Algorithmic Option Strategy Ideas

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Computers are great at repetitive number crunching, humans are great at intuition – StockViz now enables you to combine your intuition with StockViz’s proprietary option strategy algorithms for winning trades.

You may have read literature on the do’s and don’ts of option trading, like enter trades only when there’s sufficient liquidity, look-out for mean-reversion of implied volatility, choose between strangles and straddles, etc. But unless you are a programmer with access to live option pricing, you were pretty much at the mercy of broker calls to guide you through this process. But not any more!

By using a combination of technical analysis on the underlying, liquidity filters, corporate action corrections and our proprietary relative-value model, we surface option strategies for you to trade. In essence, you get a fresh set of possible trades, every 30 minutes, that is algorithmically generated by crunching through the latest information available.

A preview of trade ideas generated:

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You can dive into each trade and get a sense of what the payoffs are – all with a single click. And once you are comfortable with the risk you are taking, you can add the option strategy to your portfolio and stay on top of the trade.

Login to StockViz by clicking on image and Go Algo!
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Time to buy Volatility

Now that the earnings season is over and Europe is on vacation, volatility in the NIFTY has dropped off. Here’s a historical chart to put things in perspective:

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With the August expirations right around the corner, you should be looking at putting on Sep 5300/5400 Long Strangle on the NIFTY or if you are feeling brave, buy the Sep 5000 NIFTY Puts outright.

With the Strangle, you’ll have some protection against melt-ups. If you look at the pay-off at expiry, you are protected if Europe gets its act together or if the domestic situation improves. With break-evens at 5,118 on the downside and 5,581 on the up, a move outside of any one of these goalposts will make you money.

Whatever your strategy is, volatility seems too low at this point. So make sure you put some “reversion to the mean” trade on.

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PSU Banks vs. the Rest

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PSU banks [stockquote]PSUBNKBEES[/stockquote] have under-performed the market this year, up just 7% vs. the sector’s [stockquote]BANKBEES[/stockquote] 22% and the market’s [stockquote]NIFTYBEES[/stockquote] 9%. 2011 was not kind to the dinosaurs either, -42% vs. the Nifty’s not so great -16%.

In fact, the only time the PSUs outperformed by a meaningful measure was during the panic of 2008, where they tanked less than the rest of the market.

The gloom and doom scenario includes rising NPAs, pension provisions and rising costs leading to more capital raises. Besides, given the experience of minority shareholders in the government owned Coal India [stockquote]COALINDIA[/stockquote], FIIs have been fleeing from public sector companies in general.

PSU banks are overexposed to bankrupt state electricity boards, with no glimmer of hope in the horizon. And given the weak monsoon, the direct exposure these banks have to the agriculture sector might land a double whammy in 2012.

But given the 35% drop since 2011, this sector is worth a second look. The Finance Minister is making the right noises regarding the deficit. The monsoon may not turn out to be all that bad after all. NPAs are getting worked through and it looks like banks will be exiting 2012 with a decent balance sheet. Besides, the yield curve is positive, so the banks don’t have to try too hard to make money. The 2012 budget has sanctioned Rs. 15,888 crore to be provided for capitalization of public sector banks and financial institutions to get them Basel III compliant, so the capital situation is not that bad.

PSUBNKBEES technical analysis charts

Currently the PSU Bank ETF looks like its resting on a weak support at Rs. 300 and the near-term upside seems limited. However, if it heads towards Rs. 250, be prepared to pull the trigger.

PSU banks should on every investors radar. Remember Warren Buffett: “Buy what everybody hates”

 

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Weekly Recap

NIFTY.2012-08-06.2012-08-10

The NIFTY ended on a positive note, drifting up +1.47% for the week.
Biggest losers were BHARTIARTL (-13.79%), SBIN (-5.86%) and RANBAXY (-4.91%).
And the biggest winners were STER (+8.61%), M&M (+8.00%) and HINDUNILVR (+6.67%).
Advancers lead decliners 37 vs 13
Gold: +0.07%, Banks: +0.12%. Infrastructure: -0.09%,

IIP numbers that came out this week point to continuing slowdown in investments.

The only bright spot is that FII inflows continue to remain firm. Foreign investors pumped in closed to $2 billion in July. This, combined with hope that the government will announce a slew of fiscal policies to tackle the burgeoning deficits, uncontainable inflation and slowing growth has kept the market drifting higher.

Also, remember that Europe is on summer vacation. Summitry and politics have been postponed to September. If the global macro situation worsens next month, we can no longer rely on FIIs to support the market.

Will we be ready by September to stand on our own two feet?

 

Daily news summaries are here.

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