Thursday, January 31, 2008
How I Made Money From The Crash
I decided to hold on to the short positions and not trade (I could tele-trade if I wanted to) and later, wrote a blog post in the hotel room at Hubli, saying that my advise was to sell, regardless. If anyone felt really bad about selling, they might wait for a rally instead.
On Monday as the packers were moving our stuff in, I had no time to look at the markets, until around 3 PM, when I saw the 1000 point + drop on the Sensex. The Nifty was now at 5400. Fantastic, I thought - I just made my trip cost in one days move! I was long nearly nothing, with most of my portfolio being sold before I left - I had the puts to cover my mutual fund investments and some other shares I owned.
Tuesday was a murder for the markets. After opening circuit down and trading halted for the day, the Nifty moved to 4500 before moving back up. By Tuesday evening the positions I had were partly covered, and I was up with a profit of over 1.5 lakhs. On a net short investment of about 1.2 lakhs or so. I had to put on a few other positions to cover profits. Since the ICICI options were thinly traded and I didn't want to exercise, I could book the profit by simply buying a future at a good point, say 1170, which effectively resulted in about 35K of profits for an investment of about Rs. 6,000. But the Reliance Money site was so slow, and my connection was also quite horrendous, which resulted in huge slippages and basically bad fills on the orders. Anyways, the profit was so wide I wasn't unhappy.
I eventually covered all shorts at around the 5,000-5,100 levels on the Nifty, and netted my profits like so:
100 Mini Nifty Short sell: Sold at 5940, bought around 5100, profits of 80K or so for an investment of about 80K.
100 Nifty 5800 put: Bought at 60, Sold around 700, a 70K profit for a net investment of 6,000.
350 ICICI Put: Bought at Rs. 20, sold at Rs. 100 (net sell with a future offset), profit of around 28K for an investment of 7K.
There were about two trades I haven't mentioned here, which resulted in a 10K loss or so, but the net result was about 1.6 lakhs in profit.
While this was good, you should consider that this does not happen every week (although nowadays it seems to!) and you can lose heavily if you are on the other side of the move. But it indicates one thing - falls can be sudden and far deeper than you imagine.
Buying deep-out-of-the-money puts can be immensely profitable in such situations. I bought the Nifty 5800 put when the index was at 6200, for Rs. 60. I sold them at over Rs. 700. That means if I had bought a 8% cover-put (meaning a put that covers me beyond an 8% drop) every month I would have broken even if there was a crash every 12 months! And as we have seen, there have been at least two-three such crashes every year - meaning that buying deep-otm puts have been profitable. (Not to say that they will *remain* profitable, because the landscape has now changed, and the premiums for such options has gone up considerably)
Where option premiums are ridiculously high, it may be better to write options (sell them) than to buy them. For instance, today is expiry day, and yesterday the Nifty closed around 5160. The 5300 call was priced at Rs. 30, and the 5000 put at Rs. 40 - this has some phenomenally high implied volatility! Which means, if you wrote both these options, you would be covered for ONE day range of 4930 to 5370. And the max profit (between 5000 to 5300) would be Rs. 70 - that is Rs. 7,000 for a 120K investment if you sold 2 contracts each way. But the point is - it's for ONE DAY. If you're willing to foot the risk (which is actually a lot lesser than it seems) this could be quite profitable. (Heck, let me wait and see the end of today if things did pan out to be profitable!)
(Note: Do not try this at home. This is purely information and you should consider it fiction.)
Labels: Commentary
10 Comments:
My impression is frequent trading does not necessarily translate into more profits, at least for those who are not 24/7 into it. Little windows of opportunity are a better bet. For example, if the Nifty goes below 4500 anytime, then going long could make some money. Or at least the downside is limited.
Do not take this comment in the wrong sense.
But I request you to give a post on how you started to invest. For Example I donno anything about these puts,F/O etc. I would like to learn though.
It will be nice if you could suggest how you learnt all the stuff about the markets,derivatives etc. Because I think behind all the glitz and glamour of the profits that you have outlined in this article I think there is serious hardwork somewhere which we need to put in.
The other thing I would like to know is how you learnt to analyze balance sheets and get the required information about the comapanies that you have decided to buy for example your suggestion on BHEL , Balaji Tele etc was great.
And just to leave on a final not Dr Reddys is at a 52 week low I think.You have outlined it as a pick for the Current Year.What is the reason for such a fall? Would you still buy it?
Thanks
hari
For your luck. Please let us know how much tax you will have to pay?
It is considered business income and will be charged at normal rates. No short term Cap. gains i suppose.
BTW not all can be correct both in direction and time.
Also check out
to understand the nitty-gritty of investing
Good going with the futures. If you see a short term upside, you can buy a feb future and offset the position (no extra margin required, thats the nice thing about SPAN margins)
Hari: I don't think it's useful to find out how I learnt - the web is my master for most things. What I would advise is to keep learning and trying out new things - soon things will be quite obvious, and then it doesn't seem like hard work!
Anon: Oh yes, this is business income all right, for me at least. The good thing is that I can offset it with expenses, and I can reduce profits by any losses incurred in other transactions.
Still, consider this - the Nifty is at 5150, down from 6300, nearly 20% down. And I am up 1 lakh (consider 33% tax on the 1.5 lakhs odd, giving no leeway for expenses etc) - on an investment of 1.2 lakhs. You will probably admit that profits are better than losses, and paying taxes is not a huge deal when you are making money when the market is losing it.
I may not be right all the time, and I've admitted it when I'm wrong. I get the sense that some people consider my trading obnoxious; that trades like this are somehow a bad thing. To each his own, I say - in the end what matters is that someone earns and someone learns. I've done bits of both, and I don't ask anyone to emulate me.
I've learnt to cut my losses and ride my winners, and to me this is the biggest lesson of all. Most people don't cut losses using "long term" as an excuse, but I think believing you are right everytime is just arrogance. Mistakes are mistakes, just don't lose your shirt on them.
Sebi has allowed short selling in select stocks i.e F&O stocks... I beleive some stocks are going to rise without much reason in the days to come and probably there will be more pain for the uninformed investor.
Is there any mechanism to find what if there are any potential stocks which can be shorted? My guess is stocks which have gone up too much after the last crash or ones which haven't been affected much in the last crash.
I hope to keep my mental balance intact and ride these tough times.
if i buy an option can i sell it off any time i want ?
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