Diversified Portfolio Picks

These would be my picks for a diversified portfolio:

1. AAPL (exposure to IPOD, Mac related growth)
2. GOOG (Tech upside)
3. RHI (Robert Half.......HR area, when hiring is up, these guys shud do well)
4. Goldman sachs (IB.....wat more wud i say)
5. Valero (a energy company that hedges agressively)
6. ICICI bank (indian bank...to capture some of the growth happenin in India)
7. STZ (constellation brand..they r in wine and beer, i am bullish on growth in wine)
8. Pfizer (PFE).........pharma
9. Lockheed Martin (LMT).........defense, safe bet in these uncertain times
10. Bellsouth (BLS)............Telecom

Entered 30 Call at 2.05 FTO

Tech Analysis and Options

Before i go back into Options, I will do one more RANT on studying stocks. Considering you have picked a stock based on Fundamental Analysis (..or it might just be a long term pick in a Stock Magazine...usually this works...in good times, like now), then the hard part is find out if this stock is going up or down in the short term.
If you are just a equity (stock) investor, this is the most important thing....... hope you understand why. But now considering you are planning to buy or sell a option, one might think the short term movement of the underlying stock is of no importance (tomorrows value of the underlying, does not impact our......options value very much.....considering there is lot of time to maturity on the option). The best example of this is the second TXU option trade posted on this blog, the day after i executed a butterfly strategy, the stock moved like 8% into an area where if it stays till maturity, one month away, i could maximize profits, but since it happened the very next day, after i placed my orders, i was hardly up any money.

Coming back to the point: why short term movement in the underlying is important? because the market makes the buying call options pricey, if the trend of the underlying is upward.

So what can you do about it: analyse the underlyings technicals, find if it is near a support level, if yes, even if the short term trend of the underlying is downward, if the long term trend is up, you can buy the option, and it will be cheap, since the trend is down, the market will give it to you at a cheaper premium (than otherwise).

Stocks before Options

Actually I got a query to understand equity (stock) investing, i guess this is an even better starting point.
Before investing one needs to know, the following:
1. Time horizon, one is investing for
2. trading style, depending on lifestyle and money to invest
3. purpose, is this your long term savings, is this risk capital (meaning u cud lose it, without much effect in your life style).

The answer to your third question, will impact the kind of investment vehicles you will get into, and cannot be answered in a general basis....lots of variables need to be considered, and a custom solution has to be got for each induvidual.
The answer for the second (and first) is much easier, on one extreme is a daytrader who buys and sells using Technical analysis, holding the equity for no longer than 15 minutes, while on the other extreme are people like Warren Buffet who do just loads of Fundamental Analysis and plan to hold the stock forever...untill the fundamentals change.

Since i cant possibly teach Technical Analysis here...check out www.stockcharts.com and then go to chart schools tab. Technical Analysis works because most players in the market use them, the trendlines, support and resistance levels are basics every trader must know.

Fundamental Analysis, this is what is used to really pick stocks to invest in, then technical analysis must be used to time the entry and exit into these stocks.

Fundamental Analysis: simply put, its finding the true value of the share, if the true value is less the market value, then this stock must be in your buy list (but buy it only when your technical indicators indicate "time to buy").

Best Tip ever heard in the market: "Buy Low Sell High"

So what are these options

As I have been trying to educate, a lot of otherwise very wise and knowledgable people about the world of option trading, I have decided to write about this into my blog. so now i will be spared the teaching bit (actually it was fun, the first few times.....i liked the attention i was getting...but not anymore).
Options are a very deep topic (atleast compared to everything else in Business), and most people dont understand them, or why they are used.

Firstly let me list out like an index, what all do i have to cover for someone to know about options, my idea is for a reader to get A-Z knowledge to trade or atleast understand options, by the time i am done writing about this...... maybe readers can take the hint and buy a book from amazon (thru my search bar of course).

1. What are options, common types, history
2. who uses them, why
3. risks of speculating using options
4. option strategies
5. Option pricing
6. Black Scholes,
7. Greeks
8. Implied Volatility
9. Binomial
10. Option Premium skewness

Let me see, how far i go with this......... anywayz while you are here, check out the advertisements, maybe there is something of relevance to you..

Price chart for TXU butterfly

Some new things that might be of concern to a option trader, Implied Volatility. Here we see the may options I.Vol, the put vol, is higer than the Call vol, so if we want a Long position in Volatility (like in my earlier post, where i will benefit, if the volatility of the underlying increases), use the Calls...... this is because, i am assuming that a Call or Put of same strike price should have equivalent implied volatility (we dont see that here, at those higher strikes, indicating at these higer strikes, buying puts is costly, while selling calls gives u less returns.....so covered call positions not so profitable) : the above paragraph is just an analysis of the above charts implications.

TXU FinalPos. P/L
42.75 0 0.4
43.75 0 0.4
44.75 0 0.4
45 0 0.4
45.25 -0.25 0.15
45.5 -0.5 -0.1
45.75 -0.75 -0.35
46 -1 -0.6
46.25 -1.25 -0.85
46.5 -1.5 -1.1
46.75 -1.75 -1.35
47 -2 -1.6
47.25 -2.25 -1.85
47.5 -2.5 -2.1
47.75 -2.25 -1.85
48 -2 -1.6
48.25 -1.75 -1.35
48.5 -1.5 -1.1
48.75 -1.25 -0.85
49 -1 -0.6
49.25 -0.75 -0.35
49.5 -0.5 -0.1
49.75 -0.25 0.15
50 0 0.4
50.25 0 0.4
50.5 0 0.4
50.75 0 0.4
51 0 0.4
51.25 0 0.4
51.5 0 0.4

While the above would be the different Profit or loss situations, if the price of TXU ends up in one of the prices indicated under heading TXU. Below table gives profit/Loss position as of today
here 1., 2. 3. indicate the 3 trades in the previous post

S 1. 2*2. 3 Position P/L
42.75 $0.7692 $0.4844 $0.0526 $0.0625
43.75 $1.1336 $0.8124 $0.1037 -$0.0249
44.75 $1.5946 $1.2845 $0.1900 -$0.1000
45 $1.7250 $1.4281 $0.2187 -$0.1156
45.25 $1.8615 $1.5828 $0.2508 -$0.1295
45.5 $2.0039 $1.7486 $0.2864 -$0.1417
45.75 $2.1522 $1.9259 $0.3258 -$0.1521
46 $2.3062 $2.1149 $0.3693 -$0.1606
46.25 $2.4658 $2.3157 $0.4171 -$0.1672
46.5 $2.6309 $2.5286 $0.4693 -$0.1717
46.75 $2.8013 $2.7534 $0.5263 -$0.1742
47 $2.9768 $2.9903 $0.5882 -$0.1746
47.25 $3.1573 $3.2393 $0.6551 -$0.1731
47.5 $3.3425 $3.5003 $0.7274 -$0.1696
47.75 $3.5322 $3.7731 $0.8051 -$0.1642
48 $3.7264 $4.0577 $0.8883 -$0.1570
48.25 $3.9246 $4.3539 $0.9773 -$0.1480
48.5 $4.1269 $4.6614 $1.0721 -$0.1375
48.75 $4.3328 $4.9800 $1.1727 -$0.1255
49 $4.5423 $5.3095 $1.2793 -$0.1121
49.25 $4.7551 $5.6494 $1.3919 -$0.0975
49.5 $4.9710 $5.9995 $1.5104 -$0.0819
49.75 $5.1898 $6.3595 $1.6350 -$0.0653
50 $5.4114 $6.7289 $1.7655 -$0.0480
50.25 $5.6355 $7.1073 $1.9019 -$0.0300
50.5 $5.8619 $7.4945 $2.0441 -$0.0116
50.75 $6.0906 $7.8899 $2.1921 $0.0072

butterfly on TXU

Short Butterfly:
4 Trades, Limited upside, limited downside, betting on volatility
Trades Cash Flow
1. Sell Call strike = 45 + 4.40
2. Buy 2 Calls strike =47.50 - 5.30 (2*2.65)
3. Sell Call strike = 50 + 1.30

Initial cash flow = 0.40 cents inflow

If the position is kept open till expiry on May 19th, the max profit to expect = 0.40 cents
max loss is when TXU closes on may 19th, at $47.50. we lose $2.1

This trade is based on Technical analysis on TXU, and Implied Vol analysis (i gotta a chart on Implied volatility... maybe i will post it...let me see if anyone is interested..lol)

Dubya coming 4 my graduation

Bush to speak at commencement

John Estus
Staff Writer

Dubya’s a comin’ to town.

The White House announced President George W. Bush’s plans to deliver the commencement speech at OSU’s spring graduation ceremony Thursday, confirming weeks of rumors and thrusting the university to the national spotlight.

The May 6 ceremony has been moved to Boone Pickens Stadium to accommodate an expected crowd of about 40,000 students and their families and friends. The two ceremonies previously scheduled at Gallagher-Iba Arena have been combined into one all-college ceremony open to the public.

Covertible Bond Mutual funds

http://www.thestreet.com/funds/funds/872317.html

Check the above site for info. regarding Convertible Bond Mutual funds. if you don't like the risk in equity, and still want to have the upside convertible bonds are good.
But disadvantages are: these are usually sub-ordinate debentures, so in case of bankruptcy, u get a worse deal than Bonds.
- lower interest rates
- sometimes they come with Call features, so if equity goes up too much, the bonds might be recalled by the company (not always a very bad feature)
- more pricy than ordinary bonds, so if the company equity does not rise at all, u get a bad deal compared to ordinary (plain vanilla) bonds.
- The big established safe companies usually dont give out convertible bonds.

So if u dont want to deal with bond picking problems, then mutual funds that focus on them are the best. look at the above article, and if u need more inputs ....please do ask.

Exit strategy for AMAT and TXU, FTO

AMAT: if the Put position is closed the minimum we should recieve is 0.65 cents, maximum we should (accord. to current market price of the option) recieve is 0.70 cents. we will hold on to the Call option....untill it gets some value (if it does we will sell it as soon as there are buyers for it at 0.05 cents).
So Final result:
Total investment: 0.45 cents
Total assured minimum return: 0.65 cents
% return : 44% profit minimum (the call option could still add to the value, in which case, we get: 55%)

TXU: Total investment: $2.95
Value of current position (if we liquidate): $2.90
as soon as TXU falls a little further, we will be in profit, then decision can be made as to if we should liquidate.
- considering there are less than 10 days for option expiration, we need to close this position to caputure as much "theta" as possible.

FTO position is for May expiration, so as of now we will not do anything about it.

FTO earlier post .. all trades to be done on May options

FTO earlier post .. all trades to be done on May options

FTO bull spread

FTO	C	P	Value	P/L
62.5	0	0	0	-1.3
63	0	0	0	-1.3
63.5	0	0	0	-1.3
64	0	0	0	-1.3
64.5	0	0	0	-1.3
65	0	0	0	-1.3
65.5	0.5	0	0.5	-0.8
66	1	0	1	-0.3
66.5	1.5	0	1.5	0.2
67	2	0	2	0.7
67.5	2.5	0	2.5	1.2
68	3	0	3	1.7
68.5	3.5	0	3.5	2.2
69	4	0	4	2.7
69.5	4.5	0	4.5	3.2
70	5	0	5	3.7
70.5	5.5	-0.5	5	3.7
71	6	-1	5	3.7
71.5	6.5	-1.5	5	3.7
72	7	-2	5	3.7
72.5	7.5	-2.5	5	3.7
	Buy 65 Strike FTO Calls at 2.45
	Sell 70 Strike FTO Calls at 1.15
	Return objective =		3.7
	Total Investment (max risk) =		1.3

AMAT buy strangle

AMAT buy Strangle: buy Call Strike 19 at 0.30, buy Put strike 18 at 0.15. Current price of AMAT at 18.36
Exit strategy1: at 17.5 close put position - then close call at premium of atleast 0.05
Exit Strategy2: at 19.5 close call position - then close put at premium of atleast 0.05
minimum return goal 11.11%, max loss 0.45 cents per contract

AMAT	Call	Put	Total Val	P/L
17	0	1	1	0.55
17.25	0	0.75	0.75	0.3
17.5	0	0.5	0.5	0.05
17.75	0	0.25	0.25	-0.2
18	0	0	0	-0.45
18.25	0	0	0	-0.45
18.5	0	0	0	-0.45
18.75	0	0	0	-0.45
19	0	0	0	-0.45
19.25	0.25	0	0.25	-0.2
19.5	0.5	0	0.5	0.05
19.75	0.75	0	0.75	0.3
20	1	0	1	0.55

convertibility of INR

Is there money to be made, from the convertibility of the Indian Rupee. Current INR/US$ exchange is such that 42 odd rupees for every dollar, but the current strenght of economy and foreign inflows and investments into india could mean, a strengthening of the currency when INR becomes convertible, so this 1:42 ratio between $/INR could change to something like 1:35 (more analysis required on this number).
So if money is sent to india today for every dollar 42 rupees is got, this money is put in short term investments (bonds or blue chip indian equity) untill convertibility of INR happens (which is expected this year.....Dr. Manmohan Singh has promised this). Once the exchange rate changes to 1:35, if we liquidate our investment, and bring money back to US, we will effectively get 1 $ for every 35 rupees. This is 20% gain, without considering the returns on the investment while the money is in India waiting for the conversion to happen.

Warning: the effect on INR after being made convertible is a debatable issue, my view is it will strengthen.......as more international money will flow into the fast growing indian economy, and asset market

On Bonds Munis and Convertibles

The below link is about Municipal (Munis) Bonds (Answer to Indu's query in there)
http://www.investopedia.com/articles/bonds/05/022805.asp
Important benefits of using Munis are that they are Tax exempt, but on the downside is the low returns compared to market.

Convertible Bonds, these are awesome instruments (I am tickled by the thought of them). They have the benefits of a bond (low risk... though with lower return than a convential bond), and also have the option to tap the upside potential of the equity's return at maturity of the Bond, with no downside risk (meaning, if the share prices go up, you could swap the bonds for shares, in the initial bond-equity swap ratio (and get the equities return), but if the share prices fall, you could give up the option to swap into equity and get the Face value back.
So this could be a long term investment strategy on a corporate equity, without the downside risk, and with garunteed dividends (thats another way to look at this).
(a good introduction to all this is avaialbe at)
http://www.investopedia.com/articles/01/052301.asp

Arun NYMEX Energy Trading

Now that i am serious about this blog, I guess people who come here might need to know me (the guy in the center is me).... though as of now i am expecting only people i know to view this blogspace, i will be thrilled if others end up here.

Arun Aravind Financial Site

Google toolbar

Learnt today to post thru my google toolbar:
I am getting serious about this blogging.

http://www.nasdaq.com/options/education_area.stm

this above link will educate u on options (thats if u want to get entangled in that web)

Bollywood wallpaper by Arun

Option Strategy TXU Buy Straddle

Option	Buy Open	1	TXUDW.OPA	TXU APR 2006 47.5000 CALL	1.25	25.00	-150.00
Option	Buy Open	1	TXUPW.OPA	TXU APR 2006 47.5000 PUT	1.70	25.00	-195.00

This is called a Buy Straddle, I have done it on TXU, whose current price is 46.9
Also see attached spread sheet to understand my strategy, there are two sheets u need to look at, first one is to identify the ideal prices for the two options, (u will see that the market prices are slightly away from wat the prices shud be if priced by Black Scholes)
The next sheet shows, at what prices of TXU will u see profit.

U could close the positions induvidually or together or wait for expiry

Below are the Profit/Loss potential for the various end of month TXU positions, but i would close much before expiry, with higher profits using selective option closing strategy.

TXU	Call	Put	Total Val	P/L
40	0	7.5	7.5	4.55
41	0	6.5	6.5	3.55
42	0	5.5	5.5	2.55
43	0	4.5	4.5	1.55
44	0	3.5	3.5	0.55
45	0	2.5	2.5	-0.45
46	0	1.5	1.5	-1.45
47	0	0.5	0.5	-2.45
48	0.5	0	0.5	-2.45
49	1.5	0	1.5	-1.45
50	2.5	0	2.5	-0.45
51	3.5	0	3.5	0.55
52	4.5	0	4.5	1.55
53	5.5	0	5.5	2.55
54	6.5	0	6.5	3.55
55	7.5	0	7.5	4.55
56	8.5	0	8.5	5.55
57	9.5	0	9.5	6.55
58	10.5	0	10.5	7.55
59	11.5	0	11.5	8.55
60	12.5	0	12.5	9.55

Crazy People around me

Yeah today there are a few crazy people around me, and since craziness is infectious, i am making this blog space (seriously donno if anyone will ever read this.....god only knows why wud someone wud do that).
Getting back to why i am writing...'cos Yusuf has been building his blog space for the last 3 hours....so


About me later