Thursday, July 7, 2011

The expansion Phase: Like a rocket

After five days of narrow trading ranges, the Nifty finally took off , and it did it in style.

On Thursday, (today), the Index opened almost flat, then broke above the 15 minute high, never looked back, closing at the high point of the day, at 5745, a good 105 points up from its previous close.

This column has highlighted the cycles of contraction and expansion which are probably the only predictable cycle in the market.

After contraction comes expansion - this much is certain. When the expansion phase will come is more or less unknown, but it will come.

After expansion, markets become choppy, as theya djust to the new levels.

Monday, July 4, 2011

Understand your options

Options are a form of derivative securities. The biggest advantage of options for the retail trader is the ability to trade in markets with a limited amount of investment capital. This advantage can quickly turn into a disadvantage for the under-funded or inexperienced trader. A few bad trades could deplete a small account because of the high leverage provided.

One of the most attractive aspects of options (as well as one of the most dangerous) is that they can provide you with the ability to greatly leverage your money. This is because with an options contract, you can - in effect - control a fairly large amount of underlying value with a relatively small amount of capital.

With the Nifty at 5650, a call option of 5700 strike price is available at 78. The option is available at just 1.3% of the price of the underlying contract. Compare this with the 20% margin required to buy the futures. Traders are attracted to options because of the high leverage provided. But, there is the other side. Option values are affected by Time Decay, Volatility and of course, by the change of price in the underlying. These are complex factors, that can make the option far more riskier than the 1.3% cost.

This post is not written to provide you with a primer on options. Most readers are well aware of the options environment. The Internet will provide you with as much information as you want. The post is to warn you that there is no such thing as a free lunch. Traders should understand the risks of options clearly when trading in them.

Still Here

Dear Readers,

I apologize for not writing the blog. While I can make the excuse that I was probably overworked, I also know that I could have taken 15 minutes every day for new posts. So, please excuse!

After a sustained up move, the Nifty has come to a point where it is facing some resistance in the 5700 area. The Index also has a habit of sharp expansion followed by many days of contraction. The contraction process may be starting now.

The short term trend is up, so is the intermediate trend. We can do well by following the trend, paitently waiting for the sideways move to end. Inside the range, the trade will be to buy dips, sell rallies, look for small profits.