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Investors have better options

This article was posted on Jun 11, 2009 and is filed under Stock Views

UMBAI: The frenzied rally on Dalal Street since early April seems to be evoking, among many investors, memories of the 2007 bull run and the
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subsequent crash of 2008. But their anxiety is much lower today compared to the last bull run. This is because today most traders and investors, including retail, have played it safe by reducing their exposure to futures and hedging their positions by betting on options trading.

In the case of futures, investors can take leveraged bets as they only have to pay prescribed margins. For instance, if you buy a contract worth Rs 2 lakh by paying a margin of say Rs 50,000 or 25% of the contract value, apart from the daily mark-to-market margin. If the futures contract rate rises by 25%, you can make a gain of 100% on your margin payment. However, if the bets go wrong, the loss would also be equally large. This is what happened when the market crashed in January 2008.

On the other hand, options are like insurance policies. In the case of options (call and put), there are different payoffs for the buyer and seller which are relatively less risky. Depending upon his risk appetite, a trader can take bets based on his view on the markets. It can be a combination of strategies and may also be taken along with positions in the futures.

In the past three months, options have contributed 40% of the total turnover in the equity derivatives segment on NSE, against 10% in the three months preceding January 2008. According to analysts, the increased activity in options limits the possibility of a sharp downside.

Experts say traders are cautious about taking naked bets through futures this time. “The contribution of options in the market is higher than the last time, when the market peaked. This suggests that the market is cautious. Due to this, it is unlikely that the market would see the kind of crash it had witnessed last year,” said Gurudatta Dhanokar, technical analyst and derivative strategist at Almondz Global Securities. “Further, the last time around, the market was swayed by euphoria, driven by liquidity and leverage. This is not the case right now,” he said.

source: Economictimes

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