Algorithms At Work!

The last few weeks have been brutal to cash-only equity investors. The NIFTY has gone nowhere even while swinging wildly on a daily basis. Is there a way to turn a profit given what has been going on?

Yes! With the help of option strategies it is possible to profit from stocks you expect to go side-ways. Here’s what we did.

ACC technical analysis chart

StockViz Option Ideas drew our attention to the ACC Long Call Butterfly around the 10th of December. The stock was under a pennant formation, and was on a decline from its 5 day high of Rs. 1445. With Bollinger bands enveloping 1450 and 1360 levels, there was a strong possibility that that stock was going to be range-bound for a bit.

We entered a long call butterfly trade for December expiry. With an outlay of Rs. 26,750 we bought 5 contracts (market lot of 250).

ACC long call butterfly trade P&L

The payoff chart for our butterfly looked something like this:

ACC long call butterfly payoff

With ACC ending at Rs. 1402 at option expiry, the position made us Rs. 9,950 (38%) profit in just 17 days even as equity holders sucked wind.

Here’s what your New Year’s resolution should be:

KEEP CALM trade options

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[stockquote]ACC[/stockquote]

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Analysis: RAJESHEXPO

Today’s pick is RAJESHEXPO [stockquote]RAJESHEXPO[/stockquote]. The stock has seen a couple of major corrections after trial flights during the year. The stock has got major support around Rs. 115 levels. Post October, the stock again started an up-move which was stopped around Rs. 150 levels a couple of days ago. This is going to act as a resistance for the near term. In the last three months, the stock has moved 18% vs. a meager 4% of the Nifty’s.

RAJESHEXPO Technical analysis chart

Oscillators RSI and CMO are retreating from the over-bought territory. Also, the stock is trading close to the upper Bollinger band and is hence is short-term bearish sign.

The MACD line has just started a move down towards the signal line followed by the fall in the histogram levels suggesting a bearish move. However, Long-term GMMA lines are experiencing an expansion giving out a bullish signal for the scrip. The candle-sticks produced a bearish engulfing pattern just yesterday after a 5% fall in the scrip.

RAJESHEXPO correlation chart

RAJESHEXPO’s average correlation with the Nifty is 0.44 is positive. The scrip will be replicating the movement of Nifty. [stockquote]NIFTYBEES[/stockquote]

RAJESHEXPO volatility chart

RAJESHEXPO has a historical volatility in the range of 0.4 to 1.2. The scrip’s volatility currently is in the lower end of the range.

To conclude, given these technicals, the stock is a short-term SELL. For the long-term we suggest a BUY because of the strong underlying trend with a keen eye around the resistance at Rs. 150 levels.

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Analysis: ATUL

Today’s pick is ATUL [stockquote]ATUL[/stockquote]. The stock has been on an up-trend ever since the start of the year. It just saw its 52-week high of Rs. 475 last week.The stock has a support near Rs. 400 levels. In the last three months, the stock has moved 26% vs. a meager 4% of the Nifty’s.

ATUL Technical analysis chart

Oscillators RSI and CMO are nearing towards the over-sold territory. Also, the stock is trading close to the lower Bollinger band and is hence a bullish sign.

The MACD line and the signal line are moving far from each other but not suggesting any direction. Long-term GMMA lines are experiencing an expansion giving out an extremely bullish signal for the scrip. Short-term technical gave a 18×9 and 18×4 bearish signal recently.

Atul Correlation Chart

ATUL’s average correlation with the Nifty is 0.57 is positive and strong. The scrip will be replicating the movement of Nifty closely. [stockquote]NIFTYBEES[/stockquote]

ATUL Volatility Chart

ATUL has a historical volatility in the range of 0.4 to 0.9. The scrip’s volatility currently is in the middle of the range.

To conclude, given these technicals, the stock is a short-term HOLD. For the long-term we suggest a BUY because of the strong underlying trend with a keen eye around the Rs. 400 levels.

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Analysis: MPHASIS

Today’s pick is MPHASIS [stockquote]MPHASIS[/stockquote]. The stock had a real good start of the year with an uptrend till April, but it could not sustain the momentum and crashed to its trend-line to find support. Since then it has been in an up-trend finding constant support in the trend-line until recently, where it closed below the trend-line. In the last three months, the stock has moved – 6% vs. 5% of the Nifty’s.

MPHASIS technical analysis chart

Oscillators RSI and CMO are nearing over-sold territory.

The MACD line and the signal line are moving close to each other – directionless. Both long-term and short-term GMMA lines are seeing a constrained movement leading to an indecisive future for the stock. Short-term technical gave a 4×9 bullish signal for the stock last week.

MPHASIS Correlation Chart

MPHASIS’s average correlation with the Nifty is 0.30. The scrip will be not be replicating the movement of Nifty closely. [stockquote]NIFTYBEES[/stockquote]

MPHASIS Volatility chart

MPHASIS has a historical volatility in the range of 0.4 to 1.4. The scrip’s volatility currently is in the lower part of the range.

To conclude, given these technicals, the stock is a short-term HOLD. For the long-term we will take a stand based on how the long-term GMMA lines unravel themselves.

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Technical Analysis on VIX – Does it make sense?

You can view a chart of the VIX just as you can for any stock or index. Just go to the VIX page, add some moving averages, maybe even Bollinger Bands and RSI indicators and you are on your way. However, just because you can chart the VIX just like a stock, doesn’t mean you should actually read the chart just like a stock.

India VIX analysis

Charts for stocks and indices actually represent buying and selling over specific timeframes. Stocks gap up and down. Gaps get filled. Old resistance points can become new support levels, etc. However, VIX is not a stock. India VIX is a volatility index based on the NIFTY Index Option prices. From the best bid-ask prices of NIFTY Options contracts, a volatility figure (%) is calculated which indicates the expected market volatility over the next 30 calendar days. Hence, price points for the VIX doesn’t correspond to potential profits and losses of actual trades based on those levels. Support and resistance and trend lines and momentum effects all depend on the existence of buyers and sellers in the asset being analyzed. But you can’t trade VIX directly, so the VIX can never find “support” because no one previously bought VIX “shares” at that price level. VIX is, at best, an indicator of market expectation of volatility.

However, there are a few useful analysis you could run on VIX, given its tendency towards mean-reversion. Bollinger Bands and moving averages could help you gauge the band within which VIX is oscillating. Longer-term charts could help surface seasonal patterns. StockViz India VIX Charts are another tool in the arsenal for investors to help them make better decisions.

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