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How To Use Index Options Strategies to Manage Portfolio

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Standardized call contracts, which are some of the tools we will review, were introduced to the markets in 1973, along with the Options Clearing Corporation and, of course, the Black Sholes Option Pricing Model. As we’ve already discussed, buying a call gives the purchaser the right to buy the underlying security for a specific price either at (for a European style contract) or up to (for an American style contract) a specified future expiration date. Sellers of calls become obligated to deliver the underlying securities at these same terms.

Standardized put contracts were introduced into the market four years after the introduction of calls. Buying a put gives the purchaser the right to sell the underlying security for a specific price either at (for a European style contract) or up to (for an American style contract) a specified future expiration date. Sellers of puts become obligated to receive the underlying securities at these same terms.

Puts were quickly adopted as a way to protect or insure portfolios against losses. This differs greatly from the practice of “portfolio insurance,” which was a strategy of selling index futures in declining markets and using those proceeds to help offset portfolio losses. “Portfolio Insurance” has often been labeled as a significant catalyst in the 1987 stock market crash while buying puts to protect against losses has never been implicated in anything except teaching novice investors the potentially expensive lesson to pay attention to volatility.

While there are many entities, such as trading desks and hedge funds, that trade options exclusively and are focused on complex, multi-legged trades, there are still traditional investment managers that take a more basic approach to options. Generally speaking, when it comes to options, equity portfolio managers use them to accomplish two things: i) enhance returns and ii) protect returns. Various option strategies can provide both.

Return Enhancement

A popular strategy employed by managers is to sell “covered” calls. 

Say you have an account that is technology focused and you are looking to augment the overall portfolio yield. You can do this by selling index calls against that position. Any potential delivery obligation would be in cash. 

For this example, assume the Nasdaq-100^® Index is currently trading around 12,700. You want to sell calls but you don’t want to be forced to fulfill your obligation to deliver. In order to protect your position, you want to set the strike price high enough so that the odds of your having to liquidate the position are very low but not so high that you end up earning only a modest premium.

This is where knowing the volatility (23% for this example), of the price level of NDX comes in handy. Say you want to sell one contract that expires in 25 days. An expected, one standard deviation move in the index level of NDX over the next 25 days can be found using the current index level of NDX (12,7000), the annualized volatility NDX (23% meaning that on an annualized basis, you would expect the NDX to fluctuate up to 23% of its current level 68% of the time), and the square root of 25/365, (which is converting annualized volatility of 365 days to a term of 25 days).

Given an annualized volatility of 23%, a one standard deviation move in NDX over the next 25 days would be 764 index points meaning 68% of the time, the NDX would be expected to end up between 12700 plus or minus 764, from 11935 to 13464.

Looking at the options montage for NDX, you see that there is a 13500 strike call that last sold for 68 and a 13450-strike call that last sold for 80, which would net you 6850 or 8070 respectively. If you think that all relevant news has already been priced into the markets and you can’t foresee any other surprises on the horizon that would cause markets to trade outside a one standard deviation range, you go ahead and sell that 13500 strike call and collect the 6850 premium. So what happens if the markets decide to completely ignore your thoughtful analysis and decide to run up beyond your projection, threatening to blow up your trade? At a high level, one of two things could happen:

SHOULD WE INVEST IN IT STOCKS DURING COVID-19?

The COVID-19 pandemic has been a massive challenge for a lot of industries. But for one sector it has proven to be a shot in the arm – the technology space.

In India, the technology landscape is evolving and the larger players are re-inventing themselves. Midcap companies too are growing faster. Digital and internet consumer companies are also seeing a lot of traction.

But how will the sector perform going forward? Nilesh Shah of Envision Capital shared his views.

Higher valuations ahead?

According to Shah, technology stocks have been huge outperformers and several of the technology companies in India have been able to kind of win some large deals across the globe and bring about increased scalability in their business models.

Margins have expanded and therefore that has translated into even strong valuations, he said, adding yhat several companies have managed to win some very large deals.

Will the IT rally sustain?

Going forward, Shah believes the opportunity for technology companies is likely to sustain and even get bigger. It doesn’t seem to be just a short term phenomenon, but it is something which looks very enduring, he noted.

Preferred largecaps in the sector?

Tata Consultancy Services (TCS), Infosys, Wipro, and HCL Technologies – all these four companies have a very sound business strategy, said Shah.

"Each one of them has an edge somewhere in consulting, hi-tech, or in products. But the company that we like the most today, especially keeping in mind both growth prospects as well as the valuations, is HCL Technologies.

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ICICIBANK TOP LOOSER :PLAIN VANILLA STRATEGY ROCKS

Last week on 13 April 2021 only we have predicted downtrend in the ICICIBANK stock & given the put option ,& today on 19 April 2021 it has become the top looser -5.52%.

Now that's what we call perfect prediction. 

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Why Options Trading Is Must In Stock Market To Tackle COVID-19 Uncertainties !!!

Bouts of volatility and uncertainty come with opportunities. Especially lucrative enough to get the long-term investors glued to the screen for attractive prices.

Confused !!!!😕  how to invest  in such unpredictable market !! 😕

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It has been more than a year now since we have been overwhelmed by this global pandemic. The highs and lows are part of the equity market and so are the bouts of volatility. However, today's headline-driven market has lost significance of data analytics and has thrown the predictive models under the bus.

But there is one thing for sure about bouts of volatility. Such bouts of volatility and uncertainty come with opportunities. Especially lucrative enough to get the long-term investors glued to the screen for attractive prices.

However, such bouts could trap some of the crucial portions of investable capital for a long time if one wrong call is made. Hence, it is quintessential in such an unpredictable market to introduce Options in our investment portfolios.

We have talked about how traders optimize the equity Options to modify their risk profiles and amplify their returns but let us revisit Options' utility for investors, who could be interested in modifying the price profile of their invested stocks at least for a while (till the dust settles).

Here we will focus on how a set of intentions of an investor can be monetized using equity options. But before we go any further let us revisit the four option transactions, what would they essentially mean:

A. Buying a Put would entail a Choice to Sell a Stock 

B. Buying a Call would entail a Choice to Buy a Stock 

C. Selling a Put would entail Obligation to Buy a Stock

D. Selling a Call would entail Obligation to Sell a Stock

Two additional notables.

Firstly, all aforementioned transactions would happen at a predefined price point for the stock a.k.a Strike Price.

Secondly the cost, while buying options would be onetime cost of Premium, selling options would require margin (portion of entire transaction value) to be deposited upfront but with a small receipt of premium.

Let us see how these Option trades can be embedded into investment activity to improve our efforts of dealing with uncertainty.

1. With the existing uncertainty-led volatility there would definitely come a fear of losing wealth in stock if it is at an attractive price led by deep cuts gets even deeper, let us understand how Options can help investors take care of this fear.

Use the transaction A (as outlined above) and Buy a Put of a Strike Price below which one would not be comfortable holding the stock. In case the stock falls below the strike upon expiry we have a choice to sell the stock at strike price.

Alternatively, one may also Buy a Call (Transaction B) instead, now one gets the choice to buy the stock on the day of expiry. Exercise the choice if the stock ends up above the Strike Price upon expiry. But in case if the stock were to fall further, just don't buy it.

Cost would be Premium (3-5 percent of the stock price). Put Option will protect the investor against any fall below the strike price at the end of expiry. Call Option Premium is paid to buy a comfort of getting in only if turns out to be a money maker.

Lastly transactions C&D involve selling of Options where comes a commitment but still if in case one wishes to sell a stock at a predefined price and wouldn't want anything more than what the stock has to offer -  resort to transaction D and Sell a Call of the Strike Price at which one wishes to sell the stock.

Transaction D would require margin but that could partially be covered with the stock holding or earmarked capital for a further Buy.

Transactions A&B are protection mechanism and in today's situation a must have addition to every investment activity undertaken.

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New Cases Of Corona Rising, Increased Investor Concern !!!

The sentiment of the stock market is deteriorating due to the ever increasing cases of Corona. Due to this, the market has seen a lot of ups and downs in the past week. However, the RBI kept interest rates at a constant rate for the fifth time in the last week, leading to a recovery in the market. But the lockdown put pressure on banking stocks and the overall market declined. Today Sensex lost 1707 points to end at 47883 and the Nifty was down 524 points at 14310. The Bank Nifty index dropped 1656 points to 30792. However, midcap and smallcap sectors have given tremendous returns to investors. The IT and pharma sectors witnessed strong buying due to the constantly weakening rupee against the US dollar. Both indices gained 4-6% in the past week.

In terms of overall market, there is a possibility of huge market volatility in the medium term. There are two main reasons for this, the March quarter results and new cases of corona epidemic. In such a situation, shopping in select sectors may fall in some. In this, IT and banking shares can be in focus.

Five big events will be very important for investors this week...

Fourth quarter results of 2020-21: Today, IT sector giant TCS came out with quarterly results. With this, the fourth quarter results will start coming. About 21 companies, including Infosys, Wipro, HDFC Bank, Mindtree, Hathaway Bhavani, HDIL, Lloyd Metal, will present quarterly results this week.

New corona cases and lockdown status: Corona was confirmed in one lakh 52 thousand 565 people in the country on Saturday. For the first time since the onset of the epidemic, so many infected have been identified in a single day. In the last 24 hours, 90,328 people recovered and 838 people died. The recovery rate has also come down to close to 90%, which was 93.3% on Friday. At the same time, 100 million people have been vaccinated in the country so far.

Lockdown is being imposed in major states of the country to prevent the infection of Corona. Kerala states including Maharashtra, UP, Delhi, Madhya Pradesh, Gujarat have night curfew and total lockdown.

The impact of the lockdown on the banking sector: The banking sector is being severely affected by lock-in-place and increasing strictures in major states. Because this is affecting the quality asset of the bank. Meaning other banking businesses including debt collection will be completely affected. The result of this was that the bank index lost more than 4% last week. It may fall even further with increasing hardening. This will affect the sentiment of the overall market.

Domestic economy data will come: On Monday of this week, economy data will also come. It will release data on industrial production for the month of February and retail inflation for March, while on Wednesday the government will release the data of wholesale inflation. In January, industrial production fell 1.6% due to a decline in the manufacturing and mining sector. At the same time, retail inflation rose to 5.03% in February from 4.06% in January, due to the rise in food prices. Similarly, trade data will be made public on Thursday and Foreign Reserve Exchange data on Friday.

The rupee will keep an eye on the move: The rupee has weakened by 161 paise against the dollar due to rising new cases of corona, spending on vaccine and RBI's plan to buy bonds. Now the price of one US dollar has been increased to 74.43 rupees. The rupee came to this level on November 4, 2019. According to market analysts, in the next few days, the rupee may again see a strength. Because the US Fed Reserve's Monetary Policy meeting is going to happen soon.

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