The death of long-only

[tejasvi.mohanram]

Today there are at least a dozen companies that I am tempted to buy. Valuations look great, some of these companies have outperformed analyst expectations and their peers. Examples: BHARTI AIRTEL, L&T, INFOSYS, ONMOBILE.

But would I buy them today? No way. If the index falls by another 20%, then it is highly likely that these stocks could fall 10-15%. So should I sit on the sidelines?

I think the best way to go for investors with long-term horizons and for traders is to hedge their portfolios with futures/options. That way, you only make money if your portfolio outperforms the index. If you can pick solid stocks, based on fundamentals then this should be the way to go.

 

[sudoku1]

I think the best way to go for investors with long-term horizons and for traders is to hedge their portfolios with futures/options. That way, you only make money if your portfolio outperforms the index. If you can pick solid stocks, based on fundamentals then this should be the way to go.

derivatives r a riskier lot.....invstrs who already lost a lot will not try the waters as options also have a time decay which takes away the left cream......with n signs of a bull mkt.....options hedging is useless for already injured invstrs....

 

[tejasvi.mohanram]

Futures are a lot easier to hedge with than options. If you are skilled at picking good stocks (i.e, over a peiod of 3to6m your stocks outperform the index), then shorting NIFTY futures should be perfectly fine.

If however, one is risk-averse w.r.t margin calls etc, then they should be willing to pay the extra for options.

And I am not convinced of any impending bull run...2009 is going to be a bloodbath again.

 

[OneBull]

The long term trend is BEARISH, don't try to fool urself being BULLISH like this person:

 

[prasadam]

Today there are at least a dozen companies that I am tempted to buy. Valuations look great, some of these companies have outperformed analyst expectations and their peers. Examples: BHARTI AIRTEL, L&T, INFOSYS, ONMOBILE.

But would I buy them today? No way. If the index falls by another 20%, then it is highly likely that these stocks could fall 10-15%. So should I sit on the sidelines?

I think the best way to go for investors with long-term horizons and for traders is to hedge their portfolios with futures/options. That way, you only make money if your portfolio outperforms the index. If you can pick solid stocks, based on fundamentals then this should be the way to go.

Please through some light on the hedge part of your post. being a retail investor what are the strategies you are going to use?

Prasad.

 

[tejasvi.mohanram]

Please through some light on the hedge part of your post. being a retail investor what are the strategies you are going to use?

Prasad.

In my opinion, shorting futures (same face value as the market value of your portfolio) and rolling-over these contracts should work IF YOU ARE GOOD AT PICKING STOCKS. I write these words in caps coz if you make risky bets in your portfolio and they underperform the index by a big margin, then you are in deep sh*t.

To read a very good white paper on this, goto the blogs section of online community called fourstocks. A buddy of mine has written an article titled "De-risking your portfolio in a bear market (Part-I)". I think this is a very good primer for exactly how it works. He is currently writing 2 more similar articles.

 

[prasadam]

Have you or your friend considered the costs( brokerage,stt, other charges) involved and Income tax part of the business profits ( out of F& O transactions) ? and what about the arbitrage diff.?

please clarify.

 

[tejasvi.mohanram]

Have you or your friend considered the costs( brokerage,stt, other charges) involved and Income tax part of the business profits ( out of F& O transactions) ? and what about the arbitrage diff.?

please clarify.

I am quoting from his paper:

"In this 3-part series, we discuss how to hedge portfolios with derivatives. In this article we will discuss the basics of portfolio hedging with futures. The next article will cover portfolio hedging with options and the final article will elaborate on issues like roll-over, rebalancing, taxation, brokerage and on bringing it all together."

Guess we will have to wait till part3 for brokerage and taxes. Lets not get skeptical from the outset, shall we? I think the article is very well written (apart from the fact I know him well!)

 

[hitenshah123]

To read a very good white paper on this, goto the blogs section of online community called fourstocks. A buddy of mine has written an article titled "De-risking your portfolio in a bear market (Part-I)". I think this is a very good primer for exactly how it works. He is currently writing 2 more similar articles.

There is a table with nifty gains, naked strategy return and hedged strategy retuen. How is this hedged strategy return calculated?

 

[tejasvi.mohanram]

There is a table with nifty gains, naked strategy return and hedged strategy retuen. How is this hedged strategy return calculated?

If your portfolio was originally worth Rs.100, you shorted two index futures contracts at 50 and you had to post another Rs.15 of margin for futures (let us ssay). In 2 months time, if portfolio value is 90 and index futures contract is trading at 40.

Then you lose Rs.10 on your portfolio and gain Rs.20 on index futures (net gain Rs.10). Your total capital outlay originally was Rs. 115 (100 + 15). So, your hedged strategy return is 10/115 = 8.69%.