Make money irrespective of good or bad quarterly results - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Make money irrespective of good or bad quarterly results 

A  A  A
In this issue:
» Deficient monsoon adds to banking sector's woes
» IMF warns against rising risks to emerging economies
» Market roundup..
» ...and more!

I think it was Mark Twain who once opined that there are two times in a man's life when he should not speculate: when he can't afford it and when he can.

Well, had Twain known the virtues of trading via options, he would have perhaps changed his mind. This is because options provide what I believe is the best of both worlds. If used sensibly, not only do they limit the downside but also end up providing a good upside if the trade goes right.

However, what I love the most about options is their flexibility and the ability to create a strategy around any event. Now that the earnings season is upon us, what better time to know about the ideal option strategy for profiting from the wide fluctuations in stock prices post the earnings announcement.

Asad Dossani, my colleague over at Profit Hunter, has disclosed exactly such a strategy for his readers. Since I thought our dear readers of The 5 MinWrap Up will also find value in the article, I am reproducing it below.

By the way, there's more great news for you. Asad has put together a wonderful three part master series in which he shares his latest trading strategy to make "Income at Will". I strongly recommend you join in, and reserve your spot here.

Over to Asad now...

A recent Economic Times article talks about traders using options to speculate on Infosys' upcoming earnings announcement. Some of the strategies traders are employing include buying bull spreads and buying strangles.

Let's look at an example of the strangle. As of Monday close, Infosys is trading at Rs 1,181. A strangle is a purchase of an out of the money call and an out of the money put option. It is a long volatility trade. If the stock moves a lot, you make money. If the stock doesn't move much, you lose money. Note that it doesn't matter which direction the stock moves. What matters is the size of the movement.

Suppose you buy the 1,280 call and the 1,080 put for a total price of Rs 33. You'll make a profit if Infosys ends up trading above Rs 1,313 or ends up trading below Rs 1,047. If the price finishes in between those two levels, you make a loss.

Essentially, the stock needs to move by 11% in either direction for you to make a profit. That's a large move. Of course, this is related to the upcoming earnings announcement. If you think Infosys is going to move by 11% in either direction after the earnings announcement, then you should make this trade.

There's an alternative. If you think Infosys is unlikely to move by this amount, you can do the opposite trade. You can sell the strangle. Instead of paying the premium, you now collect the premium.

And hopefully, the stock doesn't move too much once earnings are released. After that, you can either close out your positions for a gain or hold them until expiry.

Now I'm not recommending any particular option trade here. I'm not a fundamental analyst, and I have no idea what Infosys' earnings are going to be.

But if you are knowledgeable about this stock, or any other stock, you can do these types of trade. For individual stock options, the money-making opportunities are best right before earnings are announced.

So, if you're ready to learn more about options, I would also like to invite you for a 3 Part Master Series that begins tomorrow...

Over these 3 sessions, I will cover full details on why I believe that options trading is still one of the most lucrative, and yet untapped investment opportunity. Plus, I'll also show you an options trading strategy that I have developed myself and which makes trading in options virtually riskless. In fact, in my backtest results (going back past 5 years) this strategy has a success rate of 98.3%!

The first part of this Master Series goes live at 10 AM tomorrow and you could click here to reserve your Free seat right away.

02:20  Chart of the day
Agriculture sector is becoming a constant pain for the banking sector - especially for Public Sector Banks. Thanks to the priority sector lending norms, this is one area where they can do little to mitigate risks.

What has made things worse for banks is deficient monsoons. Unlike in the past, the stakes are much higher this time. As an article in the Hindu Business Line suggests, overall exposure of banks to farm sector stands at Rs 8.1 trillion. This is 12.5% higher than the levels seen in August last year. System wide agricultural NPAs, as a percentage of total agricultural advances, are likely to go up from 4.9% in FY14 to 8.4% in FY16. This will not just increase the risk profile of these banks, but is likely to impact profitability and returns on assets. Bankers are putting brave face and relying on restructuring these loans. While this may avoid immediate default, it is likely to hurt banks' interests in the long term. If situation worsens, it may impact credit to related sectors such as rural housing.

For a sustainable growth in the economy, the prospects of farm and banking sector can not be left to monsoon vagaries. It's high time that the Government stops passing the pain and takes strong measures to improve crop yields and reduce sectors' reliance on monsoons.

Deficient monsoon makes banks nervous

While rising debt and NPAs is a negative trend, the implications are more severe for emerging economies like India. The risks and threats are not limited to farm sector. High corporate debt profile offers no comfort either. What makes things further complicated is exposure of key sectors to foreign debt. This makes Indian economy highly vulnerable to external events like rise in interest rates in US.

The International Monetary Fund (IMF) has warned of the rising risks for highly indebted emerging economies from any kind of external shocks. We can do little about the global economic events and developments. However, the need to build safety mechanisms against external shocks is higher than ever. And until this is done, investors would do well to focus on bottom up investing and not get carried by talks of turn around and better times ahead.

At the time of writing, the Indian markets were trading in the green. The BSE Sensex was up by about 50 points or 0.2%. Gains were seen in realty stocks while metal stocks were trading weak. The Midcap and smallcap indices were also trading firm.

04:45  Today's investing mantra
"All intelligent investing is value investing - acquiring more than you are paying for. You must value the business in order to value the stock." - Charlie Munger
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This edition of The 5 Minute WrapUp is authored by Rahul Shah (Research Analyst).

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