Archive for October, 2008

Happy Diwali 2008!

14 comments Written on October 28th, 2008 by
Categories: Uncategorized
A very Happy Diwali to you all, and hope y'all have a great year ahead.

My last Diwali post needs a recap. A lot of stuff out there seems to have come true - the US financial market collapse, big drop in Indian equities, a large scale move by retail (remember, that was November, the index moved up in Dec/Jan and then crashed), and in general bad year for bulls and good for shorters.

What's now? I have to say that while I expected a hammering I thought it would stop about 15% higher than this. Yet, here's my deal for the coming year.

  • It will not be a year for the index. The index may gyrate between 1500 and 4000 (Nifty) and is likely to face sharp upmoves and slow downmoves through the year. It will not be worthwhile to invest in the broad index.
  • If 2008 was about world drama, 2009 will be about the collapse of the Great Indian Real Estate Story. Prices will start coming down, though it may take a full year for panic to set in. At least one real estate company - of the big ones - will go bust. At least one bank will face serious threat of collapse due to high exposure to RE. In all likelihood, the government will rescue the banks. Commercial real estate will be in the doldrums, with distress sales reducing prices even more dramatically. NRIs who invested in India and thought they will keep their properties for a good day will call their brokers to sell, at any price. Banks will refuse to lend to real estate. Some may even try to give homeowners margin calls, but that will fail as political pressure will force them back.
  • The dollar, after a small rise, will fall hugely against the rupee. People who hedge in the 50s will be treated as heroes.
  • Inflation will literally die. We will have to face asset and consumer price deflation, and are likely to take political measures to introduce more money into the markets.
  • Interest rates will fall suddenly; and so will consumer oil prices. This will not be enough to keep growth up for the year, but it will be a good setup for the years to come.
  • India, along with the world, will go into a severe recession. This means contracting GDP (no more 7% growth), unless there is a black-money-amnesty scheme set up, with dramatic tax cuts.
  • When interest rates reach 4%, equities will again be considered a good asset class, and more of the middle class will get in. More money will flow in from Pension funds, EPF and other long term saving sources.
  • This will be the year of individual stocks. Some stocks will give 100% to 200% returns in the next year, and some of them will be large caps; some others will be midcaps.
  • Job losses and slowing economy will result in political stress. If our public will not fight the stupid politicians, we will end up with a socialist setup that has no hope for recovery.
  • I will try once more to lose some weight. I will be successful this time.
These are all random predictions, with no bearing on what will actually happen - so please, don't take these as advice. It's for my own record; what I was thinking etc. It helps to later go back and say, "what an idiot I was".

For the Record, Nifty closed at 2700 today in Mahurat Trading, and Sensex at 9000. I gotta see what happens next year. Till then, I'll be posting other random stuff. Disclosure: Some positions on the Nifty.

Posted in Uncategorized

Strangle update: booked some puts, still hold calls

4 comments Written on October 28th, 2008 by
Categories: Strangle
I bought a 2850/2900 November strangle on Friday, as per my last post, for Rs. 500 total.

I'm in Delhi on a week's holiday so I placed some orders to take care of huge moves...and the orders went through - half my puts are out at Rs. 550 each. I still own half the puts, and all the calls, and I've covered 55% of my total cost - marked to market it's still only a 20% profit or so.

I have to figure out how to create a system out of this...A profit target of 30% each way should work, I think, but this requires some rigour now.

Posted in Strangle

Readings: Shorting oneself, and No Loan For Google

2 comments Written on October 26th, 2008 by
Categories: Crisis2008
Michael Lewis: This hedge fund manager tried to short himself
As the trading room filled with smoke, and acquired that only sweet smell I know that is not success, I realized it was time for me to share more. To go deeper. I needed to re-examine honestly who I was, and why.

What could possibly have caused me to doubt my own value? I cannot say. But with my lungs stretching to the bursting point I felt a sudden urge to make the argument for shorting myself. I looked for weaknesses. I found three:

...

Very interesting read.

Friedman: If Larry and Sergey Asked for a Loan ...

The government had to step in and shore up the balance sheets of our major banks. But the question I am asking myself, and I think Paulson and Bush were asking themselves, is this: "What will this government intervention do to the risk-taking that is at the heart of capitalism?"

There is a fine line between risk-taking and recklessness. Risk-taking drives innovation; recklessness drives over a cliff. In recent years, we had way too much of the latter. We are paying a huge price for that, and we need a correction. But how do we do that without becoming so risk-averse that start-ups and emerging economies can't get capital because banks with the government as a shareholder become exceedingly cautious.

Let's imagine this scene: You are the president of one of these banks in which the government has taken a position. One day two young Stanford grads walk in your door. One is named Larry, and the other is named Sergey. They each are wearing jeans and a T-shirt. They tell you that they have this thing called a "search engine," and they are naming it — get this — "Google." They tell you to type in any word in this box on a computer screen and — get this — hit a button labeled "I'm Feeling Lucky." Up comes a bunch of Web sites related to that word. Their start-up, which they are operating out of their dorm room, has exhausted its venture capital. They need a loan.

What are you going to say to Larry and Sergey as the president of the bank? "Boys, this is very interesting. But I have the U.S. Treasury as my biggest shareholder today, and if you think I'm going to put money into something called 'Google,' with a key called 'I'm Feeling Lucky,' you're fresh outta luck. Can you imagine me explaining that to a Congressional committee if you guys go bust?"

And then what happens if the next day the congressman from Palo Alto, who happens to be on the House banking committee, calls you, the bank president, and says: "I understand you turned down my boys, Larry and Sergey. Maybe you haven't been told, but I am one of your shareholders — and right now, I'm not feeling very lucky. You get my drift?"

Maybe nothing like this will ever happen. Maybe it's just my imagination. But maybe not ...

Posted in Crisis2008

Strangle Trades: Very interesting results

3 comments Written on October 24th, 2008 by
Categories: Options, Strangle, TradingSystems
I have been looking at Nifty strangles for a while and the results seem to be very encouraging. Essentially it's about buying an option strangle - a lower strike put and a higher strike call - near the money, for a quick turnaround in these markets.

I'd mentioned last about a 50% return, and later a 38% return, on a September strangle, which were reasonable. Those were based on a hypothesis that the Nifty moves dramatically after being range bound for a few months. (And how that is true in October!)

This month, I decided to start off with a strangle. And then chickened out. A 4000 call/3800 put strangle cost me Rs. 287. I sold out for Rs. 249, incurring a 20% loss. In hindsight I would have got over 1400 for it if I had held till now - but that's teaching me a lesson. (Remember this is per lot of Nifty, size 50 each)

I then decided when the Nifty moved a lot, that implied volatilities were through the roof. the Nifty was around 3300 then - so I said, heck, the Nifty isn't sticking around here too long. So a 3300/3400 strangle was bought, for Rs. 135/123 - a total of Rs. 258 per Nifty - on a per-lot level, this is an investment of about 12500. (I usually buy larger quantities, and there is enough liquidity to take in enough)

The idea was to hit the strangles when the IV was very high and the market had just moved a considerable amount, and the target was around 30%.

Sure enough, the Nifty went down to 3050 in a couple days, netting me Rs. 335 on the return side - I cashed in, with a 30% return.

And today I saw the volatility going nuts again, and I bought yet another strangle - this time a November 2850 put, 2900 call - for a premium of Rs. 500 total. And that is up to about Rs. 570 today, though I still have a 30% target.

I'm now considering systematising this - a) buy strangles when the market stays rangebound for over two months, and b) buy strangles when the IV goes to ridiculous highs (like 55+).

I know the first part has had very good results in the recent past. I also know the second part has worked recently too. It will be interesting to see if the theories still hold.

Also need to investigate optimum profit targets (or a trailing stop loss) and an optimum holding period. Can't initiate a strangle in the last few days of expiry - that's one thing I've learnt.

Position sizing here is tough. Since premium is very very volatile, you can't put all your money in there - perhaps 10-15% of the money goes in each time. So even a 30% return is like a 3% return on your whole portfolio - still decent. I need to experiment with various levels. But the preliminary tests are very interesting.

Posted in Options, Strangle, TradingSystems

Mayhem on the bourses!

9 comments Written on October 24th, 2008 by
Categories: Crisis2008
What madness. Sensex closes around 8600, Nifty at 2550. We haven't seen these levels for a long long time now, have we? We are now down 40% in a month. Anyone remember the Nifty close at last expiry (less than a month back)?

4100.

Absolute mayhem. This is a typical destructive bear market, but it's not supposed to happen so fast, no?

A friend called me yesterday. He's a real guru - the kind that speaks with actions, not words - and he said one thing that made it all come together. Every cycle today is shorter, he said. Information flow, and the ability to act on that information is so easy today that bull markets are compressed into a very small time period. So are bear markets. Who'd have thunk the Indian markets would be down over 60% since Jan 08, within 9 months? Yet, who'd have thunk the markets could go UP 35% in six months (July 07 to Jan 08)?

Shorter cycles means the person who survives is the guy who doesn't get any of the news. One more thing my friend said was that people read a lot into history and translate times forget the shorter cycles. The 10 year bear market of the 70s may translate only to a 3 year bear cycle today. And stock markets may simply get more vibrant - ups and downs apart.

Less than 3% of Indian savings are in the stock markets. But a lot of our economy depends on stocks. You get retail chains who can raise funds from private investors saying they want to go public eventually. You get jobs because someone somewhere is a darling of the equity markets, and those funds need somewhere to go. You and I get a better life, an easier existence, relatively easy credit, multiple opportunities - all because the capital markets are vibrant.

If the markets need to continue to be attractive - and they are not, today - we need a solution that's longer lasting. Full rupee convertibility (what better time to start!). Open bond and gilt markets (hello? why isn't this there?). Listed debt and credit markets - yes, even I will want a piece of the supposedly distressed credit card or personal loan market. I have been hoping this happens, but it's way too slow. Someone light a fire, please. Wait. Someone just did.

Finally, this is a time to be prepared. Economic recessions cause political catastrophes. And I would heartily recommend that you take your life, find out what's the worst thing that can happen - loss of your job, your bank going bust, your housing loan being called back, etc. And figure out what you will do if this happens. Just a check list, so then if anything does not happen it is a bonus.

And what of the stock market? Markets are irrational (Someone please bring the random walk theory person here and beat him with hawaii chappals) and will forever remain so. Are they irrationally down? Or are these values that still make sense? The Nifty P/E is now around 11. That's a historic low, but don't let that confuse you...think about whether these companies will grow their EPS well going forward. Oh and by the way, current results are excellent. More funny-mentals. Trend of course, is down and going more down. The trend is your friend until it bends.

Posted in Crisis2008

Stopped out!

3 comments Written on October 24th, 2008 by
Categories: TradingSystems
I got stopped out of my long Nifty trade this morning - the Nifty was down only 4% then. That's a loss of around 25% net, reasonably huge for me, though I managed to recover some through a long strangle that I put on immediately. Interestingly, system's all short, so it teaches me a few things. Knowledgeable and bankrupt? :)

It's good to have stops, however wide, when you know you will get out at that point. It's down 10% now! Luckily all puts have liquidity and I'm paying a lot lesser to buy them back than I thought, and the premium gave me a little cushion (but not enough, obviously).

Tough luck, but heck I traded with what I could afford to lose, and I still have enough capital left to trade the systems. And some more actually - something unexpected turned up. I think I'll have to now decide between the discretion and systems in general - turns out systems are lot less emotional damage (and on the right side of the trend, I may add!).

Posted in TradingSystems

Systems or discretion?

7 comments Written on October 23rd, 2008 by
Categories: TradingSystems
Weird thing. Our systems - which end up being short or long, depending on the trend,are doing wonderfully in these markets. In the last couple weeks, we made over 7% and the last two days have been about trading larger capital, with a 0.75% return in that period.

We've been working with another system that has closed the month with around 5% return. A third one, that occurs only once in a while, has provided a 29% return in a few days and has provided no other entries.

Meanwhile, my discretionary trade (Long nifty) continues to make losses. I have been adding and rolling over, but it's tough to fight the feeling that this could be a seriously losing battle. I'm close to stops - stops I thought wouldn't get triggered but that's why you have stops. I remain confident about that trade - why else would I stay in - but the wave of selling, and sustained downsides is emotionally challenging.

It's largely emotions that creates problems with investing. Systems are good that way - you have a certain knowledge of how bad it might get, and you can design systems that work with your risk appetite. Yet, even systems have emotions - unless you constantly research them, you can get into system fear - i.e. running away from tweaking, observing or even training your system because you're not quite confident of it.

Take trend following. It hasn't been easy - for a few months, there really were no trends other than really short term ones. Stocks reverted to some levels and stuck there - once in a while they would move around, but get back there. Come october and a down trend sets in - but many trend followers were simply sitting on the sidelines, since they weren't confident of a system! Mean-reverters who made a killing till now, went all in - and they're in fairly bad shape. So there's a time to follow trends, a time to do mean-reversion, and a time for other kinds of strategies. But how do you identify what market works for what?

Is it a function of volatility? Daily option implied volatility or the Average True Range (ATR) specified as a percentage of move? Or do you take the ADX - a directional index? There's something out there that gives you quantifiable info - not just someone saying "yeah, I think it's going to trend today". We have to find this - and I would imagine something like this would reduce risk or improve performance. Any little bit also helps - as long as we keep it simple and don't over optimise.

Constant research is required . Just because our systems do well shouldn't mean we give up the research. But we have been guilty of that, and there are plans to fix it. More systems, more work, but hopefully we'll have alternatives when these systems go down.

An interesting thing we have been hearing from people is that they want us to use systems that have ultra-low risk. Arbitrage. Or mispriced butterfly-able options. Or pair trades. This kind of thing makes absurdly low returns but their deal is to leverage themselves, thus increasing returns. So they would do a single arb trade giving them 0.05%, twenty times a day, which makes 1% a day. Or they lever themselves 10:1 and get their 0.5%. We've been looking at such stuff and we realize that too many times, people talk only about their arb successes, not failures. So one day they see the model break down and take away all their profits.

Just recently there was talk of a pair trade of ICICI bank versus SBI - the former being oversold, so the deal was to buy ICICI and sell SBI. And then there was a day when ICICI fell 28% and SBI was UP 4%. Model went into the gutter - and any trade leveraged 4x followed it with complete loss of capital.

But there is a time to arb too - if the returns are decent enough that you don't have to lever yourself up the wazoo to make the grade. This is one time where everyone and his uncle is doing arb - and thus, diminishing returns for everyone.

Systems need a macro-view; something that tells someone that a certain kind of market is underway. A lot of discretionary traders use such macro-indicators implicitly, sometimes without even knowing it - like gap moves, increasing volumes, number of stocks hitting new highs, the advance decline ratio, or volatility measures. Systems have got to transcend from a micro-analysis to using macros too - something I must test and see.

Posted in TradingSystems

ECB Rules Relaxed: RBI

No Comments » Written on October 22nd, 2008 by
Categories: Crisis2008
RBI has relaxed the ECB regulations in a notice posted today:
3. Henceforth, ECB up to USD 500 million per borrower per financial year would be permitted for Rupee expenditure and / or foreign currency expenditure for permissible end - uses under the Automatic Route. Accordingly, the requirement of minimum average maturity period of seven years for ECB more than USD 100 million for Rupee capital expenditure by the borrowers in the infrastructure sector has been dispensed with.

...

5. At present, ECB proceeds are required to be parked overseas until actual requirement in India and such proceeds can be invested in the following liquid assets (a) deposits or certificate of deposit offered by banks rated not less than AA (-) by Standard and Poor / Fitch IBCA or Aa3 by Moody’s; (b) deposits with overseas branch of an AD bank in India; and (c) Treasury bills and other monetary instruments of one year maturity having minimum rating as indicated above. It has now been decided that henceforth the borrowers will be extended the flexibility to either keep these funds off-shore as above or keep it with the overseas branches / subsidiaries of Indian banks abroad or to remit these funds to India for credit to their Rupee accounts with AD Category I banks in India, pending utilisation for permissible end-uses. However, as hitherto, the rupee funds will not be permitted to be used for investment in capital markets, real estate or for inter-corporate lending.

Plus, LIBOR premiums have been increased (since most Indian corporates can't get a loan under current limits). This may help, if banks abroad are ok to lend to Indian corporates - and the rates abroad are starting to come down dramatically.

This is a long term thing so no immediate impact, but it's probably a good thing. Hey, why not just float the rupee at the same time? Would do wonders today.

Posted in Crisis2008

« Older Entries