Understanding Futures & Options trading

Technicians utilize a three dimensional approach to market analysis which includes a study of price, volume and open interest. Of these three, price is the most important. However, volume and open interest provide important secondary confirmation of the price action on a chart and often provide a lead indication of an impending change of trend.Volume represents the total amount of trading activity or contracts that have changed hands in a given futures market for a single trading day. The greater the amount of trading during a market session the higher will be the trading volume. As mentioned earlier, a higher volume bar on the chart means that the trading activity was heavier for that day. Another way to look at this, is that the volume represents a measure of intensity or pressure behind a price trend. The greater the volume the more we can expect the existing trend to continue rather than reverse. Technicians believe that volume precedes price, meaning that the loss of upside price pressure in an uptrend or downside pressure in a downtrend will show up in the volume figures before presenting itself as a reversal in trend on the bar chart.Open Interest is the total number of outstanding contracts that are held by market participants at the end of each day. Where volume measures the pressure or intensity behind a price trend, open interest measures the flow of money into the futures market. For each seller of a futures contract there must be a buyer of that contract. Thus a seller and a buyer combine to create only one contract. Therefore, to determine the total open interest for any given market we need only to know the totals from one side or the other, buyers or sellers, not the sum of both.Each trade completed on the floor of a futures exchange has an impact upon the level of open interest for that day. For example, if both parties to the trade are initiating a new position ( one new buyer and one new seller), open interest will increase by one contract. If both traders are closing an existing or old position ( one old buyer and one old seller) open interest will decline by one contract. The third and final possibility is one old trader passing off his position to a new trader ( one old buyer sells to one new buyer). In this case the open interest will not change. By monitoring the changes in the open interest figures at the end of each trading day, some conclusions about the day’s activity can be drawn. Increasing open interest means that new money is flowing into the marketplace. The result will be that the present trend ( up, down or sideways) will continue. Declining open interest means that the market is liquidating and implies that the prevailing price trend is coming to an end. A knowledge of open interest can prove useful toward the end of major market moves. A levelling off of steadily increasing open interest following a sustained price advance is often an early warning of the end to an uptrending or bull market.

Market is Strengthening - Possible BottomBy monitoring the price trend, volume and open interest the technician is better able to gauge the buying or selling pressure behind market moves. This information can be used to confirm a price move or warn that a price move is not to be trusted.

Futures & Options
FuturesIn finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. The future date is called the delivery date or final settlement date. The pre-set price is called the futures price. The price of the underlying asset on the delivery date is called the settlement price.A futures contract gives the holder the obligation to buy or sell, which differs from an options contract, which gives the holder the right, but not the obligation. In other words, the owner of an options contract may exercise the contract. Both parties of a "futures contract" must fulfill the contract on the settlement date. The seller delivers the commodity to the buyer, or, if it is a cash-settled future, then cash is transferred from the futures trader who sustained a loss to the one who made a profit. To exit the commitment prior to the settlement date, the holder of a futures position has to offset his position by either selling a long position or buying back a short position, effectively closing out the futures position and its contract obligations.Futures contracts, or simply futures, are exchange traded derivatives. The exchange's clearinghouse acts as counterparty on all contracts, sets margin requirements, etc.Futures traders are traditionally placed in one of two groups: hedgers, who have an interest in the underlying commodity and are seeking to hedge out the risk of price changes; and speculators, who seek to make a profit by predicting market moves and buying a commodity "on paper" for which they have no practical use.Hedgers typically include producers and consumers of a commodity.For example, in traditional commodities markets, farmers often sell futures contracts for the crops and livestock they produce to guarantee a certain price, making it easier for them to plan. Similarly, livestock producers often purchase futures to cover their feed costs, so that they can plan on a fixed cost for feed.OptionsOptions are financial instruments that convey the right, but not the obligation, to engage in a future transaction on some underlying security. For example, buying a call option provides the right to buy a specified amount of a security at a set strike price at some time on or before expiration, while buying a put option provides the right to sell. Upon the option holder's choice to exercise the option, the party who sold, or wrote, the option must fulfill the terms of the contract.The theoretical value of an option can be determined by a variety of techniques, including the use of sophisticated option valuation models. These models can also predict how the value of the option will change in the face of changing conditions. Hence, the risks associated with trading and owning options can be understood and managed with some degree of precision.Exchange-traded options form an important class of options which have standardized contract features and trade on public exchanges, facilitating trading among independent parties. Another important class of options are employee stock options, which are awarded by a company to their employees as a form of incentive compensation.Contract OptionEvery financial option is a contract between the two counterparties. Option contracts may be quite complicated; however, at minimum, they usually contain the following specifications:* whether the option holder has the right to buy (a call option) or the right to sell (a put option)* the amount and class of the underlying asset(s) (e.g. 100 shares of XYZ Co. B stock)* the strike price, also known as the exercise price, which is the price at which the underlying transaction will occur upon exercise* the expiration date, or expiry, which is the last date the option can be exercised* the settlement terms, for instance whether the writer must deliver the actual asset on exercise, or may simply tender the equivalent cash amount.The value of an option can be estimated using a variety of quantitative techniques, although most commonly through the use of option pricing models such as Black-Scholes and the binomial options pricing model. In general, standard option valuation models depend on the following factors:* The current market price of the underlying security,* the strike price of the option, particularly in relation to the current market price of the underlier,* the cost of holding a position in the underlying security, including interest and dividends,* the time to expiration together with any restrictions on when exercise may occur, and* an estimate of the future volatility of the underlying security's price over the life of the option.

JK Lakshmi Cement - Accumulate

JK Lakshmi Cement currently operates 3.5 million tonnes per year of cement capacity. The company is a leading player in north-west India with a wide network of 1500 dealers and 60 cement dumps. The company premium brand includes JK Lakshmiplast and JK Lakshmi Ready Concrete Mix (RMC).JK Lakshmi Cement is planing to set up a greenfield cement plant operating around 2-2.5 MTPA capacity with a investment of around 650 Crores in the next three years. This is expected to widen it's presence in the eastern and southern states of India.

Expansion Details
1) The company is currently increasing it's cement capacity from 3.5 MPTA to 5 MTPA. This is expected to be operation by October 2008.
2) The company currently operates 5 RMC plant and expects to add 7 RMC units this fiscal.
3) The firm recently commissioned fully it's 36MW captive power plant.

This is expected to improve it's Operating margin from the current quarter.Investor with medium risk profile can consider investment into this stock with a horizon of 2 years. At the current market price of Rs. 168/- the stock valuations appears to be discounted compared to it's mid-cap peers.
The stock currently trades at less than 4 times it's trailing 12 month EPS of 45. We initiate a buy call in this stock with a target of Rs. 320/- on it's current valuation. With the complete expansion in place which the company is undertaking, we expect the stock to be a potential multibagger.
The current quarter Q3' 07 results were below our expectation and also we saw a steep decline in Operating margins. We expect the margins to improve with the commission of Captive power plant. The bottomline of the company is also set to increase with the restructuring of it's 325 crore debt.
Risk
1) Cement imported from Asian counterparts like china and Thailand have become cheaper after goverment scrapping import duty.2) Domestic cement prises are in it's peak, Possible reversal.3) High Interest expense due to higher Debt ratio.

Buy Alok Industries - A hidden gem in Textile Arena

Buy Alok Industries - A hidden gem in Textile Arena
Alok Industries Operates in a diversified business portfolio ranging from Home Textiles, Retail (Home and Apparels), Garments, Spinning, Yarn and Apparel Fabrics.Alok revenue mix comes from Home textiles (18%), Textursing (26%), Apparel Fabrics (49%), Garment (2%) and Cotton Spinning(5%).Currently Exports account for 35% of the total revenue. Out of which exports to US account for 53% and Asia 24%.At the current market price of Rs. 66/- the stocks trades at around 6 times it's trailing 12 month EPS. Investor with a Low to medium risk profile can consider investment into this stock with a horizon of 18-24 months. Since the company has major additions coming up across it's businesses, it is too early to set a target price for the stock. The company seems to me a multibagger in the making.Inspite of the rupee appreciation the company current quarter Operating margin were flat at 26.35%. This was made possible due to the mix of it's high margin business and diversified geographical portfolio. The Net profit margin were not impressive but it is expected to increase with the current expansion in place.Alok's current significant customer base include Walmart, Kohls, Bed Bath and Beyond, GAP, CK, Ambercrombie & Fitch and others.Expansion Details1) Alok is scaling up it's Home Textile capacity from 60 to 82.5 million meters p.a. This is expected to get completed by end of FY2008.2) Alok is adding a Terry towel manufacturing unit of 6,700 TPA and expected to commence operation by end of FY20083) Alok is currently increasing it's garments capacity from 8 to 15 million pieces p.a by FY08. The company is expected to get better realization on garments as 80% of it's garment is exported to EU territories.4) Expansion of it's Texturising capacity from 75,500 TPA to 118,000 TPA is on the way and is expected to add in FY09 revenues.The company has further expansions to it's plate which will be effective FY09. The details of these expansions are not covered in the current analysis.Positives1) The company subsidiary is planing to add around 100 stores as part of it's retail wing (H&A) by end of March' 2008. Currently it operates around 14 stores in major metros.2) Alok has entered in to a agreement with "Aisle 5 LLC", under which it will manufacture and distribute home decor, bath, sleeping and dining home products in US and Canadian Market.3) Acquisition of 60% stake in Mileta, a czech company to add to revenues.4) Alok has signed a trademark license with peacock alley to market it's home linen products in the domestic market.Risks1) High Debt/Equity ratio.2) Frequent increase in equity base which inturn has dampened the Earnings Per Share3) Further rupee appreciation can impact profit margins of the company.

Sunny Skies coming soon

If you were a trader, then you should say you are ’stuck’.If you bought these businesses, then hold on to them, cause you must have been given the reason why you should buy (from your source), and if you did not do research yourself, then you should.We are playing the stock market, which is a ‘market made of stocks’. Some go up, some go down at any given moment in time. You should be buying a business, understand it, do some TA on it, and enter these at the best price points.This has a lot of ‘you’ in the above, but, even I remind myself of these golden rules, and once you get the rules, you will sleep better even with some losses and some gains, cause in the end, we are investing in businesses that are part of India INC. And, the India INC story has more chapters in it. So, hold on while we are having a bumpy ride. Smooth sailing and sunny skies to come soon!!!!!

contract notes

Dear friend
For each and every transaction, whether inta-day or delivery your broker gives you contract note. It can be in physical form, or in electronic form which will be sent through email or in your online trading account reflected in your trading account ledger. Collect all the contarct notes chronologically, compile all the information in an excel sheet and pay income tax at 10% rate for the net gain. If the result is net loss you will not pay any ST ca[ital gains tax.Keep a habit of entering information of transactions on daily basis or atleast file all the contract notes chronologically.

Volatile Year Ahead

Another Black Friday pounded the investors and took away their wealth. The Large drop this week of around 2000 points shows that the Year 2008 will record high volatilty. But I am still positive and maintain a bullish view on the market. By 25 Jan you will see a upswing happening and markets will rebound.

Halla Bol is almost done ...