Tuesday, April 27, 2010

Basic of Options

Option, an instrument used for hedging by taking a view on the future direction of market which help in generating income for investors under various market conditions. Option can be simply defined as a contract which gives the buyer the right but not the obligation to buy (call option) or to sell (put option) a particular asset at a particular price in future. For every option, buyer has to pay an amount to the seller know as Option premium or option price.

Here, I would try to explain the basic options payoffs. It is a known fact that option results in non-linear payoff i.e. losses for buyer of an option is limited whereas profits are potentially unlimited.

Long Asset (Without option)

Long refers to buying the asset at the underlying price when investor perceives the market to be bullish. For example, buyer buys a share of XYZ Ltd at Rs 2500 and decides to sell it at a future date at an unknown price. The investor is said to be ‘long’ the asset. As expected if market turns out to be bullish such that share prices goes up, buyer makes profits and if share price falls, he loses.

Short Asset (Without Option)

Short refers to selling of asset at the underlying price and buys it back at a future date at an unknown price. Once the share is sold, the investor is said to be ‘short’ the asset. For example, buyer sells a share of XYZ Ltd at Rs 2500 as he perceives the market to be bearish. If share price falls, he profits and vice versa.

Buyer of Call Options (Long Call)

A call option gives the buyer the right to buy the underlying asset at the strike price specified in the option. Now here the profit/ loss of the buyer depend on the spot price of the share. In this case, buyer along with the share (Long Asset) buys an option at the premium price which he pays to the seller of the option. Every option has an expiration date and strike price (K) which is specified in the option contract.
If upon expiration, spot price > strike price (In the Money), buyer makes a profit. If spot price < strike price (Out of the Money), buyer lets the option expire un-exercised. His loss is them limited to the premium he paid for buying the option.
For example, if buyer buys a 3 month (expiration date) Nifty 2500 call option at a premium of 100. If upon expiration spot price is 3000 then buyer makes a profit of 400 (3000-2500+100). However if spot price is 2100, buyer lets the option expire and his losses are limited only to Rs 100 (the premium).

It is important to remember that profit for buyer of call option is unlimited and losses are limited.

Seller of Call Options (Short Call)

Seller or Writer is the one who charges the premium to the buyer of call option. Whatever is the buyer’s profit is the seller’s loss. If upon expiration, spot price exceeds strike price, buyer will exercise the option on writer thus writer start making losses. However when buyer let the option expire un-exercised (strike price>spot price) writer gets to keep the premium which is his profit.

It is important to remember that profit for seller of call option is limited and losses are unlimited.

Buyer of Put Options (Long Put)

A put option gives the buyer the right to sell the underlying asset at the strike price specified in the option. Profit/loss of buyer again depends on the spot price of the underlying. Upon expiration if spot price is below strike price (In the Money), buyer makes a profit. If spot price > strike price (Out of the money), buyer makes a loss. His loss is again the premium he paid to the seller of put option.

It is important to remember that profit for buyer of put option is unlimited and losses are limited.

Seller of Put Options (Short Put)

Seller or Writer is the one who charges the premium to the buyer of put option. Whatever is the buyer’s profit is the seller’s loss. If upon expiration, strike price exceeds spot price, buyer will exercise the option on writer thus writer start making losses. However when buyer let the option expire un-exercised (spot price>strike price) writer gets to keep the premium which is his profit.

It is important to remember that profit for seller of put option is limited and losses are unlimited.

The above explained six payoffs are the basic ones which are molded and redervied to form various option strategies used by investors to maximize their profits and minimize risks. I will try to explain it more clearly through graphs in my next blog.

Source: National Stock exchange of India Ltd.

Friday, March 26, 2010

Book Review--The Monk who sold his Ferrari..

It was March 2007, when I first started reading the book ‘The monk who sold his Ferrari by Robin Sharma’. However I could not complete it due to my pre engagements and lack of interest after reading few pages. During my summers, I again got the prospect of reading it…

Robin Sharma has always been a fabulous storyteller and this notion of mine has been reassured after reading this enlightening book. At first look, the title of the novel is misleading but as you keep on reading…You will realize how Ferrari has been associated with the millionaire lawyer turned enlightened monk. A beautifully woven story with few incidents and objects is core of the novel..

Garden being symbolized as human mind to emphasize on cultivating our mind• The quality of your life is determined by the quality of your thoughts
• There are no mistakes - only lessons. See setbacks as opportunities for personal expansion and spiritual growth

Light house in the garden specifies the purpose of life constantly.• The purpose of life is a life of purpose
• Discovering and then realizing your lifework brings lasting fulfillment
• Set clearly defined personal, professional and spiritual goals, and then have the courage to act on them.
A 90 kg weight sumo wrestler is being resembled to an important concept ‘Kaizen’ of continuous improvement.• Enlightenment comes through the consistent cultivation of your mind, body and soul.

And the list is on…it talks about self discipline, time as the most precious commodity and our ultimate purpose in life is to selflessly serve others. The one thing which separates it from other self help books is the techniques which have been given to achieve the transformation that can enhance the life of every individual…A must read for all!!
Few Lines from the novel…
on an average day
the average person runs about sixty thousand thoughts through
his mind. What really amazed me though, was that ninety-five
percent of those thoughts were the same as the ones you thought
the day before!"
This is the tyranny of impoverished thinking. Those
people who think the same thoughts every day, most of them
negative, have fallen into bad mental habits. Rather than focusing on all the good in their lives and thinking of ways to make things even better, they are captives of their pasts.

Now am looking forward to read ‘I who bought his ferrari’ by some other author..

Saturday, January 16, 2010

Gender Inequality In India..

India has always been a victim of gender inequality, if we go by statistics, The World Economic Forum Gender Gap Index 2007 ranked India at the 114th position. In 2008, situation remained same with 113rd rank. Rank is calculated based on economic, political, educational and health parities among 134 countries. Surprisingly, in 2009ranking, Iceland stood 1st surpassing all other Nations whereas India struggled to stick to 114th.

We Indians often talk about Naina Lal Kidwai of HSBC India and ICICI’s Chanda Kocher, Indira Nooyi. However study shows that not more than 4% women occupy senior level positions and only 1% organization have women CEO.

Today, I read that Multinational Corporations (MNC) is inclined to hire women for the top jobs. They want to infuse gender diversity. However, it is also mandatory to be competitive in global market. Multinational Corporations (MNCs) must diversify their workforce in the international arena. This diversification, to be meaningful, must extend across both gender and cultural boundaries. With the increasing inclination of fairer sex towards MNC’s, it is the best time to leverage on that.

Corporations find it lucrative and advantageous as women attrition rate has always been low as compared to male counterparts. Women prefer to be stable and attach value to the work they do. Apart from that, MNC considers them to be good communicator and negotiator.

However, the problem persists because of lack of higher education opportunities’ for women in the male dominated country, India. Another blockage is the mindset of women towards career. They are always at the crossroads of family and career.

Step taken by MNC’s may prove to be a boon towards bridging the gap of gender inequality and hopefully place India in top 50 in the coming years in Gender Gap Index.
Keep your fingers crossed!

Saturday, December 19, 2009

Indira, a biography...Book Review

The author Pupul Jayakar, a close friend and confidant of Indira Gandhi. She traces the history of the Nehru family right from the Mughal times, where an ancestor of theNehru family occupied a position in the court of the Mughal Emperor, FarrukhSiyar. The book deals with the journey of the ancestors of the Nehru family fromthe Kashmir valley to the court of the Emperor in Delhi and to their finalsettlement in Allahabad.

Indira was born on 19th November 1917 in Allahabad, India, to Jawaharlal and Kamala Nehru.

Book is clearly segregated in parts, first 1919-1934 where Jawaharlal Nehru, India’s first Prime Minister and Indira’s father constantly advised her to mould her future through the answers to the questions which have been put up by the circumstances. Book gives you an insight about Indira’s unpleasant childhood as she was frequently a victim of sardonic laughter by her aunt, VijyaLakshmi Pandit. Indira’s encounter with freedom movement came at an early age of 4 when her father and grandfather were jailed for the first time.

1935-1945, this was the period when she suffered a personal loss in form of her mother Kamala’s demise by tuberculosis. Indira grew as a solemn, introvert and precocious child.

1946-1966, India’s independence with the ascension of Indira as a fierce and modern leader. Meanwhile, she took the audacious step to marry Feroz Gandhi who was not only a parsi but his ideologies was completely different as of her. Year 1966, also witnessed the oath of Indira as the first lady Prime Minister of India.

Indira’s political career climbed all heights; however emergency calamity, cases of corruption and nepotism always surrounded her. Lady as fierce as Indira seemed precarious in her decision at times because of her overwhelming love towards her son, Sanjay. Nevertheless, nationalization of banks, initiation of Green revolution and Lenin Peace Prize are some of the timeline achievements.

One thing in which book lack behind is the critical judgments, it may be because of the close intimacy shared by Pupul and Indira.

Lastly, book acts as a huge source of inspiration for women who aspire in participating in political activities and believe in bringing out change in the system.

Monday, December 7, 2009

Gay Rights..

Last night, I watched ‘Milk’ a movie on gay rights and could not help myself pondering over the subject. We can not deny that Homosexuals have been a part of our society since long.

Religion has played a significant role in shaping Indian customs and traditions. While homosexuality has not been explicitly mentioned in the religious texts central to Hinduism, the largest religion in India. Some interpretations have been viewed as condemning homosexuality. However there have been arguments that homosexuality was both prevalent and accepted in ancient Hindu society.

Lesbian, Gay, Bisexual and Transgender (LGBT) community have been striving for an equal status; several marches in cities like Delhi, Bangalore, Pondicherry and Orissa have shown their presence in abundance but nothing substantial was done legally until July 2009.
Section 377 of Indian Penal Code formed in 1861 was restructured and redefined, as it pertains to consensual sex among people above the age of 18, in violation of important parts of India’s Constitution. “Consensual sex amongst adults is legal, which includes even gay sex and sex among the same sexes”, this was the verdict.

A wave of joy and victory among the perceived “deviant” group with equal intensity of opposition and venomous from religious groups all over the country was evident.

In spite of this, some questions are still unanswered, such as “Will this law stand good for long, or the Supreme Court may review it under the light of vehement opposition?”
“Will it change the perception in the mind, as it has always been considered as taboo”?

Legalizing is just a baby step to the long road; gigantic stigma attached to it has yet not allowed many homosexuals to get rid off their disguised and double lives. In rural areas, it is considered as an evil disease and people are treated for it.

Need of the hour is to educate people and raise public awareness with the support of Government. It’s just a step to change the attitude of others towards LGBT. They all over the world deserved to be treated with dignity and humility.

Let’s take a step for an egalitarian culture!

PS: With all due respect to the ‘Gays and Lesbians’ community, I would like to state that am straight and have no inclinations of any kind towards them.

Wednesday, November 25, 2009

Terror Tourism..

A new face of tourism came into existence when Former Chief Minister VilasRao Deshmukh along with his son Ritesh and a renowned bollywood director Ram Gopal Varma went to visit the Hotel Taj after the 26th November terrorist attack. This audacity also cost him his job but it led to the beginning of a new era for tourism.

Tourism in history signifies, bringing you face to face with startling diversity - from different terrains and languages to a wealth of regional cultures.

But ironically, almost a year after the Mumbai terror attacks, what is now the most popular affair in Mumbai is "Terror Tourism". To put simply, it is a visit to those places which were attacked during the November 26-29, 2008 by Pakistani fidayeens, who made their ingress from the Arabian Sea.It is just not the foreigners who are keen about this affair but even the local Mumbaikars, who visit these places on weekends.

There are even guides to take you around these places explaining the attacks. Travel and tourism companies have started cashing in on the attacks. Till 2008 November, Gateway of India was the biggest tourist attraction in Mumbai but after 26/11 all tourists want to visit Taj Hotel site to get the details of the terror attacks. One needs to shell out approximately Rs 2,000 to take a look at the bullet marks at Nariman House or get an elaborate description of gunbattle at Cama Hospital and the three-day siege at Taj Hotel.

While international travel agents are also travelling to India to visit the Mumbai terror attacks site, many tourists think this kind of tourism should not be promoted.

Statistically, recent terrorist attacks have resulted in 15-20% decline in growth of tourism industry; on the other hand, terror tourism alone at Mumbai has contributed 5% to the sector.

Now, the call is on us whether to promote it or not!

Sunday, November 22, 2009


Technically recession is confirmed if GDP (Gross Domestic Product) growth is negative for a period of two or more consecutive quarters. However, this definition of recession does not take into account several other important macroeconomic factors like national unemployment rates, consumer confidence, spending level etc. As a result there is no universally accepted definition of recession. The agency that is officially in charge of declaring a recession in the United States is known as the National Bureau of Economic Research, or NBER. The NBER defines a recession as a “significant decline in economic activity lasting more than a few months.”

Shapes of Recovery

Recession shapes are used by economists to describe different types of recessions. There is no specific academic theory or classification system for recession shapes; rather the terminology is used as informal shorthand to characterize recessions and their recoveries. The most commonly used terms are V-shaped, U-shaped, W-shaped, and L-shaped recessions. The shapes take their names from the approximate shape economic data make in graphs during recessions. The letters can also be applied referring to the recoveries for example V-shaped recovery.

V Shaped Recovery - In a V-shaped recovery, the economy suffers a sharp but brief period of economic decline with a clearly defined trough, followed by a strong recovery. A clear example of a V-shaped recession is the Recession of 1953 in the United States. In 1953 growth began to slow, in the third quarter, the economy shrank by 2.4 percent. In the fourth quarter the economy shrank by 6.2 percent, and in the first quarter of 1954 it shrank by 2 percent before returning to growth. By the fourth quarter of 1954, the economy was growing at an 8 percent pace, well above the trend.

U Shaped Recovery - In a U-shaped recovery GDP may shrink for several quarters, and only slowly return to trend growth. The Recession of 1973–75 can be considered a U-shaped recession. In early 1973 the economy began to contract and continued to decline for nearly two years. After hitting the bottom, the economy climbed back to recovery in only in 1975.

W Shaped Recovery ­- A W-shaped recovery or "double dip" recession occurs when the economy has a recession, emerges from the recession with a short period of growth, but quickly falls back into recession. The Early 1980s recession in the United States is cited as an example of a W-shaped recession.

L Shaped Recovery - An L-shaped recovery occurs when an economy has a severe recession and does not return to trend line growth for many years, if ever. The steep drop, followed by a flat line makes the shape of an L. This is the most severe of the different shapes of recession. A classic example of an L-shaped recession occurred in Japan following the bursting of the Japanese asset price bubble in 1990. From the end of World War II throughout the 1980s, Japan's economy was growing robustly. In the late 1980s a massive asset-price bubble developed in Japan. After the bubble burst the economy suffered from deflation, and experienced years of sluggish growth; never returning to the higher growth Japan experienced from 1950-1990.

Now it's upto You to decide what kind of recession we are going through!