market momentum faltering ?

[aca_trader]

Hi Ashish,
I had wanted to ask the same question.

I think leverage as he uses it is not to be interpreted literally (as in borrowed funds : own funds) but otherwise.

What he probably means is : options magnify gains and losses (compared to cash markets) just as leveraging onself does. Thus FnO volumes as a mutiple of Cash volumes, is a good proxy to leverage.

Am I right KKS ?

AGILENT

But the leverage which pains in market moving in a direction opposite to the expected is the classical leverage. It accentuates the fall when the M2M calls start pouring in and are not honoured.

Best Regards,
--Ashish

 

[kkseal]

Offtopic though interesting,just see how a mis-spelt word and misplaced words (in a sentence)can attribute different meanings to the same thing. Just yesterday in the chatroom i saw an example for this,so i took it up here.
Regards
Amit.

Yeah little slips can make a lot of difference I misquoted the May EPS figs as 670 (whereas the right value is 570) in one of my previous posts (#22 on pg 3) This has now been corrected. Sorry for the inadvertent error.

Thanks
Kalyan.

 

[kkseal]

Hi Ashish,
I had wanted to ask the same question.

I think leverage as he uses it is not to be interpreted literally (as in borrowed funds : own funds) but otherwise.

What he probably means is : options magnify gains and losses (compared to cash markets) just as leveraging onself does. Thus FnO volumes as a mutiple of Cash volumes, is a good proxy to leverage.

Am I right KKS ?

AGILENT

As i see it, any transaction where you pay a margin (or premium) which is a fraction of what the amount would be if paid in cash, qualifies as leveraging as the underlying intention is to magnify ones gains (as compared to what it would be if dealt fully in cash) by putting in less & reaping more. So the ratio i presume gives a fair idea of the volume of such leveraged transactions as compared to the pure cash transactions. You could say it's an approximate indication of the prevailing greed in the market (the peaks & troughs on a chart can also be seen as cycles of greed & fear with one overtaking the other alternately, in turn).

 

[SGM]

But the leverage which pains in market moving in a direction opposite to the expected is the classical leverage. It accentuates the fall when the M2M calls start pouring in and are not honoured.

options magnify gains and losses (compared to cash markets) just as leveraging onself does. Thus FnO volumes as a mutiple of Cash volumes, is a good proxy to leverage.

Hello Ashish

In cash 10% swing against is just that 10%, where as in FnO it will wipe out 50% of the margin, I think that is what Agilent pointed out. Maybe the ratio discussed indicates the type of players involved in the market.

CASH Volume = Noise (intraday) + Delivery Position
FnO Volume = Noise (intraday) + 5 times leveraged Position

Where does open interest come into picture here? How would it tie in ?

Regards
Sanjay

 

[kkseal]

I am not an expert in derivatives ... there are members who are much more enlightened.

One thing I do know : interpreting PC ratio is v. diifficult, and should be done only in conjunction with other trends

See for example this which elaborates on this complex phenomenon
http://www.safehaven.com/article-1612.htm

Lets both give this a good read and revert. Meantime, if u have stats on the PC ratio in recent months or weeks, let me know . We can dig our knowhow together, with help of course from experts here

AGILENT

I too am not an expert in derivatives (or anything for that matter! I am just a humble learner I just try to get a little better at the things i know a little bit of and i see it as a lifelong endeavour).

I do have a take on PC ratio borne out of my observations that might appear slightly contrarion. More on that later.

Dwelling on expertise, i find we tend to think of the stock market as just some numbers, some symbols or at best some charts. But when you think of it the stock market is an aggregation of a lot of things. It's a reflection of the entire economy (not just domestic but it's global linkages as well) The myriad transactions that take place everyday & it's various complex forms. Also the prevailing psychology of the participants (greed, fear, indifference). So a 'guru' who understands, factors in everything & gives us everything on a platter would be difficult if not impossible to come by.

So i do not seek any gurus but simply try to pick those nuggets of wisdom i come across & add them to my arsenal hoping to increase the overall firepower through such incremental acquisitions. That's inorganic growth while my own thoughts, ideas, deliberations, experiments would constitute the organic growth.

Cheers,
Kalyan

 

[kkseal]

Hello Ashish

In cash 10% swing against is just that 10%, where as in FnO it will wipe out 50% of the margin, I think that is what Agilent pointed out. Maybe the ratio discussed indicates the type of players involved in the market.

CASH Volume = Noise (intraday) + Delivery Position
FnO Volume = Noise (intraday) + 5 times leveraged Position

Where does open interest come into picture here? How would it tie in ?

Regards
Sanjay

Yes, Sanjay that's the idea. You've summarized things better, more succintly than i could.
And yes, OPEN INTERESTS I understand that's very important I've been trying to factor that in but my limited knowledge of derivatives acts as a dampner Could you elaborate on the basic concept of open interests please. Once that is clearly understood all of us here can put our minds together & try to thrash out something.

Thanks for the post.

Regards
Kalyan.

 

[kkseal]

As a simple measure, if you take the total open interest (i.e. the total outstanding positions) in the mkts that would obviously rise with an increase in the leveraging ratio (as the level of leveraging rises). But more subtle clues could be provided by say the open interest in futures as compared to options.

However this needs more looking into.

 

[kkseal]

Hi Agilent & others,

The PC ratio has lost some of it's reliability because of the extensive hedging that goes on with Index Put options. As a result one often finds the Nifty futures premium & the PC ratio moving up in tandem.

However sticking to the basics, What would a rising PC ratio imply

1) The no of Put options ingreasing => the majority expecting a downturn
&/OR
2) The level of hedging increasing => long traders are getting increasingly shaky, jittery at current mkt levels

Either or both of the above would indicate a near-term bearish outlook.

Think a ratio of 1.4 could be taken as a threshold level Anything above would be danger zone.
If i remember correctly it had crossed 1.4 in May.

Cheers,
Kalyan.

 

[kkseal]

A better PC ratio to track would be the total turnover/open int in STOCK Put options to that of the STOCK Call options as this would eliminate the hedging factor to a great extent.
However i do not know if this data is readily available.

Kalyan

 

[SGM]

As a simple measure, if you take the total open interest (i.e. the total outstanding positions) in the mkts that would obviously rise with an increase in the leveraging ratio (as the level of leveraging rises). But more subtle clues could be provided by say the open interest in futures as compared to options.
However this needs more looking into.

Hello

The total outstanding position = The total open interest * 2 (both sides, zero sum)

Would it be more useful to analyse the change in OI, with the price movement? Maybe it will tell us on which side the strong hands are.

Regards
Sanjay