Category: Investing Insight

Investing insight to make you a better investor.

Options Liquidity

0

Liquidity (or the lack thereof)

Open interest is a measure of liquidity of a particular market. For each buyer of a contract there must be a seller. From the time the buyer or seller opens the contract until the counter-party closes it, that contract is considered ‘open’. OI refers to the total number of derivative contracts that have not been settled.

Other than a few select indices and stocks, there is absolutely no liquidity in the option market. Here’s a chart of the latest total OI for the nearest (April) expiry:

OI April

And its worse for the next series:

OI May

Bid-offer spread

The problem with trading illiquid options is that the bid-offer spread ends up killing your trade. Compare and contrast the spreads for UNITECH and DABUR:

UNITECH APRIL

UNITECH MAY

DABUR APR

DABUR MAY

Don’t stop at trade setups

When you conceive option trades, make sure you consider liquidity constraints. Otherwise, your trade is likely to remain on paper.

The liquidity footprint is not static. For example, RCOM, which was #8 in Jan is nowhere to be found in the liquid dozen in April:

OI Jan

Monitoring liquidity risk is as important as checking your deltas and P&L and can often make or break a trade.

Categories , Tags

Introducing The Facebook National Bank

0

We had pointed out back in February as to how startups are disintermediating banking and that given the amount of data that both banks and Facebook have on us, it is only a matter of time that we saw a “Facebook National Bank.” Turns out that it is now a reality:

Facebook is readying itself to provide financial services in the form of remittances and electronic money. The social network is only weeks away from obtaining regulatory approval in Ireland for a service that would allow its users to store money on Facebook and use it to pay and exchange money with others. “Facebook wants to become a utility in the developing world, and remittances are a gateway drug to financial inclusion.”

Source: Facebook targets financial services

Related articles
Categories , Tags

Study reveals why economists suck at making predictions

0

The ability of forecasters to predict turning points is limited. Forecasts from the official sector, either from national sources or international agencies, are no better at predicting turning points.

So the explanation for why recessions are not forecasted ahead of time lies in three other classes of theories, which are not mutually exclusive.

  • One class says that forecasters do not have enough information to reliably call a recession. Economic models are not reliable enough to predict recessions, or recessions occur because of shocks (e.g. political crises) that are difficult to anticipate.
  • A second class of theories says that forecasters do not have the incentive to predict a recession, which – though not a tail – event are still relatively rare. Included in this class are explanations that rely on asymmetric loss functions: there may be greater loss – reputational and other kinds – for incorrectly calling a recession than benefits from correctly calling one.
  • The third class stresses behavioural reasons for why forecasters hold on to their priors and only revise them slowly and insufficiently in response to incoming information.

A more than a healthy dose of skepticism is always warranted when dealing with these so called “expert forecasts.”

Source: “There will be growth in the spring”: How well do economists predict turning points?

Related articles
Categories , Tags

What can Modi do?

0

The following are excerpts from a recent JP Morgan special report titled “India: elections, markets & the tyranny of economic reality.”

The equity market exuberance, however, appears based on opinion polls increasingly pointing to a stable government post election, and the presumption of a dramatic economic pivot post election that jump starts a new capex cycle.

EM India Flow

The broad hope is that a positive cycle can be unleashed if projects get unclogged, increasing cash flow for infra companies (which account for 30% of stressed loans), enabling loan repayments, and healing bank balance sheets, which can allow a fresh lending cycle to start.

India stalled projects

But the problem is that the vast majority of projects are currently stuck because of issues that are under the purview of state governments, over which the central government has little jurisdiction.

India stalled projects reasons

And even if these problems were magically resolved, where is the money going to come from? Among the BSE-200 non-financials, 17% have operating incomes (before depreciation, interest and taxes) that are less than the perilous threshold of 1.5 times their debt service obligations. So a significant deleveraging would need to be undertaken before these infrastructure companies have the balance sheet strength to finance another investment cycle. This is a multi-quarter process.

India debt to equity

Banks are not in a position to lend. Public sector banks – which account for 70% of banking sector assets – are saddled with the overwhelming majority of impaired loans, and would need a significant quantum of capital injection by the government – far in excess of what has been budgeted – to finance any large pick-up in credit growth.

India bad loans

Given the economic reality on the ground, the translation from political stability to economic performance is likely to be far more lagged, incomplete and uncertain than the current market euphoria may be betraying.

Categories , Tags

IPOs Revisited

0

IPO performance

We had come out with the StockViz 5-day rule for IPOs back in July-2012 which basically stated that “if it [the stock] doesn’t pop within the first 5 days, chances are that it never will.” And subsequent performance of IPOs have validated that rule.

Since August-2012, there have been 53 IPOs, of which only 2 have made any real money for investors over the long-term: JUSTDIAL and REPCOHOME. Here’s how the 5-,10-,20-,50-,100-,200-day average return for IPOs look like, juxtaposed on the NIFTYBEES ETF return:

returns

The IPOs that made money were not slam-dunks either. Here’s a splattering of commentary on Just Dial:

  • Hindu Business Line: Avoid (source)
  • Economic Times: Avoid (source)
  • Aditya Birla Money: Avoid (source)
  • Microsec: Seems unattractive, subscribe for listing gains (source)
  • HDFC Securities: Avoid (source)
  • GEPL Capital: Subscribe (source)
  • VS Fernando: Avoid (source)

There simply isn’t enough information about the company to evaluate whether the stock is a good investment or not at the time of the IPO. However, if you followed the rule, you would have cut your losses and retained the winners.

When it comes to investing in IPOs, remember the StockViz 5-day rule!

[stockquote]JUSTDIAL[/stockquote] [stockquote]REPCOHOME[/stockquote]

Categories , Tags