With the yield of a 10 year government paper touching 9.48% in the bond markets on Wednesday the worst for the Indian equity markets may not be over yet .This is the highest yield for the 10 year bond in India since 2001.The yield has risen considerably in the last few days after quoting 7.46% in the middle of June.As a result we have seen a good dent coming in equity markets in the same time.Panic seems to prevail in the markets as the big players are shorting at every available price.Both the major benchmark indices have come down more then 13% from their recent highs.India vix has risen more then 70% since 25th of July to yesterday's close.
Except for metals all the sectors have been seen underperforming.The biggest fall has been seen in banks and the banking index of nifty hit its 19 month low since January last year.
Now the biggest problem is weather we should stay with cash or try some bottom-fishing at these levels.Since the markets are still expected to loose 5% to 10% from here their should be two approaches i think that a trader can execute in this scenario.The first one is i think advised all the day on all TV channels and Newspapers to enter the markets with part payments.This way you would divide your trading capital into four or five parts and buy only with the first part and keep all the cash left as a buffer in your account.But this strategy is very much flawed i think and i will never recommend due to two reasons.Firstly when the markets bottom out they are generally tend to be too volatile, moving zig-zag and hitting all the stoplosses in the markets.So if you will have positions you are more likely to be stopped out then gaining anything from them.Secondly if the markets have eventually bottomed out you would not be able to make good profits as the maximum money in your account will be in cash and not been used in any sort of position.
There is no point leaving cash in the account vacant if the markets have really bottomed out.I believe you should rather have a hedged position in these type of markets then part investments.The purpose of safety is fully fulfilled by the hedged position and at the same time you could also enjoy the benefits of trading with full account.
So for trading in these type of markets i would recommend you to use options for hedging your stock positions.I will give you an example of stock of Hero Motors Ltd.
The stockprice of Heromotoco on 2nd August on NSE was Rs.1802 and the closing price of the 1820 in the money put was Rs.74.60.The trade goes like this
Bought Heromotoco stock(Market lot 125 shares)@ 1802 * 125 = 225250
Bought Heromotoco in the money put 1820 one lot@74.60 * 125 = 9325
Total trade cost 225250 + 9325 = 234575
Guaranted exit from Heromotoco at the end of contract is at the price of 1820.
Total risk of the trade 1802 + 74.60 = 1876.6 - 1820 = 56.6 * 125 = 7075
For a total investment of 234575 the reletive risk of trade is 3.01% for keeping the position all month.Now even if the stock price of Heromotoco plunges like the stock of Satyam computors did way back in 2009 you can only loose 3.01 %. So did you like this type of stoploss or you still want to play with conventional stoplosses only to see the markets rising after hitting your stoplosses.
Coming back to trade the stock of Heromotoco was at 1985 on 16 August.The price of put was 8.
Stock profit 1985 - 1802 = 183 * 125 = 22875
Put loss 74.60 - 8 = 66.6 * 125 = 8325
Total profit for the trade = 22875 - 8325 = 14550 or 6.20% in just 16 days.
You can also trade on margins in futures for these type of trades.But i will not recomend and also the risk amount as well as profits could be much higher in margins trading.
That it form my side in this blog.Happy trading....
Regards,
Sanjeev Parmar.
Except for metals all the sectors have been seen underperforming.The biggest fall has been seen in banks and the banking index of nifty hit its 19 month low since January last year.
Now the biggest problem is weather we should stay with cash or try some bottom-fishing at these levels.Since the markets are still expected to loose 5% to 10% from here their should be two approaches i think that a trader can execute in this scenario.The first one is i think advised all the day on all TV channels and Newspapers to enter the markets with part payments.This way you would divide your trading capital into four or five parts and buy only with the first part and keep all the cash left as a buffer in your account.But this strategy is very much flawed i think and i will never recommend due to two reasons.Firstly when the markets bottom out they are generally tend to be too volatile, moving zig-zag and hitting all the stoplosses in the markets.So if you will have positions you are more likely to be stopped out then gaining anything from them.Secondly if the markets have eventually bottomed out you would not be able to make good profits as the maximum money in your account will be in cash and not been used in any sort of position.
There is no point leaving cash in the account vacant if the markets have really bottomed out.I believe you should rather have a hedged position in these type of markets then part investments.The purpose of safety is fully fulfilled by the hedged position and at the same time you could also enjoy the benefits of trading with full account.
So for trading in these type of markets i would recommend you to use options for hedging your stock positions.I will give you an example of stock of Hero Motors Ltd.
The stockprice of Heromotoco on 2nd August on NSE was Rs.1802 and the closing price of the 1820 in the money put was Rs.74.60.The trade goes like this
Bought Heromotoco stock(Market lot 125 shares)@ 1802 * 125 = 225250
Bought Heromotoco in the money put 1820 one lot@74.60 * 125 = 9325
Total trade cost 225250 + 9325 = 234575
Guaranted exit from Heromotoco at the end of contract is at the price of 1820.
Total risk of the trade 1802 + 74.60 = 1876.6 - 1820 = 56.6 * 125 = 7075
For a total investment of 234575 the reletive risk of trade is 3.01% for keeping the position all month.Now even if the stock price of Heromotoco plunges like the stock of Satyam computors did way back in 2009 you can only loose 3.01 %. So did you like this type of stoploss or you still want to play with conventional stoplosses only to see the markets rising after hitting your stoplosses.
Coming back to trade the stock of Heromotoco was at 1985 on 16 August.The price of put was 8.
Stock profit 1985 - 1802 = 183 * 125 = 22875
Put loss 74.60 - 8 = 66.6 * 125 = 8325
Total profit for the trade = 22875 - 8325 = 14550 or 6.20% in just 16 days.
You can also trade on margins in futures for these type of trades.But i will not recomend and also the risk amount as well as profits could be much higher in margins trading.
That it form my side in this blog.Happy trading....
Regards,
Sanjeev Parmar.
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