We need Long Term Structured Option Contracts…need to LEAP into LEAPS

I was just wondering…..Currently there is so much volatility in all markets,be it Equity or Commodities…due to earnings uncertainties,anxieties about health of global economy and Financial Systems

Most Experts are advising to think Long Term…Naturally…3 Years + atleast

Then why is it that we have Derivative Contracts structured only for a maximum of Three Months… for Long Term,we need to roll them over and over and over and over again ?

It’s time that we introduce Long Term Option Contracts…This will enable me to take a call on the Markets or a particular Stock or Commodity for a period of One Year and more by investing merely a fraction of what I would have to now in Spot

For example If I felt the Markets would improve in the next two years,I could buy a Nifty Call at Strike price of 2750 (Current Level) that expires in 2011 at a Premium of ,let’s say,Rs 225…Assuming Contract lot is 50,the contract Value is Rs 137500 and I would have to pay Rs 11250 as premium…That is my Cost….I now have the right,but no obligation, to exercise this Call

So if ,let’s say,Nifty moves up and is at 4000,somewhere in mid 2010,I can square of my contract and sell the Call,at a premium of let’s say,Rs 1025 and profit by Rs 800 which aggregates to Rs 40000 on the contract…a return of 356 % in a year or so !

The above is a hypothetical example and it can be argued that Option Premiums may quote at much higher % levels in this volatility…The Nifty Call of Strike 2750 may not be quoted at 225…but more at 500 perhaps or even more !…that’s an 18% premium !   

Chicago Board Options Exchange (CBOE) has a registered product on these lines and they have trademarked it as LEAPS.It stands for Long Term Equity Anticipation Securities…This product is available in the form of Calls and Puts for 450 common stocks and Ten Indices and the Expiration Date can extend upto 39 months…In fact CBOE even has the VIX or the Volatility Index Options which is the market estimate of expected volatility and is which is computed from realtime  S & P 500 Index Option Bid/Ask quotes  

I believe the SEBI Advisory Committee for Derivatives has already suggested the introduction of Long Term Derivative Contracts…Why the delay in the Suggestion being adopted for Implementation ? The Operations Framework by Exchanges is already in place for Futures and Options so this should facilitate the Introduction of Long Term Expiration Contracts fairly easily   read more

Sudden Fall in Equities soon !? I can Sense and Feel it…Better Hedge Equities Right away

As Wall Street slaps Washington,Dalal Street will damn Delhi too….It’s been perceived as a STIMU-LIE Package in both countries

Yesterday the DOW teetered more towards the Edge clsoing at 7466,the lowest in six years

It’s just past 2.30 pm in Mumbai and the Sensex and Nifty are struggling to stay over 8800 and 2700 respectively

I can sense and feel that soon,the Dow may just plunge 500 to 1000 points in a Day soon…we will follow as we too will test October 2008 Lows

This Intuition or gut feel is strongly supported by weakening macros fundamentals in USA particularly and the world over in general…The IMF has already stated that it expects many more countries to come to it for Bail-Outs

I was watching the classic Movie ‘Sea Biscuit’ last night on Star Movies…What a parrellel !…The Movie is about a Champion Horse and Horse Racing and is set in the times when America was devastated by the Depression of 1929…The Wealthy became Poor,literally overnight,and lost their Homes and All their Assets….they took to the Highways and settled in poorer conditions….It’s happening allover again,I daresay ! 

If disinclined to sell off equities at these low levels,atleast exercise prudence to fully hedge your equity portfolio right away

You can do this in Three Ways

  • Sell off All or Part of Equities…Hard Call at these Low levels already as Heavy Loss sitting in Portfolios…but it will give you Capital to Grasp Greater Opportunities ahead
  • by committing appropriate additional Funds and Investing in negatively or less positively correlated Investments to Equity…Silver and Gold as Alternative Investments run at the top of my mind  or
  • Go Short in Index or Specific Stock Futures or buy Protected Index or Stock Puts…by shorting Futures ,you are locking in the current value of your equity portfolio…so if the Market fall,so will the value of your portfolio…but this fall will be offset by the gains you make on your Futures Contracts that you shorted…..by buying Protected Puts,you pay the Premium to insure your Equity Portfolio from any Fall,while keeping the upside potential alive…this would seem the best strategy,if you need protection from significant downside,but don’t really have such an intense feeling or sense like I do that this will happen suddenly and soon…It is better to pay a 2%-3% Premium to protect from a 15% to 20% potential downside from here…The OPTIDX Nifty PE with Strike Level of 2700 and Market lot of 50 has a premium of Rs 47 and Rs 142 respectively for Feb 26,2009 and March 26,2009 contracts…You’ll be paying Rs 2350, that’s under 2% costs, on a contract Value of Rs 135000 for a week’s hedge and a high Rs 7100,under 5%  cost, for a month’s hedge…the underlying Nifty is 2717 and it’s just past 2.30 pm
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