Hi Guys,
Definition of Butterfly strategy option:
A butterfly strategy is used to minimize risk, non- directional optional strategy designed to have a large probability of earning small limited profit when the future volatility of the underlying is expected to be different from implied volatility.
I have heard this but never tried it and i am also not much familiar with this concept but love to know more about it.
So it would be great if anyone of us had already tried this strategy or know more details can share it with all,
Regards,
Amit
Hi Amit,
ReplyDeleteI wanted to respond to your posting in the last few days itself., however, I couldnt get time for the same. Sorry for that... :-)
Honestly, Im not an expert in this concept. Anyhow, I would like to take this opportunity to explore this concept further and get an upper hand on it., before concluding if it is really worthwhile trying this concept.
Firstly, not everyone understands the Put/Call options clearly. So, I believe, before we move on to Butterfly Strategy, lets take this opportunity to touch base on the basics of options trading. For sure, Options is a more complex trading concept but worth it when compared with futures trading where huge margin is required.
At a very high level, as for Butterfly strategy is concerned, it is quite similar to hedging. You take put/call options below and above a strike price. Based on the market movement, few options will reach zero value and some would fetch decent profit.
I'll debug further and post in this group along with the fundamentals of options trading...
Just while we are discussing about Options which is part of F&O, I would like to share something. Yesterday, I couldnt resist myself from taking a futures nifty contract after quite a long time. Given the low level reached by the market, I was pretty sure that there will be a technical pullback in the market and so thought of swimming in it. Yesterday in contrary to the trend, I took a long position in Nifty futures around 5250 levels. Just to be safe, I took a March month contract as I can then have a longer waiting period without having to carry forward if the market did not move in my favor. However, fortunately, the market pulled back today itself to close around 5320 levels, resulting in 70 points profit... :-)
Now, coming back to Options, given the current market situation, I would first like to focus on equities and pick up the value stocks for the long term. I feel at this juncture, this is more important. As for Options trading, this can be picked up at any point of time irrespective of the underlying stock price. So, now is the time to pick up the value stocks for the long term. Hope you would agree with me in this regard... :-)
Looking forward to your views...
Cheers
Selva.
HI Selva,
ReplyDeleteGood to see your respond yes you are right before getting in to some strategy of equity derivatives we need to have detailed article to learn F&O.
I personally feel Option is always better then future, less risk less profit but bit secured then futures. In futures more risk more loss and dangerous if market collapse. Anyhow will discuss more with details after publishing some information, So you can publish from your side some article on F&O even i will try the same.
Regarding current market condition are not good. But your nifty contract is very wiser decision to pick now there will be surely technical pull in market but not sure how long will it sustain. There is not much positive investors currently specially retail investors are clueless of market trend.
Regarding stock picking for long term is very basic and strong fundamental of investment. But picking stock is challenging task especially in such trend of market. You need to select stock considering prospect of whole sector itself no doubt even company performance but sector prospect will drive the leader stock of it. I invested 3 years before assuming R.com will give good return in future bought for rs.650 and now it is rs.98.But currently the whole telecom sector is dry and dull due to heavy competition which i did'nt predict or alert to divert the stock. I am still double mined whether i should average my cost or not because i have lost interest on telecom all stocks after investing in R.com. Let me know your view on it.
Hi Amit,
ReplyDeleteYeah., it is true that F&O itself is very very risky and not everyone's cup of tea. Within the two, definitely Options is better as it is a wise use of money. But then, it has its own complexities. In both the cases (Futures & Options), I believe, it is very difficult for us to do from here through online and during our office hours. It creates more tension and stress...From that perspective, equities is a relaxed approach... :-)
Lets slowly explore the Options further and keep the thread active.
Regarding current market condition, I have recently posted my comments. Pls. check this:
http://tirupur-shares-forum.blogspot.com/2011/01/stock-market-heading-into-which.html
In my opinion, as individual retail investors/traders, we dont have to be too much worried about the market condition or direction or trend. We should look at the current market situation as an opportunity for entry into specific stocks that have come down dramatically and have good value/potential for the long term.
Regarding my nifty entry, yeah, I was quite fortunate, Im planning to exit on Monday, if there is a positive gap opening on Monday.
Regarding stock picking, yes, you are right in that it is a challenging task. My approach is, I normally confine myself to any index based stock which gives a bit of a comfort that,the stock being in the index itself is a certification that it is a good company. So, within this boundary (which itself is quite huge), I narrow down to stocks that are beaten up currently in the down trend... (Will write more about this in subsequent blogs).
I take your point that a sectoral view is to be considered. I also consciously balance my portfolio across various sectors., meaning, I do not take excess holding in 1 sector and make sure that it is more balanced...
Regarding Rcom and your long term investment approach: Let me give my view. Im a long-term investor and at the same time a short-term trader. :-)
If, as a long-term investor, we buy and forget it, then, for most of the time, what we see is just paper money. When it goes up, we feel happy and when it comes down, we feel sad. This is not the right approach.
What I normally do is, I take holding in certain good stocks. When it goes up, I will sell a portion of it. If the price goes further up after I have sold, I will just leave it. Subsequently, when it comes down, I'll buy-back the portion I sold. In this way, I would be reducing my cost price. If the price continues to fall further, I'll try to average further (if the fall is quite significant., ie., more than 20-30%). For the short term entry and exits, I rely on technical indicators...and that helps me a lot. (Will post more on this in subsequent blogs)
Regarding Telecom sector, yes, the short term outlook is not bright. There is very stiff competition between the service providers. However, I do still feel that the long term potential is intact. The subscriber base is growing every day and there is still a lot of room for growth. Also, in India, the data plans (3G) are yet to penetrate and that has a huge potential. So, definitely better times are ahead... :-)
Regarding your Rcom holding, I dont think it would be a bad idea to average it at this point of time., considering that your holding price is so high. However, you may want to take stock of your total exposure into this stock in relation to your overall portfolio value and also the extent to which you can invest now in that stock...Hope you get this point clear... In fact, I have bought Rcom @ 93 on friday. I had earlier sold at 190 levels few months back.
HI Selva,
ReplyDeleteI will considering to average my r.com holding and i use to be active trader in India but after coming here i am not monitoring much. But now i am planning to start again.
Regarding your method of picking stock from Index or you can say blue ships stocks. Which does not required much research on performance. But i have beaten on that too i have invested in RIL one of the most reliable stock in BSE. Market recovered from 8K to 18K but RIL is not yet joined any momentum.
And regarding your concept of booking partial profit or average when goes down so like that your capital is safe. I personally started my investment in that concept and i made much profit during good market of 2007 especially RNRL and RPL. But i do not know some point of time i never able to judge right time to entry or exit and so on currently my portfolio is -50% today. Though my capital is safe but still i mean to say here is any concept you have is very difficult to stick on that for long.
I would also like to know if there is any good upcoming primary market stock to invest.
And also share if you have any buy call on particular stock for short term investment 3 months.
Regards,
Amit
Hi Amit,
ReplyDeleteRegarding RIL, my strategy is the same for this as well. That is, even the good stocks, we have to occasionally book profits and re-enter at lower levels. Otherwise, what we see is just notional...
Im also holding this since long long time, but follow the above strategy only. Late last year, I sold this @ 1075 levels., and when it came down, I re-entered at 950 levels. I would now wait for it to move up. If it goes further down, I would wait and re-enter at lower levels. I believe, RIL is having good support @ 880-900 levels, because at least on 2 previous occasions it has bounced back from this level.
For the long term, if there is one stock that can take market to 21k levels or beyond that, it has to be RIL!! :-)