Discovering Market Value

Picking winners out of the ever-expanding list of derivative contracts is not an easy task. However, one can choose the front-runners based on the increasing market-wide position limits (MWPL). Derivatives trading is banned if the open interest crosses 95 per cent of the MWPL.

There is a strong co-relation between the MWPL and the market value. The study shows that higher the MWPL, better the chances of an outperformance or underperformance on the part of the derivative contracts.
A rise in the value of securities, accompanied with high MWPL, indicates the creation of long positions. On the other hand, a decline in value coupled with high MWPL, demonstrates short positions. For example, the NSE banned fresh buying in 13 derivatives contracts till the MWPL falls below 80 per cent. Long positions were created in 12 of the contracts, whereas short positions were seen in Gitanjali Gems. IFCI has been the best performer in the derivatives segment in the last one year.
The open interest data of IFCI shows that its derivatives contract was banned for almost a year as its open interest has consistently been above 95 per cent of the MWPL on the very first day of new contracts series. No wonder, IFCI has surged 10 times in the last one year.

Market Wide Position Limits

At the end of each day the Exchange disseminates the aggregate open interest across all Exchanges in the futures and options on individual scrips along with the market wide position limit for that scrip and tests whether the aggregate open interest for any scrip exceeds 95% of the market wide position limit for that scrip. If yes, the Exchange takes note of open positions of all client/ TMs as at the end of that day in that scrip, and from next day onwards the client/ TMs should trade only to decrease their positions through offsetting positions till the normal trading in the scrip is resumed.

The normal trading in the scrip is resumed only after the aggregate open interest across Exchanges comes down to 80% or below of the market wide position limit.
A facility is available on the trading system to display an alert once the open interest on the NSE in the futures and options contract in a security exceeds 60% of the market wide position limit specified for such security. Such alerts are presently displayed at time intervals of 10 minutes.

Are You Investing Or Gambling? By Corry Mithell

Merriam-Webster dictionary defines gambling as: a: to play a game for money or property
b: to bet on an uncertain outcome
to stake something on a contingency : take a chance.

When trading is looked at, gambling takes on a much more complex dynamic than what is presented in the definition. Many traders are gambling without even knowing it; trading in a way or for a reason that is completely dichotomous with success in the markets.
In this article we will look at the hidden ways in which gambling creeps into trading practices, as well as the stimulus that may drive an individual to trade (and possibly gamble) in the first place.


Hidden Gambling Tendencies

It is quite likely that anyone who believes they don't have gambling tendencies will not happily admit to having them if it turns out they are in fact acting on gambling impulses. And yet discovering of what drives us to take certain actions can create change within us as the underlying motivators are discovered by the conscious mind.
Before delving into gambling tendencies when actually trading, there is one tendency that is apparent in many people before trading even takes place. This same motivator continues to impact traders as they gain experience and become regular market participants.

Social Proofing

A person may not even have an interest in trading or investing within the financial markets, but social pressures induce them trade or invest anyway. This is especially common when large numbers of people are talking about investing in the markets (often during the final phase of a bull market). The person feels pressured to conform by their social circle. Thus they invest so as not to disrespect or disregard other's belief's or feel left out.
Buying some stocks or placing some trades in an effort to appease social forces is not gambling in and of itself if the person actually knows what they are doing, but entering into a financial transaction without a solid investment understanding is gambling... regardless of what the social media will portray. This person lacks the knowledge to exert control over the profitability of their choices. There are many variables in the market, and misinformation or disinformation within the investor or trader creates a gambling scenario. Until knowledge has been developed that allows the person to overcome the odds of losing, gambling is taking place with each transaction that occurs. (For a primer on how stocks work, check out our Stock Basics Tutorial.)
Contributing Gambling Factors
Once someone is involved in the financial markets, there is a learning curve, which based on the social proofing discussion above may seem like it is gambling. This may or may not be true based on the individual. Depending on how the person approaches the market will determine if they become a successful trader or remain a perpetual gambler in the financial markets. The following are two traits (among many) which are easily overlooked but contribute to gambling tendencies in traders.

Gambling (Trading) for Excitement

Even a losing trade can stir emotions and a sense of power or satisfaction, especially when related to social proofing. If everyone in a person's social circle is losing money in the markets, losing money on a trade will allow that person to enter the conversation with a story of their own. When a person trades for excitement or social proofing reasons, it is likely that they are trading in a gambling style rather than in a methodical and tested way. Trading the markets is exciting; it links the person into a global network of traders and investors all with different ideas backgrounds and beliefs. Yet getting caught up in the "idea" of trading, the excitement, or emotional highs and lows is likely to detract from acting in a systematic and methodical way.(Learn about how emotions can interfere in trading by reading Master Your Trading Mindtraps.)

Trading to Win, and Not Trading a System

Trading in a methodical and systematic way is important in any odds based scenario. Trading to win seems like the most obvious reason to trade, after all, why trade if you can't win? But there is a hidden detrimental flaw when it comes to this belief and trading. While making money is desired overall result, trading to win can actually drive us further away from the realization of making money. If winning is our prime motivator, the following scenario is likely to play out: Jill buys a stock as she feels it is oversold compared to the rest of the market. The stock continues to fall, placing her in a negative position. Instead of realizing that the stock is not simply oversold and that something else must be going on here, she continues to hold the position, hoping it will come back so she can win (or even break even) on the trade. The focus on winning has forced the trader into the position where they don't get out of bad positions because to do so would be to admit they lost on that trade.
Good traders take many losses, they admit they are wrong and keep the damage small. Not having to win on every trade and taking losses when conditions indicate they should is what allows them to be profitable over many trades. Holding losing positions once original entry conditions have changed or turned negative for the trade means the trader is now gambling and no longer using sound trading methods (if they ever were).(Read about some of the common trading methodologies in our Stock-Picking Strategies Tutorial)

Conclusion

Gambling tendencies run far deeper than what most people initially perceive, and well beyond the standard definitions. Gambling can take the form of needing to socially prove one's self, or acting in a way to be socially accepted which result in taking action in a field they know little about. Gambling in the markets is often evident in people who do it mostly for the emotional high they receive from the excitement and action of the markets. Finally, not trading a system which is methodical and tested, but rather relying on emotion or a must-win attitude to create profits shows the person is gambling in the markets and unlikely to succeed over the course of many trades.

Foreign Funds Hint at Hiking India Allocation

Portfolio investors are positive on the India structural Story. Foreign Fund Managers from GIC, Boston-Based Mass Financial, Jamuss, T Rowe Price, Boston Based Wellington Management, Singapore -based Aberdeen Asset Management and Fidelity, which were recently in India, have indicated that they are looking  for the right opportunites to Match their India  allocation.
( Extracted from The Economic Times, New Delhi,Thursday 25 March 2010)http://niftynext.blogspot.com/2010/03/fii-data-updated-for-23-march-2010.html

Cement Sales Likely to Rise by 12% in March

Sales of cement is likely to go up by 12% in March on demand from real estate and construction sectors, says industry executives and analysts. This would be the third consecutive growth in sales of the building material in a month.
Cement companies are scheduled to announces sales data on March 31.
"There are no dampeners to growth", said Shree Cement managing director Hari Mohan Bangur. Demand is robust and the industry will see healthy growth in March. The growth momentum will continue as there are no dampening Factors."
The growing sales are reflective of a robust demand scenario and Indian companies are expanding capacities from the Current 240 million tonnes. Globaly , India is the Second-Largest cement maker after China.
(Extracted From The Economic Times, New Delhi,Thursday 25 March 2010)
 ( http://niftynext.blogspot.com/2010/03/india-cements-buy-target-12816-march.html )

Dollar Index

Just as the Sensex reflects the general state of the Indian Stock Market, the US Dollar Index (USDX) reflects the general assessments of US Dollar against the other major world currencies. The Index is a weighted geometric mean of the dollar's value compared with Euro(EUR), Japanese Yen(JPY),Pound Sterling(GBP), Canadian dollar(CAD), Sweddish Kroner(SEK) and Swiss franc(CHF). The Dollar Index was instituted in March 1973, soon after the dismantling of the Bretton Woods system. Since then the makeup of the "basket" has been altered  only once, when several European currencies were replaced by the Euro at the Start of 1999. USDX is traded as a futures cintract inthe Intercontinenetal Exchange(ICE) and is also available in exchange traded funds (ETFs). At its start, the value of the US Dollar Index was 100. It has since traed as high as the mid-160s and as low as 70.698 on March 16,2008, the lowest since its inception. It traded at 80.002 by late Tuesday evening .accroding to Indian Standard Time.
(Extracted from The Economic Times,New Delhi ,Wednesday 24 March 2010)

Importance of Cost-Of-Carry

A future Contract is an agreement between two parties to BUY or SELL an underlying asset, including stocks, indices,commoditities or currency, at a certain time in the future at a certain price. Futures contracts are standardized and are traded on the exchange. To facilitate liquidity in futures contracts, the exchange defines certain standard specifications for  a particular contract, including a standard underlying instrument, a standard quantity and quality of that underlying asses ( to be delivered or cash settled), and a standard timing for such a settlement. If you have taken position in equity futures, whether long or short, you have to close the position by entering in an equal and opposite transaction anytime prior to expiry of the contract as there is no delivery of the underlying assest.
The Relationship between Futures Prices and Spot Prices can be summarised in terms of what is commonly known as the COST-OF-CARRY. Typacilly, the cost-of-carry meassures the storage cost plus the interest paid to finance the asest less the income earned on the assest. However, in equity futures,there is no incidence of storage costs as in commodity futures. Moreover, equity has a dividend stream, which is a negative cost if one is long on the futures of the underlying and positive if one is short.
The Pricing of a futures contract is a simple pricess. Using the cost-of-carry logic mentioned above. one can calculate the fair value of a futures contract, The cost-of -carry model used for pricing futures is given below:
F=Se(rT)  Here rT is Power
Where,F is the theoretical Futures prices,
S is the spot Price
e is 2.71828
T is the time to expiration in years and r is the cost of financial ( continuously compounded interest rate)
Suppose ABC Ltd trades in the spot market @ 1150 .the money can be invested @11% p.a. The fair value of a one-month futures cintract in ABC is calculated as follow:-
F=1150x2.718280.11x(1/12)
   =1160
The above example show how to  calculate the futures price when no dividend is expected.
Now we shall see how the futures price is  calculated when divindends are expected. Suppose the Interest rate is 10% and the market price of ABC Ltd is Rs.140. The  company will be declaring a dividend of Rs.10 after 15 Days of purchassing a two-month contract. then the Rs.10 dividend will  be compounded for the remaining 45 days of the Contract.
Therefore,
F=140x2.718280.1x(60/362)-10x2.718280.1x(45/365)
  =132.20
Although cost-of-carry is a critical indicator to judge the movement in the futures market, cost-of-carry in conjunction with open interest is a good indicators of the prevaoling market Sentiments.
Open-Interest is the number if contracts that are not squared off or closed(Futures) or exercised (Option-Buyers) on a particular day. For example, says Mr. R buys a futures contract, and at the end of the day, he does not squre-off his position, then the contract is considered open and the  open interest is said to be one.
1. An Increase  in Open-Interest  with an Increase in cost-of-carry  indicates accumulation of long -position, which means that the price of the underlying is likely to go up in the next few trading sessions.
2. An Increase inopen-interest witha decrease in cost-of-carry indicates addition of short positions,which means that the price of the underlying is likely to go down in the next few trading sessions.
3. Similarly, a fall in open-Interest accompanied by a rise in cost-of-carry indicates closure of short positions, which occurs when the market moves against a trader's exisiting short positon, thereby triggering his stop-loss. This means that the stock is not likely to fall and may witness upside in the next few trading sessions.
4. Likewise, a fall in both the open interest and cost-of-carry indictes closures of long positions,whcih occures when the market moves against a trader's existing long possition,  thereby triggering  his stop-loss.This means that the stock is not likely to observe further upsides and is likely to witness a fall in the next few trading session.