing of Put Options

Bullish

3

 Increase in Call O.I

Increases

Decreases

Buying of Call Options

Bullish

4

Increase  in Call O.I

Decreases

Decreases

Writing of Call Options

Bearish

5

Decrease in Call O.I

Decreases

Increases

Call Unwinding

Bearish

6

Decrease in Put O.I

Decreases

Decreases

Put Unwinding

Bullish

7

Decrease in Put O.I

Increase

Decreases

Short Covering in Put Option

Bearish

8

Decrease in Call O.I

Increase

Increases

Short Covering in Call Option

Bullish

Let’s see how the combination of the Scenario 4 & 8 from the above table provided a Buying signal before the big up spurt in Nifty.
 

Chart A –Nifty Futures July Series

(Upper Sub Graph –Nifty Futures Price, Green Line –Nifty Futures Open Interest)

Chart B- Nifty 10,000 July CE

(Upper Sub Graph-Nifty 10,000CE, Blue Line –PCR, Red Line-Implied Volatility 10,000CE, Green Line –Open Interest 10,000CE)



Chart A: Nifty futures witnessed a swift increase in prices from 9650 levels to 9950 levels where the markets started to consolidate, coinciding with a gradual increase in Nifty futures O.I. Traders at this levels started to create fresh short position in the futures market, expecting the market to correct as the open interest surged higher along with a small drop in prices. 

Simultaneously in Chart B from 10th July to 20th July we witnessed call writing in OTM call option strikes including 10,000CE(as shown in the above graph) as the traders expected market to correct or remain range bound and not cross 10,000 levels in the current series. This is indicated by a decrease in PCR and increase in Open interest of Nifty OTM call options including 10,000CE strike during the same timeframe.

As price of Nifty futures started to increase from 23rd July, traders who were short in the futures market along with the call option writers had to run for a cover and close their short positions. This panic was observed by a sharp decline in the open interest positions of Nifty future contracts. In addition, implied volatility also tumbled along with an increase in Put Call ratio due to unwinding of open positions in short call option strikes.

Any smart trader, by analyzing the above mentioned positions in Nifty futures and call options could have taken a bullish stance by anticipating a huge short covering in the markets.

 

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Cochin Shipyard Limited (CSL) - IPO Note

Cochin Shipyard Limited (CSL) - IPO Note
by Nikita Boota 31/07/2017
Untitled Document

Issue Details

Issue Open

August 1,2017-August 3,2017

Price Band

Rs 424-Rs 432

Bid Lot

30 Equity shares

Face Value

Rs 10

Issue Type

100% Book building

Source: DRHP

% Shareholding

Pre IPO

Post IPO

Promoter

100.0

75.0

Public

0.0

25.0

Source: DRHP

Company Background

Cochin Shipyard Ltd (CSL) is the largest public sector shipyard in India in terms of dock capacity. The company has two docks – Dock 1 (Ship Repair Dock) and Dock 2 (Ship Building Dock) with a maximum capacity of 125,000 DWT and 110,000 DWT in FY17. CSL caters to clients engaged in the defence sector in India and in the commercial sector worldwide. In addition to shipbuilding and ship repairing, they also offer marine engineering training.

Object of the Issue

The offer consists of fresh issue of ~962 cr shares and an Offer for Sale (OFS) of up to 1.13 cr shares; out of which employee reservation is up to 8.24 lakh shares. At an upper price band, there is a discount of Rs 21 per share for employees and retail investors.

Investment Rationale

CSL has the largest ship repair capacity in the public sector while Reliance Defence being the largest repairer by capacity in private sector and in overall Indian ship repairing industry. However, CSL has the highest market share of 39% in revenue terms in the overall Indian repair industry as it has the necessary infrastructure and competencies that is reflected in its timely deliveries in the past decade.

CSL being a public sector shipyard is a likely beneficiary of gaining orders like Indigenous Aircraft Carrier (IAC) on nomination basis and benefiting from favorable working capital cycle as against other private shipyards. Reliance Defence has average working capital days for ~300 days, whereas for CSL it is ~100 days. In addition, CSL is debt free while private shipyards are posting losses owing to high interest obligations.

Currently, ship repair accounts for 26.4% of CSL’s overall revenue. Post expansion of building stepped’ dry dock, the company will be able to increase its number of ship repair vessels by 60-70% from current 80-100 vessels repaired in a year. The increase in capacity will improve the EBITDA margin as ship repair margin are almost twice of ship building.

CSL has a current order book of Rs 3000 cr in Ship building and Rs 370 cr in ship repair in FY17. As per media reports, the Indian Navy and Indian Coast Guard have plans to induce 60 and 80 ship/vessels each to reach a fleet of 200 from 140 and 120 ships /vessel at present. Continuous orders from the said clients and potential repair orders are expected to support the order book growth.

Key risk

The company derives ~85% of its revenue from top two customers namely the Indian Navy and the Indian Coast Guard. The customer’s decision to procure/repair vessels from other public/private sector shipyards can pose as a threat to the growth of the company. Further IAC forms significant portion of the company’s order book, any delay in delivery of the carriers will have an impact on reputation as well as revenues of the company.

Conclusion

At upper end of the price band of Rs 432, the issue is attractively priced at PE multiple of 18.8x its FY17 EPS on post IPO outstanding shares. Thus, we recommend SUBSCRIBING the issue.

Disclaimer: https://www.5paisa.com/research/disclaimer
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Short Put Options Trading Strategy

Short Put Options Trading Strategy
by Nilesh Jain 02/08/2017

What is short put option strategy?

A short put is the opposite of buy put option. With this option trading strategy, you are obliged to buy the underlying security at a fixed price in the future. This option trading strategy has a low profit potential if the stock trades above the strike price and exposed to high risk if stock goes down. It is also helpful when you expect implied volatility to fall, that will decrease the price of the option you sold.

When to initiate a short put?

A short put is best used when you expect the underlying asset to rise moderately. It would still benefit if the underlying asset remains at the same level, because the time decay factor will always be in your favour as the time value of put will reduce over a period of time as you reach near to expiry. This is a good option trading strategy to use because it gives you upfront credit, which will help to somewhat offset the margin.

Strategy Short Put Option
Market Outlook Bullish or Neutral
Breakeven at expiry Strike price - Premium received
Risk Unlimited
Reward Limited to premium received
Margin required Yes

Let’s try to understand with an Example:

Current Nifty Price 8300
Strike price 8200
Premium received (per share) 80
BEP (strike Price - Premium paid) 8120
Lot size 75

Suppose Nifty is trading at Rs. 8300. A put option contract with a strike price of 8200 is trading at Rs. 80. If you expect that the price of Nifty will surge in the coming weeks, so you will sell 8200 strike and receive upfront profit of Rs. 6,000 (75*80). This transaction will result in net credit because you will receive the money in your broking account for writing the put option. This will be the maximum amount that you will gain if the option expires worthless. If the market moves against you, then you should have a stop loss based on your risk appetite to avoid unlimited loss.

So, as expected, if Nifty Increases to 8400 or higher by expiration, the options will be out of the money at expiration and therefore expire worthless. You will not have any further liability and amount of Rs. 6000 (75*80) will be your maximum profit. If Nifty goes against your expectation and falls to 7800 then the loss would be amount to Rs. 24000 (75*320). Following is the payoff schedule assuming different scenarios of expiry. For the ease of understanding, we did not take into account commission charges and Margin.

Short Put Options Trading Strategy

Analysis of Short Put Option Trading Strategy

A short put options trading strategy can help in generating regular income in a rising or sideways market but it does carry significant risk and it is not suitable for beginner traders. It’s also not a good strategy to use if you expect underlying assets to rise quickly in a short period of time; instead one should try long call trade strategy.

 

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Reverse Cash and Carry arbitrage

Reverse Cash and Carry arbitrage
by Nilesh Jain 05/08/2017

Reverse Cash and Carry arbitrage is a combination of short position in underlying asset (cash) and long position in underlying future. It is initiated when future is trading at a discount as compared to cash market price. In other words, the cash market price is trading higher as compared to future. The arbitrageur/ trader can take position by selling his delivery of stocks in cash and simultaneously buying futures of same underlying assets of equal quantity. A trader must have delivery in that particular stock when there is such an opportunity available in the market.

Reverse cash and carry arbitrage occurs when market is in "Backwardation", which means future contracts are trading at a discount to the spot price.

Let’s try to understand with the help example of CEATLTD as on 26th APRIL 2017:

As we can see in the above illustration from 5paisa terminal there was a price difference between cash market price and May futures price of Rs 60.

Cash market price (as on 26th April 2017) (S)

Rs 1570

May Futures (Expiry on 29th May 2017) (F)

Rs 1510

Contract size

700

Rate of Interest

9% (p.a.)

Time to expiry (n)

29 days

Amount received from selling Delivery of CEAT

Rs 10,99,000 (1570*700)

Margin required to sell futures

Rs 1,37,595

Free cash available

Rs 9,61,405

Fair value is measured by the formula

S= F/(1+R)^n

Lending rate

0.72%

Basis

Spot price-Future price

Free cash available to lend will be Rs 10,99,000 - Rs 1,37,595 = Rs 9,61,405

Gain from amount lend is Rs 6,874.71 (9,61,405*(0.09^(29/365)))

S= 1510/(1+0.09)^(29/365)

Fair Value of spot price (S)= 1500

Current spot price= 1570

Hence, we can see that there is an arbitrage opportunity.

Risk free Arbitrage=Rs 70 (1570-1500)

To take advantage from this mispricing, trader/arbitrageur will buy futures at Rs 1510 and sell CEATLTD in cash market at Rs 1570. This would result in gross arbitrage profit of Rs 42,000 (60*700). And income received from lended amount would be Rs 6874.71, so Net arbitrage profit would be Rs 48,874.71.

Scenario analysis:

Case 1: CEATLTD rises to 1620, at expiry

Loss on underlying (cash) = (1620-1570)*700= (Rs 35,000)

Profit on futures = (1620-1510)*700= Rs 77,000

Gross Gain on Arbitrage= Rs 42,000

Inflow from lending: Rs 6874.71

Net gain from arbitrage: Rs 48,874.71

Case 2: CEATLTD falls to 1450, at expiry

Profit on underlying (cash) = (1570-1450)*700= Rs 84,000

Loss on Futures= (1510-1450)*700= (Rs 42,000)

Gross Gain on Arbitrage= Rs 42,000

Inflow from lending: Rs 6874.71

Net gain from arbitrage: Rs 48,874.71

To round up, in any reverse cash and carry arbitrage, the moment you trigger this arbitrage, your profit is fixed depending upon the arbitrage opportunity. This is also called risk free arbitrage because your profit is secured irrespective of underlying price movement.

Whenever future price of an underlying asset are higher than the current spot price, a cash and carry arbitrage opportunity arises.

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Bear Call Option Trading Strategy

Bear Call Option Trading Strategy
by Nilesh Jain 05/08/2017

What is a Bear Call Spread Option strategy?

A Bear Call Spread is a bearish option strategy. It is also called as a Credit Call Spread because it creates net upfront credit at the time of initiation. It involves two call options with different strike prices but same expiration date. A bear call spread is initiated with anticipation of decline in the underlying assets, similar to bear put spread.

When to initiate a Bear Call Spread Option strategy?

A Bear Call Spread Option strategy is used when the option trader expects that the underlying assets will fall moderately or hold steady in the near term. It consists of two call options – short and buy call. Short call’s main purpose is to generate income, whereas higher buy call is bought to limit the upside risk.

How to construct the Bear Call Spread?

Bear Call Spread can be implemented by selling ATM call option and simultaneously buying OTM call option of the same underlying assets with same expiry. Strike price can be customized as per the convenience of the trader.

Probability of making money

A Bear Call Spread has a higher probability of making money. The probability of making money is 67% because Bear Call Spread will be profitable even if the underlying assets holds steady or falls. While, Bear Put Spread has probability of only 33% because it will be profitable only when the underlying assets fall.

Strategy

Sell 1 ATM call and Buy 1 OTM call

Market Outlook

Neutral to Bearish

Motive

Earn income with limited risk

Breakeven at expiry

Strike Price of short Call + Net Premium received

Risk

Difference between two strikes - premium received

Reward

Limited to premium received

Margin required

Yes

Let’s try to understand with an example:

Nifty Current spot price (Rs)

9300

Sell 1 ATM call of strike price (Rs)

9300

Premium received (Rs)

105

Buy 1 OTM call of strike price (Rs)

9400

Premium paid (Rs)

55

Break Even point (BEP)

9350

Lot Size

75

Net Premium Received (Rs)

50

Suppose Nifty is trading at Rs 9300. If Mr. A believes that price will fall below 9300 or holds steady on or before the expiry, so he enters Bear Call Spread by selling 9300 call strike price at Rs 105 and simultaneously buying 9400 call strike price at Rs 55. The net premium received to initiate this trade is Rs 50. Maximum profit from the above example would be Rs 3750 (50*75). It would only occur when the underlying assets expires at or below 9300. In this case both long and short call options expire worthless and you can keep the net upfront credit received. Maximum loss would also be limited if it breaches breakeven point on upside. However, loss would also be limited up to Rs 3750(50*75).

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 Schedule:

On Expiry Nifty closes at

Net Payoff from Call Sold 9300 (Rs)

Net Payoff from Call Bought 9400 (Rs)

Net Payoff (Rs)

8900

105

-55

50

9000

105

-55

50

9100

105

-55

50

9200

105

-55

50

9300

105

-55

50

9350

55

-55

0

9400

5

-55

-50

9500

-95

45

-50

9600

-195

145

-50

9700

-295

245

-50

9800

-395

345

-50

Bear Call Spread’s Payoff Chart:

Impact of Options Greeks:

Delta: The net Delta of Bear Call Spread would be negative, which indicates any upside movement would result in to loss. The ATM strike sold has higher Delta as compared to OTM strike bought.

Vega: Bear Call Spread has a negative Vega. Therefore, one should initiate this strategy when the volatility is high and is expected to fall.

Theta: The net Theta of Bear Call Spread will be positive. Time decay will benefit this strategy.

Gamma: This strategy will have a short Gamma position, so any upside movement in the underline asset will have a negative impact on the strategy.

How to manage Risk?

A Bear Call is exposed to limited risk; hence carrying overnight position is advisable.

Analysis of Bear Call Options strategy:

A Bear Call Spread strategy is limited-risk, limited-reward strategy. This strategy is best to use when an investor has neutral to bearish view on the underlying assets. The key benefit of this strategy is the probability of making money is higher.