Market Outlook : Long Term View

Often we are puzzled about the direction of the market. Many of us usually buy when everyone buys and sell in panic when everyone is selling. Though handling such instances could be psychologically challenging, the use of technical charts could come in handy in such situations.

After long market correction in 2008, Markets have actually started on an uptrend. But the actual potential of the market in the long term is little understood. That makes many book short term profit or loss.

For instance, today (11th Jun 2010) markets ended the week on a buyoant mode. Lots of positive news from global markets helped the domestic market rally by 140 points on the sensex to 17050 levels. And Nifty ended up at 5119 (+40 pts). Those few investors who had these technical views before hand bought boldly and are now sitting in rich profits. Many of the investors who are sitting on the sideline would be worried if the market has got some more steam left.

Here is a simple analysis of a technical chart.

(1) Nifty on 14-Aug-2008 was at 4430
(2) From 4430, Nifty fell to 2584 on 31-Oct-2008
(3) Now look into the table below. You would actually see the markets actually retracing the uptrend as per Fibnocci calculations.
(4) As calculated, markets have reached exactly 5301 on 9th April 2010 and have fallen down. Now market is now picking up and closed today at 5119

Now the outlook:
The first target of the market in the short term could be 5301, followed by 5478. But after 5301 itself, market could be in the long term uptrend leading to 6131. Beyond that you could see much higher values on the NSE.

Many may now wonder : what about the short term trend reversals?
Technically at each retracement levels, market could slide.

Markets could see major reversals on 8-Oct-2010, 25-Feb-2011 and 29-Apr-2011.
Probably we could touch all time high of 6131 by these dates.

Now with this picture in mind, Long term investors can stay invested and pick stock when ever market falls.

Movement of Options

An option price increases or decreases with relevance to Nifty Spot Price. In a rising market, call option price increases where as a put option price decreases. Viceversa is true in a falling market.

For example:



Points to Note:

At the time of initiating an option trade, both of them are in the money. But when market rises, Call remains "In the Money". But Put option goes out of Money.

Similarly in a falling market, Call goes out of the money and Put remains in the Money

Option Trading : Fail Safe Theory

Our Agenda:
...........
We are primarily going to sell (write) call and put option only on nifty (and not on stocks).

We need to understand the following:
(1) Nifty spot Price: This is the NSE index value
For Eg: NSE Nifty Spot price is = 5000
(2) Strike price (Call and Put price) should be 5000
(3) Check the price of call and put. Either it should be equal + or minus 10 points and the total should be above 300.
(4) Per Lot means a pair of Call & Put Option

An illustration:

Understanding Options

What is an Option:

It is the right to buy or sell but not the obligation.

For instance if you want to buy 1000 shares of TATA Steel at current price of Rs.500 hoping that the price would rise, you normally buy it by paying Investing 5,00,000 (500*1000). As the price rises, say it becomes Rs.600, then you may opt to sell booking a profit of Rs.`100 per share or Rs.1 lakh in total.

Instead, you can make an advance payment (premium) and hold on to 1000 shares of TATA Steel buy buying its CALL Option. In future, if the price rises, the premium also rises. Then you can square up (sell) the call option and book your profit to the extent of premium. It needs to be noted that the rise in premium need not be propotionate to the rise in share price.

Alternatively if the share price falls, then your call premium decreases and sometime you may lose money to the extent of the premium.

It would now be clear that you have unlimited upside potential but limited downside risk.

Types of Options:

Call option - It is the right to buy but not the obligation to sell
- Here the Profit is Unlimited
Put Option - It is the right to buy but not the obligation to sell

When you sell the call option, it is called Call writing. Here the profit is limited to the premium earned.

Methods of using options :
--------------------------
Either you can BUY Call or Put Option
or
You can write (sell) Call or Put Option

Concepts to understand:
-----------------------
In the Money : If the Nifty spot price increases by Rs.100, call will increase by Rs.75 to Rs.80.

At the Money : If the Nifty spot price increases by Rs.100, call will increase by Rs.50.

Out of the Money : If the Nifty spot price increases by Rs.100, call will increase by Rs.30.

In our theory we would enter the option trading "In Money or At the Money"

An Intro to Arasar Ideas

Many a times people trade in stock market with an eye on winning. But many traders are not confident of making a winning trade. Many of them follow the market after the best part of it is over.

In this website, I intend to :

(1) propose theories which would have higher probability of success.
(2) analyse the short term trend and judge the intraday levels
(3) capture the long term trend which investors could hold on for long duration
(4) step by step approach to trading
(5) break myths of investing
(6) create tutorial for basis of analytical investing