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Adani Ports 745.85 (-0.54%)
Asian Paints 3094.65 (4.20%)
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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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7 Hacks To Lower Your Car Insurance Costs

7 Hacks To Lower Your Car Insurance Costs
by Divya Nair 01/06/2017

Buying a new car today might be cheaper than actually using one in our daily lives. The running cost of a car today is definitely higher than the day it was bought. While nothing can be done about the rising premiums on car insurance, we can certainly try cutting down the overall costs on our insurance covers.

Try These 7 Smart Ways To Save On Your Car Insurance Cost:

1. Accumulating NCB - Car owners can accumulate No Claim Bonus (NCB) by not claiming for minor repairs. Many insurance companies usually reduce premiums for the preceding year if you don’t make any claims in a year. Moreover, it is better to spend on your own on minor repairs than file a claim and lose the no-claim bonus.

2. Transferring NCB -

You can transfer your NCB when you sell your old vehicle and buy a new one. When getting your new car, all you have to do is inform your insurance provider that you wish to transfer your NCB. That done, the insurer will provide you with a certificate stating the details of the new car.

3. Apply For Discounts -

There are few insurance companies that offer discounts based on your age and profession. Make sure you apply for it.

4. Install Anti-Theft Devices -

People can also reduce the premium costs by installing smart anti-theft devices like alarms and tracking devices. By installing such safety devices, vehicle owners can get substantial discount.

5. Drop Unnecessary Add-On Covers -

We are often advised to buy the necessary add-on covers while buying a new car. But an add-on should not be bought only for the sake of buying it. One should drop any unnecessary add-on covers which will otherwise increase the premium costs.

6. Opt For Voluntary Deductible -

Vehicle owners can opt for a voluntary deductible and get further discount. But this also means that they will have to bear the claim cost upto the value of the deductible chosen.

7. Compare Quotes Online Before Purchasing -

It is wise to do an online comparison of policies from a number of companies before buying a policy. Most insurance companies offer lower premiums online. You may miss out on huge discount if you do not compare various plans.

Conclusion - With the rising cost of vehicles and changing lifestyles, car insurance cost is unlikely to go down in times to come. With these 7 ways mentioned above, we hope you will be able to lessen that extra cost on car insurance.

Buy a Car Insurance Cover Now!

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All About House Rent Allowance (HRA)

All About House Rent Allowance (HRA)
by Divya Nair 01/06/2017

House Rent Allowance (HRA) is the amount which your employer pays you towards the rent of your accommodation. Every salaried individual living in a rented flat is entitled to claim HRA to save on taxes. HRA is regulated by the provisions of Section 10(13A) of the Income Tax Act.

How Is HRA Decided?

It is decided based on the criteria like salary of the employee and the city of residence of the employee. If the employee resides in a metro city, then he/she is entitled to HRA almost equal to 50% of the salary. For others, HRA entitlement is 40% of the salary.

How To Use HRA To Save Income Tax?

A salaried individual can claim HRA exemptions only if these conditions are met: HRA is received as part of the salary package If an employee stays in a rented house rent paid is more than 10% of the salary.

How Much Of HRA Is Exempt From Income Tax?

The entitled HRA to an employee is not always fully exempt from tax. Employers take into consider the least of the below three heads to exempt tax - HRA received from the employer Actual rent paid less 10% of salary 50% of basic salary for those living in metro cities 40% of basic salary for those living in non-metro cities

Taxable HRA For Mr. X Who Lives In Mumbai
Basic Salary Rs 30,000
HRA Received Rs 13,000
Rent On Accommodation 1,44,000

Hence, Mr.X would get an HRA exemption of Rs 13,000 (the least among the three conditions). You can also save tax by paying rent to your parents, grandparents even if they do not have taxable income. In this case, they will act as your landlord, but the owner of the house should be the one whose name is furnished in the rent receipt.

Documents Required To Claim HRA Benefit -

If the HRA claim is just upto Rs 3,000/month, employees need not furnish any documents. But for amount exceeding this limit, the following documents need to be submitted to the employer -

Rent Receipts:

For HRA tax exemption, employees need to affix a one rupee revenue stamp on rent receipt with details of rented house and landlord like address of rented house, landlord name, amount of rent etc. The rent receipt has to have the signature of the landlord.

Rental Agreement In Some Cases:

If the rent exceeds Rs 15000/month, then PAN details of the landlord is mandatory for claiming HRA exemption.

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5 Stocks Recommendation For Feb 25th, 2019 – Mar 1st , 2019

Stock recommendations
by Gautam Upadhaya 21/07/2017

1) Balkrishna Industries Ltd - Buy

 

Stock Balkrishna Industries Ltd
Recommendation The stock has witnessed a breakout from its sideways consolidation
backed by an uptick in volumes on the daily chart. It has also shown
positive momentum on the daily MACD-Histogram, an indication that
the uptrend will continue in the short term.
Buy/Sell Range Target Stop Loss
Buy (Cash) Rs850-855 Rs892 Rs827
NSE Code Market Cap (in Rs cr) 52-week high/low 200-Day EMA
BALKRISIND 16543 Rs1467/741 Rs987

 

2) REC Ltd - Buy

 

Stock REC Ltd
Recommendation The stock has witnessed a consolidation breakout backed by an uptick
in volumes on the weekly chart. Derivative data indicates fresh long
positions in the stock.
Buy/Sell Range Target Stop Loss
Buy (Cash) Rs131-133 Rs139 Rs127.8
NSE Code Market Cap (in Rs cr) 52-week high/low 200-Day EMA
RECLTD 26068 Rs148/89 Rs119

 

3) Mahindra & Mahindra Ltd - Buy

 

Stock Mahindra & Mahindra Ltd
Recommendation The stock has witnessed a rounding bottom formation and has managed
to close above its 10-DEMA, short-term resistance level on the daily charts.
It has also formed a bullish hammer candlestick on the weekly charts.
Buy/Sell Range Target Stop Loss
Buy (Cash) Rs641-647 Rs672 Rs625
NSE Code Market Cap (in Rs cr) 52-week high/low 200-Day EMA
M&M 80272 Rs992/615 Rs771

 

4) Raymond Ltd - Buy
 

Stock Raymond Ltd
Recommendation The stock has witnessed a breakout above its resistance levels backed by an uptick in volumes on the daily charts. It has also shown strong momentum on the daily MACD-Histogram.
Buy/Sell Range Target Stop Loss
Buy (Cash) Rs721-728 Rs755 Rs705
NSE Code Market Cap (in Rs cr) 52-week high/low 200-Day EMA
RAYMOND 4478 Rs1151/593 Rs806

 

5) HDFC Bank Ltd - Sell

 

Stock HDFC Bank Ltd
Recommendation The stock has formed a bearish engulfing candlestick pattern backed by an uptick in volumes on the daily chart. Derivative data indicates fresh short positions in the stock.
Buy/Sell Range Target Stop Loss
Sell (March Futures) Rs2105-2120 Rs2030 Rs2164
NSE Code Market Cap (in Rs cr) 52-week high/low 200-Day EMA
HDFCBANK 569029 Rs2219/1830 Rs2041

 

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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What Stocks/Shares (Equity) Are And How Do Shareholders Make Money?

how do Shareholders Make Money
by Priyanka Sharma 05/08/2017

Jargon is the biggest hurdle to every new investor, particularly when it comes to those who want to invest in stocks. For that reason, it's important that before someone starts focusing on losses and gains, or the BSE versus the NSE, it's important to understand what stocks really are and what they represent. You can't make any money until you grasp the fundamentals of the tools you're working with, after all. 

Put simply, stocks represent a share in a company. If someone goes online and buys a share of ONGC stock then that individual now has a stake in how well ONGC does. If the company does well, the investor does well. If the company does poorly, then the investor can lose money. How much one stands to gain or lose depends on how much stock that person has in the company, and how that particular company performs.

Let's use an example to make this a little bit clearer. Say that Company ABC wants to attract investors. As such it divides itself up into 5,00,000 shares of stock. For every person who buys stock, that money goes to the company so it can hire new employees, build new stores and generally attempt to get a bigger share of the market. Seen this way, it's clear that trading stock is great for the company. but how do you, the investor, make money?

Method 1: Make Money Trading Stocks
Trading stocks is the most well-known way to make money on the stock market. The price of a stock is liquid, climbing and falling within the space of days or even hours. The trick to make money as a trader is to buy the stock when its price is low, and to sell it when the price rises. So, say that a stock broker heard Reliance Industries is claiming a bigger part of the market and it's poised to rebound from a slump. He or she might buy stock at Rs.50 a share, and wait. If the stock goes up then the broker can sell it at a profit. So if the stock climbs to Rs.90 a share the broker has made a Rs. 40 per share profit. That's not terribly impressive for a single share, but if the broker purchased 100 shares, or 1,000 shares then that profit is going to go up pretty quickly.

It doesn't matter whether you hang onto a stock for an hour, a year or a decade; if you sell it for more than you paid for it you made a profit.

Method 2: Making Money With Stock Dividends
When someone is a stockholder in a company, that company's profits are also the stockholder's profits. The increasing value of a stock is just one instance of this. Another may be dividends paid to shareholders by the company. In plain English, that means that every quarter the company will take a segment of its profits, split it up and give those profits to stockholders according to how much stock someone has. The more profit the company makes, the more money the stockholder gets paid at the end of the quarter. The ideal situation for you to be in is to hold stock in a company that pays dividends, and which is making record profits. If you hold onto your shares then as long as the company is making money, you're making money. In essence you're being paid to own the stock, because when you bought it you paid for a share of the company. That share of the company comes with your own little piece of the profits pie.