17,488% Gains in a Day - The 5 Minute WrapUp by Equitymaster
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17,488% Gains in a Day

Jun 3, 2016
In this issue:
» Gains on L&T
» Banks' rising credit card appetite
» Is the worst over for India's power sector?
» ...and more!
0:00
Tanushree Banerjee, Co-Head of Research

Dear Readers,

We don't get to recommend this stock too often. So whenever we do, we don't miss the chance. We recommended our subscribers to buy L&T twice in the past five years. And each time after a big market crash. Our September 2013 recommendation on L&T was closed with gains of 57.8% in 10 months. It's rather unusual for us to close a StockSelect recommendation so soon. But L&T met our expectations well before the time frame.

Our latest recommendation on the stock was in January 2016. Again this was when the stock had corrected by over 40% and was trading at 52 week lows. The stock has returned about 29% in past five months. But we are unlikely to close the position too soon.

Now, of course this is safe value investing.

What if you are game for more risks on such stocks?

Well then one thing is for sure. I am not the person you need to pay heed to act on the stock. Rather you would need to listen to someone who can vet your appetite of more risk and higher returns.

My friend and colleague at Daily Profit Hunter, Apurva Sheth, recently wrote about traders struck gold with L&T. Being the editor of Swing Trader, Apurva, explained the exact mechanism by which the traders multiplied the double digit return on L&T into a five digit number! Yes you read that right.

And if you don't believe me, go on to read how this happened and whether such strategies are for you.

Happy reading!
Tanushree Banerjee

*************************************************************

 Apurva Sheth


Surprised? Shocked?

Don't be. It happened. Recently, some investors made 17,488% gains in just one day. And they weren't made from a lottery ticket. These gains were made in listed securities on the Indian stock market.

I will tell you how it happened...

Larsen & Toubro announced its quarterly results on May 25, 2016, after market hours. The numbers were much better than anyone had expected. Markets gave a thumbs up to the stock. On May 25, it closed at Rs 1,291.60, but it opened much higher than this price on May 26. It opened with a massive gap up of more than 100 Rs to Rs 1,404.

This wasn't enough. Many people wanted to get in to the stock and even paid higher price for it. The stock moved further up during the day and ended the session at Rs 1,474.15. It ended the day with gains of 14%.

This is just one half of the story. The real fun begins now.

Fourteen percent gains in a day is not bad at all, but other instruments could amplify your returns. Options are one of them.

Options are of two types - Calls and Puts. If you have a bullish view, you may buy a call. If you have a bearish view, you can buy a put.

If you are not aware of how calls and puts work, then I strongly recommend you to go through these two articles:

Click here to read about Call Options

Click here to read about Put Options

Assuming you know about call and put options now, let's go back to the L&T stock.

L&T ended the day with gains of 4% to Rs 1,291.60 on May 25 before its results were announced. A trader who had a bullish view on the stock could have bought a call option on the stock.

Many contracts are available with different strikes for a call option. Let's say the bullish trader picked the May 1,400 strike call option. This option was trading at Rs 0.4 on May 25.

But on May 26, it ended the day at Rs 70.35. This was a staggering gain of 17,488% in just one day.

Closing Price of L&T May 1,400 Call

 Closing Price of L&T May 1,400 Call


Why and how did this happen? Options are leveraged instruments. They can amplify your returns substantially. When a trader buys a call with a strike price of 1,400, he buys a right to buy the stock at a price of Rs 1,400 on the day of expiry.

The buyer makes money if the stock (in this case L&T) is trading above the strike price on the day of expiry (which was May 26). The contract becomes worthless after expiry.

On May 25, these rights were selling for a meagre Rs 0.4 as the stock was trading much lower than the strike price of 1,400 and the probability of stock moving up above 1,400 were low.

But the stock did make a large move against everyone's expectations on May 26 and so did the call options of the stock. They made an even larger move resulting in a huge profit for the buyers.

Buying options is generally considered to be a losing proposition as most of the contracts expire worthless. But there are times when buying an option can result in huge profits if done with proper research and logic.

And before you ask... I want to inform you that I have already started to explore ways we can benefit from buying options. I have already started building a process for this and have made good progress. I will tell more about it later.

Meanwhile, I want to update you about our Swing Trader recommendations. Last Wednesday, I mentioned that we had just one live trade in our portfolio and were waiting for opportunities. I am happy to inform you that I have found ample opportunities during the week. I have made seven new recommendations since we spoke last and three are already live.

Have you noticed recent gains in the options market? Share your views in the Equitymaster Club or share your comments here.


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------------------------------

3:35 Chart of the day

Indians are not known for their appetite for credit cards and personal loans. But over the past few years, not just the borrowers' appetite for such credit but their bankers' appetite for such products too has grown multi fold. Public sector banks that are yet to get big on retail loans are not seeing the credit card loans multiplying yet. But for most private sector banks, including HDFC Bank, this was the fastest growing retail loan segment.

Credit card loans grew at over 30% in FY16. This at a time when growth in loans to corporates languished at just 1%. Eight years back, the loans growth in both the segments were at par.

Rising Exposure in Credit Card Debt of Banks

Rising Exposure in Credit Card Debt of Banks


The fact that most Indian households are not over leveraged is comforting. But banks need to be careful before over exposing themselves to such unsecured credit. So far credit cards and personal loans are just a fraction of the retail loan portfolios. But banks cannot allow these to become as big a pain as the restructured corporate loans are.

4:25

India does not need more power plants for next three years.

This is the headline in today's Economic Times. It certainly makes one quite inquisitive about the matter, given one third of the India's population lives without power.

Reportedly, country's existing resources have sufficient capacities to supply power for the next three years. According to the assessment made by the power ministry, India currently has many under-utilised plants, and also some plants that are under construction. Over and above, the upcoming renewable energy projects, would make up to address the power need in the country.

According to a power ministry official, the demand for electricity is unlikely to rise in the near future. The demand is expected to pick up after 2019 government programmes ('Ujwal Discom Assurance Yojana' (UDAY)) start yielding results.

But the moot point here is, what if once demand outpaces supply? Just focusing on distribution will not be enough; capacity expansion is equally important. Power plants take several years to get commissioned. Given rising challenges in this sector, several companies have put expansion projects on hold. If the capacities do not expand, the India's power deficit will certainly rise from the current levels of 2.1%.

4:45

After opening the day on a firm note, the Indian indices have lost their gains and moved below the dotted line. At the time of writing, The BSE Sensex is trading lower by 32 (down 0.1%) and. The BSE Mid Cap index is trading up by 0.3%, while the BSE Small Cap index is trading flat.

4.50 Todays' investing mantra

" Risk comes from not knowing what you're doing." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst) and Bhavita Nagrani (Research Analyst).

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Equitymaster requests your view! Post a comment on "17,488% Gains in a Day". Click here!

2 Responses to "17,488% Gains in a Day"

Pradip Roy chowdhury

May 26, 2017

Call & put monthly charhes

Like 

Gokal Gajaria

Jun 4, 2016

VVVV IMP

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Equitymaster requests your view! Post a comment on "17,488% Gains in a Day". Click here!
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