Theta of all Times

Theta of all Times

If you an option to borrow my pen, whenever you want for the next five years, that is a more valuable option than it would ideally be than having the option available only for a month. Similarly, with financial options, the longer the tenure before expiry, the more valuable that option is. However, there is a flip side to it – with each passing day, the option’s value tends to decrease. This concept is generally termed as time decay and is measured via theta. Continue reading

VN:F [1.9.22_1171]
Rating: 0.0/5 (0 votes cast)

Let’s Meet Delta !

Let’s Meet Delta !

In the world of Options, one of the most commonly known and widely used terminology is ‘Delta’. It is essentially a risk measure that represents the sensitivity of an option’s price to the underlying asset.

Delta can be defined as the rate of change in the option’s price as a result of a change in the price of the underlying asset. This particular Greek provides an invaluable insight to the option traders regarding the expected movement in price of an option given any changes in price of underlying asset.  Continue reading

VN:F [1.9.22_1171]
Rating: 5.0/5 (1 vote cast)

Alpha, the God of Active Investments!

Alpha ActiveAlpha is simply a Risk Adjusted Performance Measure (RAPM), which is used to assess on a risk adjusted basis, investment performance relative to a benchmark. Alpha, however, is much more than that.

Michael Jenson was the person to first define Alpha back in 1968 while investigating on the Emerging Efficient

Continue reading

VN:F [1.9.22_1171]
Rating: 0.0/5 (0 votes cast)

OPTIONS – IT’S ALL GREEK!!

OPTIONS – IT’S ALL GREEK!!

If you are a finance student or an Option trader, you must be well versed with the concept and significance of Option Greeks. But for the uninitiated, any discussion on the same is likely to seem, well, ‘all Greek’.

The price of an Option is influenced by a number of parameters, namely Price of Underlying asset, Volatility and Passage of time and Interest rate. In simple terms, Greeks are a set of ‘risk measures’ that describe the sensitivity of an option’s price to a change in each of the underlying risk factors. Continue reading

VN:F [1.9.22_1171]
Rating: 0.0/5 (0 votes cast)

Why are markets spooked and why they shouldn’t be!

Markets have slumped once again with the Sensex losing over 1400 points in just 4 trading sessions. Some real and some not so real issues are spooking investors, more the result of irrational exuberance over the last 2-3 months.

  • From the recent high of 29,850 in end-January, the Sensex has slumped nearly 8%. In the short span since the start of 2015, investors have seen stomach churning swings in the Sensex:
  • From 27,500 at beginning of the year to nearly 29,850 by the end of January (over 8.5% jump)  only to reach 28,044 on 10 February (6% fall in 10 days); and

From 27,250 at end of March to 29,100 on 15 April (7% jump in about 18 days) only to reach a low of 27,687 as on 21 April (5% fall in 6 days).

Some of the reasons offered for the nervousness with their logical counter-arguments are:

FactorCounter
The US Fed will hike interest rates soon, leading to a) slowdown in the US; and b) reversal of capital flows back into the USThis factor is now so well priced in through excellent expectation management by the Fed that the mere possibility cannot be a market swinger in itself. Besides, latest US economic indicators are vague enough to cause the Fed to pause on rate hikes
Government’s inability to push through reforms in its first year and unmet market expectations Again, this has been an ongoing issue with the opposition stalling proceedings in the Rajya Sabha. Realistically, this Government was never going to be able to push through reforms at a blazing pace, more so with the fiscal constraints India faces
Possibility of Grexit and continued turmoil in EuropeNegotiations between the EU and the new Greek Government have led to a solution that has effectively kicked the can down the road. Besides this, growth indicators in peripheral and large economies are stronger than the last time around
Geo-political turmoil in the Middle East (Yemen, Syria)The action in Yemen has turned out to be a very localized one with no impact on either oil supplies or on stability in the wider region
FPIs selling out on equities as risk-off gathers steamPer SEBI data, FPIs have bought an average of Rs12,000crs of equities (net) every month from January to March and ~Rs2,300crs MTD in April. This comes on top of the ~Rs600crs (net) of equities that DIIs have purchased this month.
MAT levy on FPIs, which will dampen their investment appetite and allocations to IndiaThe proposed retrospective MAT levy of ~Rs40,000crs is on transactions up to March 2015. The FM has already clarified that there will be no MAT levy on transactions from April 2015 hence there is no question of this issue impacting prospective investments. Also, MAT applies only to FPIs registered as corporates and does not apply to the hugely popular P-note route

 

So why the sell-off?

For once, the reason has to do with pure fundamentals. The primary reason for the correction is the disappointment over quarterly results. A glance at the timing of the swings makes it obvious that markets had run up way too much in both beginning of January and April over sky high expectations from Q3 and Q4 results, respectively. Soon as early results started trickling in from mid-Jan and mid-April, prices started correcting. The genesis of the expectations was in the oil price crash between October and December 2014 that had led investors to expect that savings will start reflecting in results immediately. This fallacious expectation disregarded core aspects such as advance orders for raw materials (at older prices), inventory levels, hedged positions, etc., all of which combine to temper the gains from falling oil prices.

The rolling quarterly price swings will end only once the unreal expectations over financial results abate – as things stand, with no other fundamental triggers on hand, this does not seem very likely.

VN:F [1.9.22_1171]
Rating: 4.0/5 (3 votes cast)

Measuring the Market Heat against GDP

Measuring the Market Heat against GDP

In case you feel that you have missed out on any bull runs, you are wrong! Investors still have ample room to penetrate the market; given India’s market cap-to-GDP ratio is at 0.83. Just a few weeks back, the Sensex breached 30,000 and the Nifty crossed over 9,000 before retracting to some extent. Hence, the million dollar question would be – Is the Indian market overheated? Not really, if you could look at the market cap-to-GDP ratio i.e. Warren Buffett’s all time preferred long-term valuation indicator.

GDP Measure

India’s market cap-to-GDP ratio is at 0.83 at the moment. Although this has moved up from 0.65 last year, a ratio below 1 implies that there is no cause for alarm. Looking back at historical numbers, the last time this ratio crossed 1 was back in 2007-08 ahead of the global crisis. However, the present cap-to-GDP ratio of the market isn’t too far away from that threshold. So, should the investors really worry?

The practical view is that – In case the market-cap to GDP is under 1, the market is undervalued, however, at around 0.83, the market is in a zone of reasonable valuation and a further upside is quite a possibility. This means that there is still a lot of room for new or existing investors to make money – the macros are quite on the right side of the table. There was also a rate cut and with moderated inflation, the rupee has been quite stable. The Centre has also taken growth initiatives in the Budget, which would fructify over a period of time.

The increase in the ratio has happened due to the rally in the market cap. Usually, when the market heats up, the market cap-to-GDP ratio also moves higher and once we are into a bull market for two to three years, like in 2007-08, the ratio gets to 1.2 or 1.3 or even more. This time, the bull market began a year and half ago and it can quite comfortably go to 1.4 or 1.5 from here.

The ‘Rally’

Of the BRICs pack, China had witnessed the sharpest run in their stock markets over the past year. Their market cap has moved up 61% to $5.4 trillion during this period and the investors continue to bet on the country’s growth prospects. However, despite this rally, China is still cheaper than India reflected by their market’s cap-to-GDP ratio at 0.53. China’s GDP is over $9 trillion but the securities market is relatively smaller with mostly industrial companies and not too many MNCs. Given, that the industrial companies not doing well worldwide, China’s valuation is low.

On the contrary, India’s market cap has recorded a 36 per cent upward run to reach the current level of $1.68 trillion. Other BRIC nations didn’t fare well. Brazil’s market cap fell by 22 per cent to $0.68 trillion and Russia’s market cap plunged by 29 per cent to $0.4 trillion over the past one year predominantly due to the decrease in the prices of commodity-based securities. It probably explains why the ratio is below 0.5 for both these countries.

Expensiveness

On the market cap-to-GDP parameter, there are several global markets that are way more expensive than India. Thailand being one from the emerging markets segment has a market cap-to-GDP ratio of 1.18, while that of the Philippines is at 0.97. From the developed markets segment, the US is currently at 1.42 i.e. up from 1.33 last year, while Japan’s market cap-to-GDP ratio is at about 1.01. Singapore, too, boasts of a ratio well above 1.

VN:F [1.9.22_1171]
Rating: 5.0/5 (1 vote cast)