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Just Shoot Me

Bala, 28, Gordon Gekko in the making, pseudo-intellectual, cynic, bibliophile, obsessive compulsive ranter...

Thozhil Ragasiyam

June 20, 2006

Markets went down 30% between May 12 and Jun 14. The bulls were slaughtered left and right and the bears were whipsawed savagely by the extreme volatility. So How does one make money in such a market?.. The answer is simple - use the volatility.

The Buy Straddle is a strategy tailor made for the conditions witnessed in Indian Stock Markets for the past 30 days. And the rewards are modest. A Nifty call and put option bought at the strike of 3200 (on 29th May) would have cost around 260 Rs per lot. (100 X 260 = 26000 cost price). Enter the straddle and let the volatility take care of the rest. Two weeks later the combined prices of 3200 call and put were trading at 400 Rs. (100 x 400 = 40000) - A cool 50% return. A more prudent approach would be to cash in the profits once the profit percentage reaches 20% and migrate to a straddle at different strike.

The downside risk in this strategy is something called time value erosion - since markets are highly volatile, the time value erosion doesnt kick in till the 3 week of the month. So that risk is capped and the trader is safe. So instead of bitching about the markets one sees good profits at lesser risk.

PS : There are only seven trading sessions left to settlement for this month. So dont try this now and get a bloody nose - time value erosion has already set it and is moving fast.
posted by Bala, 3:54 PM

2 Comments:

Never knew that you started blogging again

well welcome back :))
commented by Anonymous Dubukku, 6:12 PM  
dubukku,

never stopped blogging - just stopped tamil blogging.. but was alway blogging :-).. naanavadhu pulambaradha nirutharadhavadhu ;-)
commented by Blogger Bala, 5:09 PM  

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