Corona journey of Nifty

 Corona journey of Nifty  

Exactly before a year, it was a time of Nov end or December beginning in 2019. Most of us were very enthusiastic about the lifetime high of Nifty @ around 12111. The boom in the economy was in the air. All were excited about investments they did in 2015 or 2017 or even before. It was giving great returns. But life is very strange. It gives surprises at a time when no one expects.

Till the beginning of Mar 2020, Corona news was spread in every corner of the world. The market slowly was making new low every day. Many of us smelled some major downfall. Some had liquidity at that time, so they might have invested more in February 2020 or the beginning of March 2020. Nifty fell by 2000 points by then and it was trading at around 10000. No one knew what was the lowest of Nifty due to Corona's fear. But still, some folks were happy that they could invest at a good low. Sometimes “I-don’t-know-you-don’t-know” is better. Because the new low was coming soon then.

Then comes the D day of 23rd March 2020 and the lower circuit of Nifty happened. Trading halted in the exchange. Soon it touched the season’s low of 7511. Everyone was in terrific shock. NEWS channels talked about blood-bath everywhere. Major world indices observed bottoms. Last 4-5 years of returns of stocks washed away. No one has imagined any uptrend of Nifty in near future. It was a major setback for investors. Some even bid the stock market adieu for a lifetime.

 

Now in just eight months, Nifty touched its new high- lifetime high. Today’s high was 13055. Again, most of the stocks are performing far better with flying colors.  Old investment started giving better results.

Look at the graph, how correctly it shows correct-  ✔ sign! It's all corrected.

Once again, it proves fear and greed of the mass human beings drive the market. During the time when Corona just started in India, fear captured in people’s minds. Fear is instant, pervasive, and intense.  They just started selling. However, the reality was not that worst when Nifty touches lows. Then when it touched the lowest point, it has nothing to do but go up. People had developed hope for the betterment after seeing downfall. Now greed had started capturing people’s minds thinking this is very cheap and it has to come up. Greed is slower. This time in just eight months, it resulted in the lifetime high for the Nifty and many stocks.

It is imperative to remember now what Warren Buffett once said that it is wise for investors to be fearful when others are greedy, and greedy when others are fearful!

Check your fear greed meter now. Is it a time to invest more or hold or book profit?

Stocks selection for Short Gamma Option Delta Strategy

The selection of stocks for Gamma position is a crucial part of position creation. For Short Gamma, as its name suggests, it is created by shorting options that mean the Vega is negative. Technically when Implied Volatility is high, short gamma position is created and profit can be booked once Implied volatility decreases. Usually, it depends on many parameters. Let us understand some of the basic parameters.

1.    Stocks in Panic

Typically, during the panic, Implied Volatility (IV) reaches the highest value and as panic passes, it is started cooling down. Therefore, short Gamma position is created when IV just started cooling down and no further uncertainty seems. i.e. almost nearer to highest IV, it is shorted and once it completely cools down, profit can be booked. A trader can enjoy both Vega profit as well as theta profit.

2.    Stocks in very stable mode

Sometimes, some stocks are in idle mode, they have not decided to move in either direction. There will be no sector news around. The quarterly result is not scheduled in near time. Its bonus, split or dividend news is not nearer. Apart from it, no major world economic event happened or VIX movement too is stable, in that case, these stable stocks are extremely suitable for short Gamma. Though its IV seems less or at an average level, it will remain stable. There is no chance of movement in these stocks so no more delta neutral activities required and Delta trader can enjoy theta profit over a while.

3.    Weekends or long weekends or holidays

As Short gamma is the game of theta more than Vega, holidays are the best days to enjoy theta profit. Delta traders can create diversified ( many stocks) short gamma positions just before a day of holiday starts. The thing to remember here is that make sure to create short gamma position in at least 8-10 different sectors. May be delta trader can choose 1 or 2- the most stable, large-cap stocks from each sector.  It requires to manage delta-neutral properly and can run such positions for 3-4 days or till expiry.

4.    Highly impacted world economic news, Government Finance policy change, etc.

These are some uncertainties and no one can plan. But surely can be controlled. If it looks major, the best thing is to get out from the short gamma position and the wisest thing is to enter into long gamma position to enjoy Vega profit. Another strategy is to remain in the same short gamma position but buy enough protection. Even if Gamma position makes a loss, protection can earn you enough profit or at least balance out the loss. For beginners, it's best to get out by taking 4-5 % of Vega loss.

5.    Big Events scheduled like election counting date, Union budget, FED policy

It is common that market movement and hence Implied Volatility increases till an event occurs. Once the result is out, it is going to get settled. So, delta hedgers will grab these opportunities and once the event occurs, they enter into short Gamma position to take maximum benefit of Vega. These types of position can be squared off within some hours or one-two days. They are targeted for Vega profit, not for theta.

 To learn and trade Option Delta Hedging, Please visit  https://BlissQuants.com/Bliss_Coaching

Option strike selection for Short and Long Gamma

Short Gamma position is created by shorting Implied Volatility i.e. creating negative gamma; delta neutral position when the market seems less volatile. It is expected to be less or almost no movement of stock. Technically At-the-money the option will remain ATM only and its premium starts decreasing when no movement seen in the stock. It will result in decreasing Implied Volatility. A Delta Hedger would like to take benefit of Vega as well as theta over a while. Eventually, OTM IV also decreases, but ATM IV decreases speedily as compared to OTM IV. That’s what volatility smile graph suggests. Hence, it is advisable to short ATM IV in case of short Gamma. But it may vary based on how many days are remaining for expiry. Out-The-Money strike can also be shorted in the week of expiry as some premium is available to short that strike. During the expiry time, ATM premium is quite less and Delta hedger would like to short good premium which is available in OTM.

Long Gamma position is created when the market is expected to become more volatile. It is expected to be heavy movement in the stock. Technically stock can move in either direction and hence a delta hedger can avail the benefit of increased Implied volatility. That means OTM or deep OTM premium values may exponentially rise due to panic, which results in increasing IV of these strikes. OTM Strikes were bought at a lower premium, now Delta hedger would like to take benefit of Vega as well as delta neutral movement. Therefore, it is advisable to buy OTM strike in case of Long Gamma.

 To learn and trade Option Delta Hedging, Please visit  https://BlissQuants.com/Bliss_Coaching 

Long and Short Gamma

One primary law of the stock market is to restrict the loss. All smart traders on the planet focus on controlling loss and riding on profit. It is an art of balancing between risk and reward. Options traders have endless possibilities to keep their trade balanced always because of the nature of options. Different types of options like call put, At-the-money, out-the-money, In-the-money strikes, etc. are available to protect existing trades or create new positions using hedging techniques.

Synthetic hedging techniques provide numerous permutation- combination to create perfect hedging position. Usually Long and Short Gamma methods are very popular amongst delta hedgers.

Future contracts can be bought with selling equivalent delta value call options or buying equivalent delta value put options. Then with every price change, the delta can be made neutral with managing gamma. If an option is bought in a hedging strategy, it is called a Synthetic long hedging technique and known as Long gamma strategy.

Future contracts can be sold with buying equivalent delta value call options or selling equivalent delta value put options Then with every price change, the delta can be made neutral with managing gamma.  If an option is sold in a hedging strategy, it is called a Synthetic short hedging technique and known as Short gamma strategy.

Short gamma strategy: In short gamma position, it is preferred to have a less volatile market and hence Implied volatility settles with the time. It will result in decreasing Vega with time and convert Vega difference into the profit. If this position will run until the expiry of the series, theta is increased with time and it will directly convert into profit over a period of time. It has only one dangerous zone where loss can occur and that it managing gamma. In short gamma strategy, with every price movement of spot price, gamma should be managed to keep delta neutral. It is important to buy equity worth gamma quantity at a higher price and sell at a lower price.  So, this is a possible area where profit is decreased. It is advisable to create short gamma position when the market is stable or less volatile.

Long gamma strategy: In Long gamma position, it is preferred to have a more volatile market and hence Implied volatility rises with the time. It will result in increasing Vega with time and convert Vega difference into the profit. If this position will run until expiry, theta is increased with time. Theta is negative for long gamma position so here are the chances of decreasing profit.  But the most beautiful point is gamma management. In long gamma strategy, with every price movement of spot price, gamma should be managed to keep delta neutral. It is important to buy equity worth gamma quantity at a lower price and sell at a higher price.  So, one can enjoy more profit in case of more movement in the price. It is advisable to create a long gamma position when the market is projected to be more volatile due to economic events, panic news, result seasons, etc.

In synthetic hedging strategy, Gamma is a decisive factor to determine profit. Apart from technical parameters of the position, it also depends on option delta hedgers’ skill to manage gamma for making delta neutral. Gamma management is very crucial in case gap -up or gap-down market seen over the night.

 To learn and trade Option Delta Hedging, Please visit  https://BlissQuants.com/Bliss_Coaching 

GST in India - FAQ

1.    What is GST?

• Goods and Service Tax
• It is the biggest indirect tax reform since 1947.
• Taxes such as excise duty, service, central sales tax, VAT, entry tax or octroi will all be included by the GST under a single umbrella.
• In the words of the Indian Finance Minister Arun Jaitley, the GST bill will lead to the economic integration of India.

     2.    What is the main function of GST?

• The main function of the GST is to transform India into a uniform market by breaking the current fiscal barrier between states. 
• Thus the GST will facilitate a uniform tax levied on goods and services across the country.
• Currently, the indirect tax system in India is complicated with overlapping taxes levied by the Centre and the State separately. 
• GST is seen as a game changer for the economy. But the impact of these tax reforms, will not be immediate. 

     3.    When will the GST be implemented? 

• The ambitious goods and services tax (GST) may be a reality soon.

     4.    What % will be the GST? 

• Mostly it will be 17-18 percent.

    5.    Why do we see a delay for the passage for the GST Bill?

• To pass GST, the government needs Parliament approval to the pending bill during the ongoing session. It is getting opposed in the Rajya Sabha. 

    6.    What is the impact on the Indian stock market if the GST will be implemented?  

• It will be a big sentiment booster for the markets. It has a positive impact on goods and services related companies and thus progressing on Indian GDP.
• According to Indian Finance Minister Arun Jaitley, the implementation of the GST could augment India’s GDP by 2 percent.
• Increased GDP will attract more foreign investments and which in turn would take the Indian economy up and thus stock markets will make new highs.
• According to market experts, the sectors to benefit the most would be logistics, E-commerce, automobile, and FMCG among others

 To learn and trade Option Delta Hedging, Please visit  https://BlissQuants.com/Bliss_Coaching 

Delta Neutral methodologies in Option Delta Hedging Technique

Let us first understand what a Delta hedging technique is.

It is an options strategy that aims to hedge the risk associated with price movements in the underlying asset by offsetting long and short positions. It is also referred to as short gamma or long gamma position in a synthetic hedging technique.

For example, a long call position must be delta hedged by shorting the underlying stock. This strategy is based on the change in premium i.e. change in the price of option caused by a change in the price of the underlying security. The change in premium for each basis-point change in the price of the underlying is the delta and the relationship between the two movements is the hedge ratio.

In a Delta hedging process, it is mandatory to manage delta Greeks by maintaining delta as neutral. There are various methods to keep delta neutral with a price change.

Let us take an example.

Say we have created a short gamma position of SBI.

The spot price is 300 INR.

We have bought one future

Two “At-the-money” call options @310/- are shorted at high Implied Volatility (IV). Here we want to get the benefit of Vega.

We have shorted IV at a very high price. Once the panic settles, IV will go down and we will square off the position to book Vega profit.

Now let us understand how to manage this position, till the panic resolves.

(Note: option pricing is calculated using the Black–Scholes model for Indian stock market.)

1.    Delta neutral by keeping 1% out manually 

Here we want to manage delta by keeping 1 % price movement out. i.e. in the above example, if the price moves up to 303, we will not calculate any delta. Once the price goes to 303.5, we will calculate delta neutral at 300.5 and whatever quantity we get, we will buy that amount of equity. Thus we make 300.5 delta neutral. However, the spot price is 303.5 at that time. So we call it 1% delta out. If the price goes to 304, we buy equity for price 301 to make 301 spot price delta neutral.

Same way if the price goes down to 297 from 300, we will not do anything. If it goes to 296.5, we will manage delta for spot price 299.5.

2.    Delta neutral by keeping 1% out by setting SL (stop loss)

This is similar to method 1. However, instead of observing and doing it manually, we set a stop loss once we create a position. We sell equity at every half rupee change if the price goes to or below 296.5 or buy equity at every half rupee change if the price goes to or above 303.5.

In this method, there is a risk of not being able to execute one or two stop losses if there are flashy movements in price. However, there are advantages. One can’t miss managing delta at all and one can manage the fear and greed which comes while using method 1.

3.    Delta neutral by keeping 1 % out with managing using a call –put option

This method is recommended only when gamma is comparatively high. In this method, if the price goes to 303.5, we calculate a 0.3 or 0.4 delta put option and short it to adjust the delta-neutral equity. Same way if the price goes below 296.5, a 0.3 or 0.4 delta call option can be shorted.

4.    Delta neutral by changing strike

If the market goes in one direction i.e. if it continuously goes down, try to short “At-the-money” option and square off the current one. In our example, square off the 310 Call and short 300 call option.

If the market goes up, square off 310 call and short 320 call option.

Thus delta-neutral will be managed automatically and you will remain mostly always on at-the-money option shorted.

5.    Run time Delta using equity with every price change

Every time price changes, manage delta. I.e. if the spot price is less than 200, make delta neutral at every 0.5 paise. If the spot price is between 200-700, manage delta at every 1 rupee. Beyond that, manage delta neutral at every 2 rupees.

In this method, one can gain the maximum benefit of the delta process. But the disadvantage is that it’s very difficult to manage positions of more than 3-4 scripts if the market movements are very high.

Happy Option trading and position managing! 

 To learn and trade Option Delta Hedging, Please visit  https://BlissQuants.com/Bliss_Coaching

Capital Market Trading elemental

When one thinks of the stock market, mostly one of these two thoughts come in mind; Warren Buffet or Speculation! If a person possesses knowledge of this field, he/she will be inclined to think about the Warren buffet philosophy. Most of the other folks think that it is a speculative world and if they’re lucky, they can make a fortune.

I too belonged to the second category of folks a few years ago. I used to believe that one can become wealthy by practicing the ‘art’ of speculative trading. I had an opportunity to step into the world of stock markets and started exploring the ‘how what and when’ of trading. I soon realized that the subject is a deep ocean of knowledge but practically lends itself to human emotions of panic, fear, and greed.

Cutting a long story short, here is a simple understanding of stock market trading.

Trading can be categorized into:

Speculative trading, Fundamental-based trading, and technical trading

Speculative trading involves trading in a financial instrument involving high risk, in expectation of significant returns. The motive is to take maximum advantage of the price fluctuations in the market. Speculators, therefore, trade-in securities which have highly volatile prices and are traded frequently. This type of trading was definitely not my cup of tea and led me to ponder on the other methods of playing the markets to ‘make some money’.

There are different philosophies/theories and each must be right for a certain set of people, of course, depending on their risk and return preferences.

It’s a known fact that fundamentals of a company should be the basis of its stock price and few, rather none can challenge ‘Buffetology’.  Warren Buffet strongly advocates investing in fundamentally strong companies and identified the right stocks using fundamental analysis. Fundamental analysis involves an analysis of the balance sheet of the target company and of many more other parameters like turnover of assets, profitability, quality of the management team, demand for their products/services, future resilience/ vulnerability, state of the world economy, trends, competition, innovations in that industry, etc.

Primarily, fundamental analysis helps define the target security and prediction of the price or value. This method can lead to having very complex criteria for buying and selling stocks. It’s usually the experienced and established market participants who use fundamental analysis techniques for trading. It is used to make long term investments in the market. There are high chances that human emotions like fear and greed play a big role while taking a decision of entry or exit of the stocks.

And then there is this whole different world of technical analysis.

Simply put, technical analysis is based on the philosophy that trends and patterns repeat and that the stock prices can be predicted, with a degree of accuracy, by analyzing the price patterns/trends.

Technical analysis today consists of several theories around the study of patterns/trends. There are many universities and institutes which offer courses/certifications on technical analysis. You will find several certified technical analysts employed in the industry and this skill is found to be useful for individual traders, fund managers, and investment bankers.

Technical analysis requires skills in mathematics, statistical analysis, and money management.

There primarily are two categories of technical analysis:

1. Chart theory - discretionary trading and

2. Trend following

The chart theory is based on price, volume, and indicators; - namely, support and resistance levels. It has a defined mechanism of price determination. Though it is designed to avoid getting sentiment and emotion in the equation, the nature (discretionary trading) of this business is such that often emotions may play a bigger role in buy/sell decisions than rationale and mathematics. Besides, the backtesting of this system is a fairly complex exercise and is often not required as pattern science is based on historical behavior. People with knowledge and passion for mathematics prefer trading this style.

The trend-following technique is purely based on price theory. Frequently, trend followers say the price is ‘GOD’.  The technique doesn’t involve any prediction of price. The trend following system can only be proven using historical data analysis; technically known as backtesting.

It gives a trader proven and consistence track record of how a stock behaves in a bullish, bearish and sideways market. The backtesting gives confidence as it shows how the stock has performed during major economic/political events in the economy, natural calamities, economic cycles, etc. The concept is really simple and is based on simple or exponential moving average or high-low price theory. 

The beauty of this trading method lies in the discipline it lends to trading. The trader has to just be disciplined, once the rules in the system are set up. The system rules are defined such that the scope of influence of human emotions driving trading decisions is largely eliminated. Investors who prefer simplicity and discipline will favor this technique for trading in the capital market.

Happy disciplined trading!

 To learn and trade Option Delta Hedging, Please visit  https://BlissQuants.com/Bliss_Coaching