What are Sensex and Nifty?

What are Sensex and Nifty?
by Nutan Gupta 05/08/2017

Sensex and Nifty are stock market indices which represent Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) respectively.

Sensex - BSE is India’s first listed exchange which was established in 1875. The total companies listed on the exchange are close to around 6000. The total market capitalisation of all the companies listed on BSE is Rs. 1,24,69,879 crore. BSE's popular equity index - the S&P BSE SENSEX - is India's most widely tracked stock market benchmark index. It is traded internationally on the EUREX as well as leading exchanges of the BRCS nations (Brazil, Russia, China and South Africa). BSE Sensex consists of 30 top scrips from different sectors which forms this index. BSE SENSEX is calculated on a free-float market capitalization methodology and the performance of these stocks impact the performance of Sensex.

BSE has recently launched a special platform for trading in SME securities. It has also launched a free float index - S&P BSE Sensex. BSE has a lot of other indices under various categories of Equity and fixed income. Indices under Equity include- Market cap/broad, Sector & Industry, Thematics, Strategy, Sustainability, and Volatility. Indices under Fixed income include - Composite, Government, Corporate, and Money Market.

Nifty - NSE began its operations in the year 1994. Nifty consists of 50 top scrips from different sectors which forms this index. NSE has a lot of other indices under various categories - broad market indices, sectoral indices, strategy indices, thematic indices and fixed income indices. The total market capitalisation of all the companies listed on NSE is Rs 12,282,127 crore.

In the year 2016, NSE launched Nifty 50 Index futures trading on TAIFEX. Nifty50 was earlier known as CNX Nifty. It was renamed Nifty50 in the year 2015. NSE has also been felicitated with a lot of awards over the years.

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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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.

 

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Cash and Carry Arbitrage

Cash and Carry Arbitrage
by Nilesh Jain 05/08/2017

Arbitrage: Arbitrage is the process of simultaneous buy and sale of shares in order to profit from difference in the price of underlying assets. It is the process of exploiting risk free return which arises due to price differences. Arbitrage opportunity exists because of market inefficiencies.

Cash And Carry: Cash and Carry arbitrage is a combination of long position in underlying assets and short position in underlying futures. Cash and carry arbitrage occurs when market is in "Contango", which means the future prices of an underlying asset are higher than the current spot price. To initiate cash and carry arbitrage, the difference between spot price and future price should be reasonably high enough to cover transaction cost, financing cost as well as to earn profit. As expiration date approaches nearby, prices of spot and future converge and liquidation of position can be done at that time.

In order to exploit the risk free return, the arbitrageur/ trader will have to carry the asset until the expiration date of future contract. Therefore, this strategy would be profitable only if the cash flow from future at expiration exceeds the acquisition cost and carrying cost on long asset position.

Let’s try to understand with the help of example of DHFL.

Cash market price (as on 25th April 2017) (S)

Rs 422

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

Rs 430

Contract size

3000

Fair value is measured by the formula

F= S*(1+R)^n

Rate of Interest

9% (p.a.)

Time to expiry (n)

65 days

Amount borrowed

Rs 12,66,000 (422*3000)

Cost of Borrowing {0.09*(65/365)}

1.6%

Basis

Future price-spot price

Expected future price (F) = 422*(1+9%) ^(65/365)

Therefore, in above case F= 428.53

Current future price= 430

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

Risk free Arbitrage = Rs 1.47 (430-428.53)

To take the advantage of this mis-pricing, an arbitrageur/ trader may borrow Rs 12,66,000 at an interest rate of 9% p.a. and buy 3000 shares of DHFL in cash market at Rs 422 and sell 1 lot of DHFL Futures contract at Rs 430.

Cost of borrowing in Rs [(1266000)*(9%*(65/365))]= 20,291

Gains from price difference between futures and spot= Rs 24,000

This would result in to net arbitrage opportunity of Rs 24,000-20291= Rs 3,709

Scenario analysis:

Case 1: DHFL rises to 435, at expiry

Profit on underlying (cash) = (435-422)*3000= Rs 39,000

Loss on futures = (435-430)*3000= (Rs 15,000)

Gross Gain on Arbitrage= Rs 24,000

Cost of borrowing: Rs 20,291

Net gain from arbitrage: Rs.3,709.

Case 2: DHFL falls to 415, at expiry

Loss on underlying (cash) = (422-415)*3000= (Rs 21,000)

Profit on Futures= (430-415)*3000= Rs 45,000

Gross Gain on Arbitrage= Rs 24,000

Cost of borrowing: Rs 20,291

Net gain from arbitrage: Rs.3,709.

To round up, in any cash and carry arbitrage, the moment you lock in your position, 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 futures are trading at a substantial discount to spot, a reverse cash and carry arbitrage opportunity arises.

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Short Call Ladder Options Strategy

Short Call Ladder Options Strategy
by Nilesh Jain 05/08/2017

A Short Call Ladder is the extension of Bear Call spread; the only difference is of an additional higher strike bought. The purpose of buying the additional strike is to get unlimited reward if the underlying asset moves up.

When to initiate a Short Call Ladder?

A Short Call Ladder spread should be initiated when you are expecting big movement in the underlying assets, favoring upside movement. Profit potential will be unlimited when the stock breaks highest strike price. Also, another opportunity is when the implied volatility of the underlying assets falls unexpectedly and you expect volatility to go up then you can apply Short Call Ladder strategy.

How to construct a Short Call Ladder

A Short Call Ladder can be created by selling 1 ITM call, buying 1 ATM call and buying 1 OTM call of the same underlying asset with the same expiry. Strike price can be customized as per the convenience of the trader. A trader can also initiate the Short Call Ladder strategy in the following way - Sell 1 ATM Call, Buy 1 OTM Call and Buy 1 Far OTM Call.

Strategy Sell 1 ITM Call, Buy 1 ATM Call and Buy 1 OTM Call
Market Outlook Significant moment (higher side)
Upper Breakeven Higher Long call strike price + Strike difference between short call and lower long call - Net premium received
Lower Breakeven Strike price of Short call + Net Premium Received
Risk Limited (expiry between upper and lower breakeven).
Reward Limited to premium received if stock falls below lower breakeven.

Unlimited if stock surges above higher breakeven.

Margin required Yes

Let’s try to understand with an example:

Nifty Current spot price (Rs)

9100

Sell 1 ITM call of strike price (Rs)

9000

Premium received (Rs)

180

Buy 1 ATM call of strike price (Rs)

9100

Premium paid (Rs)

105

Buy 1 OTM call of strike price (Rs)

9200

Premium paid (Rs)

45

Upper breakeven

9270

Lower breakeven

9030

Lot Size

75

Net Premium Received (Rs)

30

Suppose Nifty is trading at 9100. An investor Mr. A is expecting a significant movement in the Nifty with slightly more bullish view, so he enters a Short Call Ladder by selling 9000 call strike price at Rs 180, buying 9100 strike price at Rs 105 and buying 9200 call for Rs 45. The net premium received to initiate this trade is Rs 30. Maximum loss from the above example would be Rs 5250 (70*75). It would only occur when the underlying assets expires in the range of strikes bought. Maximum profit would be unlimited if it breaks higher breakeven point. However, profit would be limited up to Rs 2250(30*75) if it drops below the lower breakeven point.

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

Payoff from 1 ITM Call sold (9000) (Rs)

Payoff from 1 ATM Calls Bought (9100) (Rs)

Payoff from 1 OTM Call Bought (9200) (Rs)

Net Payoff (Rs)

8600

180

-105

-45

30

8700

180

-105

-45

30

8800

180

-105

-45

30

8900

180

-105

-45

30

9000

180

-105

-45

30

9030

150

-105

-45

0

9100

80

-105

-45

-70

9200

-20

-5

-45

-70

9270

-90

65

25

0

9300

-120

95

55

30

9400

-220

195

155

130

9500

-320

295

255

230

9600

-420

395

355

330

9700

-520

495

455

430

9800

-620

595

555

530

Impact of Options Greeks:

Delta: At the initiation of the trade, Delta of short call condor will be negative and it will turn positive when the underlying asset moves higher.

Vega: Short Call Ladder has a positive Vega. Therefore, one should initiate Short Call Ladder spread when the volatility is low and expects it to rise.

Theta: A Short Call Ladder has negative Theta position and therefore it will lose value due to time decay as the expiration approaches.

Gamma: This strategy will have a long Gamma position, which indicates any significant upside movement, will lead to unlimited profit.

How to manage Risk?

A Short Call Ladder is exposed to limited loss; hence it is advisable to carry overnight positions. However, one can keep stop Loss in order to restrict losses.

Analysis of Short Call Ladder Options strategy:

A Short Call Ladder spread is best to use when you are confident that an underlying security will move significantly. Another scenario wherein this strategy can give profit is when there is a surge in implied volatility. It is a limited risk and an unlimited reward strategy if movement comes on the higher side.

 

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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.