Of whatsnexters, horoscopes and personal experiences

Can Stock Market Forecasters Forecast?

It’s time we stopped listening to the “whatsnexters.” These folks are everywhere in the financial media pontificating confidently about what they can’t possibly know — what’s next for the economy or the stock market.

Read: Don’t let market pundits lead you astray

Good to Great

The story of success swarms statistics. And there’s always enough random success to justify almost anything to someone who wants to believe.

Read: Stories triumph Statistics

A case for rules-based investment methodology

Our personal experiences disproportionately impact our investing behavior. By simply repeating investing behaviors that resulted in good outcomes for us in the past, and avoiding those that resulted in poor outcomes, we’re potentially eliminating important information that could help future investment performance.

Read: Bad Investor Behavior: Overemphasizing Experience

Long term ≠ Always

always2

Previously, we had highlighted the difference between ‘Long-Term Investing vs. Buy And Hold Forever’ (src) Economies shift, competition catches up, moats wither away. So it is essential to have a periodic review of your portfolio.

Recently, in a post titled ‘The answer is that there is no answer’ (src) we saw the inherent contradictions that exist in asset management.

James Osborne over at Bason Asset Management brings it together brilliantly:

The world is a complex place and how each generation of investors experiences these long term truths may be very different. This is simply a reminder that in some periods, we may have a different experience than these long-term facts.
 
Most importantly we should be aware that “over the long term” doesn’t mean “always” in advance so that we aren’t surprised when we experience the opposite result of our long-term beliefs.

The whole thing is worth a read.

Source: “OVER THE LONG TERM” DOESN’T MEAN “ALWAYS”

Opening Bell 22.04.2014

Your world at 9am

world equity markets 2014-04-22

Equities

Major
DAX(DEU) +0.99%
CAC(FRA) +0.59%
UKX(GBR) +0.62%
NKY(JPN) +0.30%
SPX(USA) +0.38%
MINTs
JCI(IDN) -0.35%
INMEX(MEX) -0.51%
NGSEINDX(NGA) +0.07%
XU030(TUR) -0.15%
BRICS
IBOV(BRA) +1.78%
SHCOMP(CHN) -0.14%
NIFTY(IND) +0.56%
INDEXCF(RUS) -0.85%
TOP40(ZAF) +0.47%

Commodities

Energy
Brent Crude Oil -0.09%
Ethanol +0.00%
Heating Oil +0.04%
Natural Gas +0.11%
RBOB Gasoline +0.02%
WTI Crude Oil -0.11%
Metals
Copper -0.11%
Gold 100oz -0.02%
Palladium +0.51%
Platinum +0.44%
Silver 5000oz +0.00%

Currencies

USDEUR:-0.01% USDJPY:+0.04%

MINTs
USDIDR(IDN) +0.48%
USDMXN(MEX) -0.02%
USDNGN(NGA) +0.43%
USDTRY(TUR) -0.02%
BRICS
USDBRL(BRA) -0.30%
USDCNY(CHN) +0.09%
USDINR(IND) +0.50%
USDRUB(RUS) +0.34%
USDZAR(ZAF) +0.01%
Agricultural
Cattle -0.02%
Cocoa +1.24%
Coffee (Arabica) -2.39%
Coffee (Robusta) +0.00%
Corn +0.00%
Cotton +0.23%
Feeder Cattle +0.11%
Lean Hogs -0.33%
Lumber -0.80%
Orange Juice -0.36%
Soybean Meal +0.16%
Soybeans +0.27%
Sugar #11 +1.20%
Wheat -0.19%
White Sugar -1.34%

Must reads

Felix Salmon: Founding a Silicon Valley startup, then, is a deeply irrational thing to do: it’s a decision to throw away a large chunk of your precious youth at a venture which is almost certain to fail. Meanwhile, the Silicon Valley ecosystem as a whole will happily eat you up, consuming your desperate and massively underpaid labor, and converting it into a few obscenely large paychecks for a handful of extraordinarily lucky individuals. (Reuters)

SC allows iron ore mining in Goa with 20 mt annual cap. But the state govt ban stays. (LiveMint)

Did you know that the National Pharmaceuticals Pricing Authority (NPPA) sets the price of Crocin? The price of paracetamol 500 mg — the drug molecule — is capped by NPPA at 94 paise for a tablet, or around Rs 14 for a strip of 15. (TOI)

Good luck!

Opening Bell 21.04.2014

Your world at 9am

world equity markets 2014-04-21

Equities

Major
DAX(DEU) +0.99%
CAC(FRA) +0.59%
UKX(GBR) +0.62%
NKY(JPN) +0.63%
SPX(USA) +0.14%
MINTs
JCI(IDN) +0.27%
INMEX(MEX) +1.10%
NGSEINDX(NGA) +0.07%
XU030(TUR) -0.17%
BRICS
IBOV(BRA) +1.78%
SHCOMP(CHN) -0.33%
NIFTY(IND) +1.56%
INDEXCF(RUS) +2.02%
TOP40(ZAF) +0.47%

Commodities

Energy
Brent Crude Oil -0.42%
Ethanol +2.28%
Heating Oil -0.27%
Natural Gas -0.06%
RBOB Gasoline -0.30%
WTI Crude Oil -0.19%
Metals
Copper +0.00%
Gold 100oz -0.57%
Palladium -1.81%
Platinum -1.31%
Silver 5000oz +0.00%

Currencies

USDEUR:+0.03% USDJPY:+0.17%

MINTs
USDIDR(IDN) +0.08%
USDMXN(MEX) +0.01%
USDNGN(NGA) +0.28%
USDTRY(TUR) +0.06%
BRICS
USDBRL(BRA) -0.30%
USDCNY(CHN) +0.01%
USDINR(IND) +0.05%
USDRUB(RUS) -0.11%
USDZAR(ZAF) -0.01%
Agricultural
Cattle -0.96%
Cocoa +1.30%
Coffee (Arabica) +7.88%
Coffee (Robusta) +2.66%
Corn -0.45%
Cotton +0.48%
Feeder Cattle -0.13%
Lean Hogs +0.98%
Lumber +0.09%
Orange Juice -0.21%
Soybean Meal +0.41%
Soybeans +0.41%
Sugar #11 -1.42%
Wheat -1.74%
White Sugar -1.36%

Must Reads

Happy Easter!

Is India about to elect its Reagan? (Hindu). Related: What can Modi do?

RBI’s gave banking permits to only two of the 25 applicants. Bandhan Financial Services – because they wanted one – and IDFC – because they needed one. (LiveMint) IDFC 117.10 -1.75 (-1.47%)

Is Reliance Industries a hedge-fund in drag? Treasury operations contributed Rs 8,936 cr (40%) of the total profit during the previous financial year. (BS) RELIANCE 966.80 -0.95 (-0.10%)

Good luck!

Condors

Introduction

Just like how the strangle had a wider range than a straddle, condors can be thought of as “wider” butterflies. The rational for entering condor trades are the same as that of butterflies. The number of options that you trade are the same, except that the middle is now composed of 2 strikes instead of one.

Long Call Condor

Say you are neutral on the underlying and expect it to stabilize between a range of prices, then a Long Call Condor can be preferable over a Long Call Butterfly.

For example, with the Nifty trading at 6780, instead of doing an April 6700/6750/6800 Long Call Butterfly, you could do an April 6700/6750/6800/6850 Long Call Condor. If the Nifty ends between 6721.85 and 6828.15 at expiry, you make a profit of Rs. 1407.50 and your downside (max loss) is limited to the premium you paid (Rs. 1092.50). Note how the range of the Condor is wider [6721.85, 6828.15] vs. [6712.00, 6788.00] and the max profit is lower Rs. 1407.50 vs. Rs. 1900.00 when compared to the butterfly.

Nifty 6700-6750-6800-6850 Long Call Condor

Nifty 6700-6750-6800-6850 Long Call Condor payoff
Nifty 6700-6750-6800-6850 Long Call Condor PL

θ: helpful when the position is profitable
δ: greatest around the outer strikes, zero around the middle strikes
κ: volatility is unhelpful, unless the underlying moves outside the outer strikes
γ: peaks negatively around the middle strike and positively around the outside strikes

Short call condor

A short call condor can be used instead of a short call butterfly to speculate on increasing volatility.

For example, with the Nifty trading at 6780, instead of doing an April 6700/6750/6800 Short Call Butterfly, you could do an April 6700/6750/6800/6850 Short Call Condor. You might even end up collecting more premium than the butterfly. If the Nifty ends outside of 6721.85 and 6828.15 at expiry, you make a profit of Rs. 1092.50 and your downside (max loss) is Rs. 1407.50. Note how the range of the Condor is wider – [6721.85, 6828.15] vs. [6712.00, 6788.00] – and the max profit is higher – Rs. 1092.50 vs. Rs. 600.00 – when compared to the butterfly.

Nifty 6700-6750-6800-6850 Short Call Condor

Nifty 6700-6750-6800-6850 Short Call Condor payoff
Nifty 6700-6750-6800-6850 Short Call Condor PL

Trading condors

You should know the historical volatility of the underlying and its distribution before you get into volatility trades. As a rule of thumb, always try to position your derivative book towards being long volatility.

If the bid/ask spread is too wide, it can affect the quality of the trade. Since the losses are capped, running this trade to expiry may be tempting in such a scenario.

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