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Revisiting Our Do-It-Yourself Capital Protection Plan

Deepak Shenoy4 min read
Quick Facts
What is "Revisiting Our Do-It-Yourself Capital Protection Plan" about?
What category is this article in?
Premium
Who wrote this article?
Deepak Shenoy, Capitalmind's research team.
When was this article published?
Published 23 June 2014.
How long does this article take to read?
4 min read
What topics does this article cover?
Hedge, No Downside
What does the "Method 1: 92% Debt, 8% Anything" section say?
We spoke of buying an ultra-short term plan with 92% of the money, and putting 8% into just about anything.
What does the "Method 2: Nifty ETF + Put Option" section say?
The second method was to buy the Nifty ETF and a Long Term Put option. We had chosen to by 50 Nifty BEES, chosen a Dec 2014 Put at 6500 trading at Rs. 560, and the remaining money in a liquid fund.
What does the "Method 3: Nifty Spreads" section say?
We chose two choices of spreads. One was:
What does the "Disclaimer" section say?
Nothing in this newsletter is financial advice and should not be construed as such. Please do not take trading decisions based solely on the matter above; if you do, it is entirely at your own risk without any liability to Capital Mind. This is educational or informational matter only, and is provided as an opinion.

We spoke about “Capital Protection Plans” in the early part of Capital Mind Premium, in November 2013. We saw a few ways of building your own Structured Product in the form of a plan that if you invested, you wouldn’t lose money, and had a reasonable upside.

Let’s assume we invested Rs. 500,000 in these strategies. Where would we be now?

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Method 1: 92% Debt, 8% Anything

We spoke of buying an ultra-short term plan with 92% of the money, and putting 8% into just about anything.

What about the remaining 8%? This can be invested in multiple ways.

Buy “momentum” stocks, which will move faster than the Index; stocks like Jubilant Foods, Just Dial and so on.

Stocks that have a huge upside potential but are mired in controversy - effectively, “option” stocks. This includes stocks like Sintex, Gitanjali Gems, SKS Microfinance. Or those that will benefit from clarity (if it emerges from elections in 2014), such as BHEL, PSU Banks and so on.

Beaten down sectors like Infrastructure (Lanco, GMR) or Gold finance (Muthoot, Manappuram) where the chances of returns are low, but if they come, they’ll be big.

This 8% would have done really well. Momentum stocks have more than doubled, and stocks like Sintex have tripled since November!

Assume 92% in JM Money Manager Super Plan. This has grown 5.59% since November 19 (Absolute).

  • 92% or Rs. 460,000 of debt would have become Rs. 485,700.

  • 8% or 40,000 of equity would probably have become Rs. 75,000.

  • Total: 560,700.

The return, over 7 months is 12.2%, which is a big figure annualized.

Even if the equity part had gone to half, you notice that we would have protected our capital of Rs. 500,000.

Method 2: Nifty ETF + Put Option

The second method was to buy the Nifty ETF and a Long Term Put option. We had chosen to by 50 Nifty BEES, chosen a Dec 2014 Put at 6500 trading at Rs. 560, and the remaining money in a liquid fund.

Today the put option trades at Rs 48.

The Nifty ETF was at Rs. 612.8 then. It trades today at Rs. 756.75. Here’s a big estimate of what the strategy would be worth today.

Again this is an 11% return on Rs. 500,000, in 7 months.

Method 3: Nifty Spreads

We chose two choices of spreads. One was:

  • Sell a 5000 call at 1500 (50 shares, Dec 2014)

  • Buy a 6500 call at 560 (50 shares, Dec 2014)

  • Put the rest in a liquid fund

Here’s how this would’ve done

  • Nifty 5000 call is Rs. 2648

  • Nifty 6500 call is Rs. 1275

This is not quite that great. It has protected capital though!

However it would make sense to exit the options and leave the liquid fund as it is.

We’re reversing the signs on the options to count for an exit. Essentially we are losing Rs. 21,000 on the options, but the liquid fund + margin cash has grown to keep capital protected.

We had another one out there, with a different kind of spread. Here’s what that looks like now (not calculating the return, though this was more risky)

The product performed as expected and the Nifty’s up substantially. Yes, we could have made much more - about 20% absolute - by investing in the Nifty. But that wasn’t the goal - since it brought us risk as well. We wanted zero downside risk (which is achieved) and reasonable upside (which has come in with the “kicker” options of Methods 1 and 2).

We’ll revisit this after a year. We hope this has helped you understand how simple it is to build your own structured product.

Disclaimer

Nothing in this newsletter is financial advice and should not be construed as such. Please do not take trading decisions based solely on the matter above; if you do, it is entirely at your own risk without any liability to Capital Mind. This is educational or informational matter only, and is provided as an opinion.

Disclosure: The authors at Capital Mind have positions in the market and some of them may support or contradict the material given above, or may involve a direction derived from independent analysis.

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