43
FINANCIAL DERIVATIVES STOCK TRAK REPORT Facilitator Frank Conway Submitted By Ragavi Sinniah M.Sc in GFIS Student No. W20065148 Submission Date 11 th December

Stock Trak Report

Embed Size (px)

Citation preview

FINANCIAL DERIVATIVESSTOCK TRAK REPORT

Facilitator Frank Conway

Submitted By Ragavi Sinniah

M.Sc in GFIS

Student No. W20065148

Submission Date 11th December

Contents

INTRODUCTION...........................................................................................................................................3

BUY AND HOLD STRATEGIES........................................................................................................................3

PORTFOLIO OVERVIEW OF BUY AND HOLD ACCOUNT..............................................................................11

BUY AND HOLD REFLECTION.....................................................................................................................12

ACTIVE ACCOUNT......................................................................................................................................13

SRATEGIES INVOLVED IN THE ACTIVE ACCOUNT.......................................................................................13

ACTIVE ACCOUNT - STOCKS.......................................................................................................................16

ACTIVE ACCOUNT - FUTURES.....................................................................................................................20

ACTIVE ACCOUNT – OPTIONS....................................................................................................................25

PORTFOLIO OVERVIEW..............................................................................................................................29

ACTIVE ACCOUNT REFLECTION..................................................................................................................30

REFLECTION OF STOCK TRAK.....................................................................................................................31

REFERENCES..............................................................................................................................................33

INTRODUCTION

FINANCIAL DERIVATIVES

2

Financial derivative is the concept of deriving the value from the performance of an entity based

on the assets and the interest rate. Derivatives provide increased exposure to the price

movements (speculation) and to insure against the price movements (hedging). The most familiar

derivatives are the options and the futures. Financial derivative has two instruments equities and

debt. The equities include stocks and shares whereas debt includes bonds and mortgages.

(Derivatives, 2013)

STOCK MARKET

The stock market includes the buyers and sellers of the market trading within the stock exchange.

Trades can be made within the stock exchange with various types of securities like fixed interest

securities. Participants include stock investors and larger trade investors. In previous years

human trading was used now the trend has changed to electronic trading. The stock market has

irrational behavior and sometimes leading to stock market crash.

The stock trak is a game to invest in equities, futures and options. In this game I participate as

the stock investor. This game is to give experience in investing and earning profits as well as

losses. It provides two accounts Buy and Hold and Active account with 1 million U.S dollars.

Making use of this money and utilizing this opportunity to understand the concepts stands first.

BUY AND HOLD STRATEGIES

Buy and Hold Account is the passive account for me. Instead of trading on a day to day basis this

Buy and Hold account is helf for a long period of time without concerning about the short term

prices and other technical indicators. According to me Buy and Hold has advantages because

when we do long term investments the taxes will be reduced where it does not work out in the

short terms. In this passive account I was given 1 million U.S dollar in which 20 trades can be

made. I tried to equally split out this money well I could say it worked out except in some trades

where small amounts were invested. First I made 13 trades but Buy and Hold account should

have minimum 15 trades so then I bought 6 trades totally 19 trades were made.

When I was researching about Buy and Hold I just came across Halloween strategy. I felt this

strategy as interesting. In this case investor does investing in the market in the month between

3

October 31 and May 1,that is “Sell in May and and then walk away”. It has a strategy that the

capital gains are made between these six months period.

The three strategies I used for buying stocks in the passive Buy and Hold account are

Momentum strategy

Buying stocks based on Brand

Dartboard approach

Momentum strategy Buying stocks based on

Brand

Dartboard approach

Walmart Stores Apple Axis Bank

Bank of America General Motors Marathon Petroleum

Exxon mobile corporation Twitter State Bank of India

CVS Caremark Facebook HSBC

Kroger Intel ONGC

Momentum strategy

In this case I selected companies of the best performers in the previous years from the fortune

and forbes list. There were lots of companies in the list but I analysed the company profile,

charts before investingin in each stock.

Buying stocks based on Brand

Most of the them use this trick to buy the stocks when it comes to buy and hold. I was discussing

in the class people said that they also bought some stocks based on brand. The popular brands in

todays market is facebook and twitter. In case of iphones Apple was famous. With regard to

electonics, Intel is one of the worlds leading and utmost esteemed semiconductor chip makers.

General motors is the best brand in automotives industry. These reasons made me to select these

stocks.

4

Dartboard approach

According to Youguo et al.(1995) random picks perform better than the professional

recommendations. They did research comparing the portfolio with the professional picks(pros

pick) and random or dart picks from the investment dartboard. The results suggested that in the

one week period pros pick outperformed random but in 6 month holding period the random

stocks performed better than the professional picks.

With regard to the above mentioned I decided to take this approach and wanted to see the effects

in my portfolio as this is buy and holding for 3 months I wanted to know what random picks will

make my portfolio lower or higher. So I randomly picked the stocks.

STOCK NAME PRICE SHARES CAPITAL

COMMITTED

AXIS BANK 405.35 123 812.68

MARATHON 76.64 600 45,924

5

PETROLEUM

APPLE INC 100.63 496 49,912.48

KROGER CO. 53.43 1000 53,430

GENERAL

MOTORS

30.18 1700 51,306

STATE BANK OF

INDIA

2597.90 1200 50,634.92

INTEL

CORPORATION

34.69 1440 49,953.6

ONG CORP LTD 412.50 7,500 50,428.12

TWTR 51.41 962 49,456.42

CAM 69.55 720 50,076

I bought most of the stocks from U.S market and Indian market. As I am familiar with Indian

stocks, I can pick stocks easily and I chose it from Bombay Stock Exchange for U.S from

NASDAQ, NYSE and AMEX. With these approaches I selected the stocks but also I did

fundamental analysis to check whether the selected stocks are actually to be bought. Mostly I

used the chart to check the company is going in profit or in loss.

STOCKS:

Exxon Mobile Corporation (XOM):

After selecting this stock by the Momentum strategy I decided to analsye the stock. I came to

know that the earnings of XOM has been recovering from a sudden drop in the year 2013. It has

6

a market capitalization of about $389.5 billion, it had revenue of about $483.3 billiion with net

profit of 32.6 billion U.S dollar in the year 2013. Most of all it is the largest energy producer in

U.S. From analysing the chart and XOM reports I came to a conclusion that XOM had 15%

growth rate. This made me to that the companies revenue will be increased. With the help of

momentum strategy and looking at the companys profile. In the chart it was about to go in a

upward trend so I bought 600 shares for 90.41 share price comitting capital amount of $54,246.

The stock is performing well with profit of $2,046.

TWITTER(TWTR):

I selected Twitter based on the best brand, after selecting I started researching about this brand. I

took 1 year chart in that it has reached higher as $73.31 and from looking at the chart I decided

that it is moving forward. I bought the stock in the market of 962 shares at the price of $51.41

7

with capital amount of 49,456 us dollars. But actually what I predicted didn’t work out the price

fell of about $13 which affected my portfolio. I got loss of about 12,429.04 with negative

percentage return of 25.13%. This is a huge loss.

MARATHON PETROLEUM CORPORATION (MPC):

According to dartboard approach I selected this stock that is I randomly picked this stock.

Eventhough I used this approach I wanted to confirm myself about the findings by Youguo et al.

(1995). I looked at the earnings estimates of the companys four quarters and it has made 8 new

highs in the past 6 months and also when looking from the chart it has went below the resistance

level. In my view the stock is actuall going to rise so I confirmed to buy this with 600 shares at

the price $76.54 it costed me of about 45,924 US dollars. But after investing I waited to see what

is going to happen but it was actually a shock the random pick worked out the stock price has

rised of about $15.61 it increased my portfolio value with 20.39% rate of return. In my point of

view random pick works in some cases but not in all this occurred in the case of Cameron

International where I picked this stock randomly but it is the highest loss value in my portfolio,

loss of about $14,011.20.

8

The below figure shows all my stocks with market value and profit and loss for each stocks.

9

10

PORTFOLIO OVERVIEW OF BUY AND HOLD ACCOUNT

Overall market value for the Buy and Hold Open positions in the past 3 months portfolio value

of $1,022,610.11.

11

BUY AND HOLD REFLECTION

The Passive account is the Buy and Hold Account where I did not spend much time on watching

the markets. It was not difficult since it is only buying the stocks and holding it for nearly 4

months. I had no knowledge about the market so I started making principles myself and then I

bought stocks based on the rankings of the companies, based on the familiar brands and some of

them I picked randomly. But also I was seeing the charts and trying to predict whether price will

be rising or falling. I considered the stocks which are rising and I bought accordingly. I totally

bought 19 stocks. I was holding the account for 3 months and I was observing that some stocks

are rising and getting profits and some stocks were getting loss. I believed that my portfolio will

be rise. The long buy leads to higher percentage return. My portfolio value for Buy and Hold

account $1,022,610.11 based on the date of 8th of December.

12

ACTIVE ACCOUNT

After buying stocks in my Buy and Hold account, the next is I have to be actively involved in my

Financial Derivatives account that is the active account. I felt very hard to understand the

concepts and the strategies about the market. This is because I did my undergraduate in computer

science and stocks, trading were totally new to me. Further I realised that learning will take me

to be actively involved in this StockTrak game. After attending my first webinar I got many

ideas of how to trade stocks, options and futures using the StockTrak, I felt quite easier after

attending that webinar. In my childhood I usually hear people talking about share markets and

share prices, the market is going down or the market is going up. But now I am actively

involving in the share market and came to know a lot about the stock market with using many

strategies. In this game I have to trade for 1 million U.S dollar, I felt that each penny should have

a worth when I am trading stocks. Profit and loss will take place in all the cases we can take up

profit easily but bearing loss will be an effect. This active account is a place where one can think

about loss as well as gain. I bought some stocks after my first webinar but it ended up in losses

because I did not use any strategies. Then after attending the second webinar (Reference:

Economic Rockstar) about the “Technical trading Strategies” I got more ideas how to trade the

stocks technically. In this active account I bought more stocks by using technical strategies and it

resulted in profits as well as losses. From Buy and Hold account I came to know about the

fundamental analysis after the third webinar about the “Using Fundamental Analysis in Stock

Market Trading” I came to know more about fundamental analysis. This section will explain

what strategies I have used why I invested and sold the particular company. When I get loss in

stocks I analysed why it is going in loss then I rectified myself.

SRATEGIES INVOLVED IN THE ACTIVE ACCOUNT

Fundamental Analysis:

When someone is investing in a company it is essential to understand what the company does

and in which it operates and should not invest blindly in a company which I did for some stocks

in my Buy and Hold Account. It is very important to look at the company’s financial statements,

13

Warren Buffet a famous fundamental analyst chooses stock based on the overall probability of

the company he keeps in mind four methods

Has the company constantly performed well? (ROE- Return on Equity)

Has the company avoided intemperance debt?  (Debt/Equity ratio)

Are profit boundaries elevated? Are they greater than ever? (profit margin)

How stretched has the company been public? (IPOs- initial public offerings )

This made me to buy stocks analysing the ratio’s like P/E ratio (Price to Earnings), EPS

(Earnings per share), Tobin’s q Ratio. I mostly see the Beta coefficient when I am investing in

the stocks if the Beta value is less than 1 it resembled that it has a lower volatility that means the

risk is lower and if the Beta value is greater than 1 the risk is higher. According to William

(1970), when the Beta value is greater than 1 the investments are not highly correlated with the

market. For example the price of the gold goes up and down a lot, but not in the same direction

or at the same time as the market. In my point of view fundamental analysis is one of the main

strategies to analyse the company’s performance. Fundamental analyst considers earnings,

dividends, new products and research. For doing fundamental analysis Yahoo Finance comes in

handy for each stock I first use this and the next one is the Money Control where the analyst

gives opinion whether to buy the stocks, hold the stocks and sell the stocks. For example for

Infosys, first I will check the Beta coefficient and then the P/E and EPS ratio here the Beta is

very high but sometimes we should take risk in investing and in Money Control they gave

opinion to buy the stock after analysing this I decide to buy the stock.

14

Technical Analysis:

Technical analysis is a method to forecast the past market data, prices and the volume. It has

various chart tools such as candlestick techniques, which analysis the chart and the trend

patterns. Technicians mainly look out at the technical indicators, moving averages, relative

strength index, MACD, resistance and support. There are various techniques that can be

implemented in the technical analysis. In this stock trak game I have used Dow Theory believing

that the prices trend upward or downward. Backtesting is the systematic trading employed to test

on the historic data. Sometimes there occurs Efficient market hypothesis (EMH) where future

prices cannot be predicted from the past prices. The various concepts used in this stock trak

game includes chart pattern, Fibonacci, momentum, resistance, support and trending.

15

ACTIVE ACCOUNT - STOCKS

EXXON MOBILE CORPORATION (XOM)

XOM was going good in my Buy and Hold account so I chose this stock and carried out the

fundamental analysis. I was looking mainly on the income statement of the company. For

September 2014 revenue was 107,490, earnings per share - 1.89 and the net income was 8,070.

With regard to the cash flow the company receives amount from the operations of about 12,396

with capital expenditure of about 8,198. This analysis made me to buy XOM on 16 th of August

with 5 shares of price at $4.50 costing me $2,250. I decided to sell the stock when the price

started to fall so I sold it at $5.30 with the profit of $150. This is the first stock I bought in my

active account. Here I invested in a small amount where I didn’t get much profit. I rectified

myself to invest in more shares so that profit may be increased.

JOHNSON AND JOHNSON (JNJ): (SHORT)

I came across the famous company JNJ which is known for consumer packaged goods. I decided

to do technical analysis for this company. In this stock I used 20 day and 50 day moving

averages to determine the price movements the upward trend or downward trend. In this case it

shows downward trend when looking at the 20 day and 50 day moving standard the price

movement is moving in a stable manner. I decided to go on with 20 day moving average I

shorted the stock by investing $15,765 at the price of $105.10 with the dividend yield of 2.60%.

Unexpectedly my speculation was wrong within 2 days after I did short the stock started rising of

about $2.63 so I decided to cover the JNJ stock so that I can avoid losses.

16

DLF LIMITED:

Looking at the company profile, DLF is a large cap company having a market cap of Rs.

28813.77 Crore. In the quarter report of 30th September 2014 DLF has reached 48.16% from the

previous quarter sales, it got a net profit of about Rs. 220.74 Crore after taxation. Technically in

the chart I used the momentum oscillator with 15 days using the Fibonacci in October in the

chart it can be seen that there is a gap to be filled out. With Fibonacci showing a long red fall in

the price and simple moving average of 141.09. This gap I analysed yet to be filled, So I bought

this stock on 5th of November with 20,000 shares at the rate of 130.70 INR costing me 42,608.20

and it was going well I decided to sell the stock I found the stock will be falling in few more

days I sold it at the price of 154.25 earning profit of Rs.7,677.30 with percentage return 18.02.

17

18

The figure below shows some stocks I bought with their profits before selling the stocks.

19

ACTIVE ACCOUNT - FUTURES

According to Keith Redhead (1996) “Futures are traded on a futures exchange represent an

obligation to buy or sell a specified underlying delivery date or final settlement date in the future

at a specified price. The settlement price is the price of the underlying asset on the delivery date.

Both parties to a futures contract are legally bound to fulfill the contract on the delivery date. If

the holder of a futures position wishes to exit their obligation before the delivery date, they must

close it either by selling a long position or buying back a short position. Such an action

effectively closes the futures position and its contractual obligations”.

The best part of game for me is in the Futures, I gained lots of money from futures even though I

got loss in some stocks but profit was higher when compared to the losses. Future contract is an

rendezvous between two the parties’ buyer and seller. Firstly, the vendor is to deliver and the

consumer is to receive on a given prime of life date, a given quantity and an underlying financial

instrument at a price fixed. Futures involve two groups who actively participate in the trading:

hedgers and speculators. I entered into futures contracts to hedge risk and to do speculations for

some contracts. I bought totally 8 futures contract. With regard to the discussions in the class, I

tried to buy oil in futures contract but due to some reasons in the stock trak, I could not buy. The

figure below shows the open positions of my futures before selling.

20

Future Options:

Future Options is the case in which options are traded on the futures. In this case, call is the

option to obtain the contract and put is the option to vend the contract. First I was not unsure of

this then I gathered information’s on Future options. I bought two stocks in the future options

which are listed below. In both the case I acted as the option buyer for certain period.

21

Wheat Dec 14 Futures

Agriculture commodity price hedging for wheat:

After learning the concepts of Futures hedging the first contract that reached my mind is wheat.

The supply and demand for the market value will be fluctuating constantly. For example, the

farmer sell a number of future contracts corresponding to the crop range, he mane the price of

wheat here the contract is an concord to deliver certain bushels of wheat to the buyer in the

future at the fixed price. In this event, the farmer has hedged his exposure, he won’t care even if

the prices fluctuates. But hedging has lots of risk if the farmer could not cultivate agreed bushels

he has to spend from his own pocket which is a commodity risk. Further, I did some analysis of

wheat, I read news in which I came to know that wheat will be rising due to the ‘Russian Cold

Spell’ in Chicago but at the same time winter wheat was planted in Kansas. The National

Agricultural Statistics reported that 93% of the wheat was planted in the state. As a normal

person I can judge that during winter season there will be a demand for the wheat crop since dry

weather will erode the crops and the young plants will frost and also demand for wheat crops

will be increased during the month of November and December. After analysing this took a

forward step for me but also I wanted to be 100% sure so I did technical analysis for this future

contract.

Technical analysis for wheat:

In this case I considered interactive chart displaying using candle sticks, indicators I used are

moving averages and momentum. Using trend line, I drew an upward and downward line both

these made me to conclude that wheat is going in an upward trend. The single wheat futures

contract is based on the price of 5000 bushels of wheat. I bought 20 contracts at $5.26 on 5 th of

November costing me 525,500 US Dollars.

22

Closing the contract:

As this contract is due to expire in Dec 2014 I decided to close my positions and sell the contract

at $6.02 with the profit of $76,000. This is the huge profit I earned in the stock trak game and my

portfolio value increased due to this particular contract. This future contract made me to realise

when investing in a particular commodity hedging one should do also technical analysis in order

to be successful in the market.

23

Cattle living Dec 2014 Futures

Technical analysis for Cattle:

For cattle I used technical indicator as MACD oscillator, it is the difference between simple

moving averages and the exponential moving averages when the histogram is above the line of

zero indicates bullish signal when the histogram is below the line of zero indicates bearer signal.

I have used time periods 12, 26 and 9 for MACD oscillator with the bar type as hollow candles

which clears the pricing falls or rises. In this chart MACD shows bullish signal there is an

upward trending line. It has a resistance point of $1.65. So I decided to buy futures cattle on 14 th

of November at the price of $1.70. But future cattle started going in the downward trend at the

price of 1.65 it will go up, it went below 1.64 so I decided to sell the cattle future at 1.64 with the

highest loss of 23,520 with negative percentage return of 3.46. Futures can get huge profit as

well as huge loss. I came to know when investing in futures one should be very careful or else

leads to loss of investment.

24

ACTIVE ACCOUNT – OPTIONS

Option is the contract between the buyer and the seller with the right to buy or sell an asset at the

specified date with specified strike price. In this case the buyer pays a premium to the seller to

get this right. Options have Call and Put; call is the option of the right to buy and put is the

option of the right to sell at a specified price. In this stock trak game, I have utilized the call

option using the bullish strategy which is used by most of the options traders.

AMAZON OPTION:

Amazon is the biggest commerce company I started researching on this company. I decided to do

short call option for Amazon the Beta value is very high of 1.69 but I am going to take this risk 

25

“Prev Close was 299.86, High 304.89, Open 300.00, Low 300.00, Volume 1.7m52 Wk, High

408.06 Mkt Cap140.75B, 52 Wk Low 284,  P/E 1Y, Target Est 353.61, EPS-0.47” [Source

yahoo.com].

In this I technically analysed, I felt that the stock will rise. So I bought call option with Strike

price of 285 and last price is 304.41 with the premium of 15.15 and contract size is 100 and it

costed me 2335.

I sold this short call option with making profit of $1009 with percentage return of 26.98%.

Bank of America Corp Options:

Bank of America Corp is a famous American financial services corporation. I analysed technically using

chart the technical indicator; Relative strength Index which is J. Welles Wilder, Jr. trading tool. The

main rationale of this indicator is to measure vigor and flaw of the markets. If the RSI is above 70 it is

considered as the weakening of the bull market. Conversely, if there is a low RSI that is below 30, it is

said as oversold market or dying bear market. In this chart I have used the period time as 200. The

26

chart shows there is a resistance level at 15.50 and 15. The RSI suggests that it is not above 70. I felt

that the stock is going to rise I did call option for BAC at $17.30 with the premium of 0.10 and the

stock price at 17.50 costing me $1000. I did simple call buying bullish option strategy.

The option started to fall my speculation was wrong I decided to sell the call option at the strike price

of 18 so it costed me only 650 with the premium of 0.08.

27

The below figure show the call options loss and profit.

28

PORTFOLIO OVERVIEW

There is a drastically increase in the portfolio in the past 3 months; I made 76 trades with the

portfolio value of $1,090,952.29.

29

ACTIVE ACCOUNT REFLECTION

The Active account is the one which needed more attention where we have to be active in the

market. In this account technical and fundamental analysis should be carried out. I was not aware

of these concepts I started researching in Yahoo finance, Google, Bloomberg, Money control,

barchart.com. I started to use fundamental and technical analysis when I started investing in

stocks, options and futures. I bought more stocks and call rather than using short and put options.

I selected which suits me and I traded based on that. Futures trading suited me the best I was able

to predict the future market. According to me buying the stocks and holding it for a long period

and selling at the correct moment will make profit. So after investing in the stocks I waited for a

period time and then I sold it. I was learning the market fluctuations in that gap. From the Active

account I learned a lot than the Buy and Hold where we are participating actively in the market.

My portfolio value seemed to be higher than the Buy and Hold account. I became frustrated in

the end of October when my percentage return became negative 10% and I went last in the

ranking. After sometime I came to know that the stock trak has crashed. Loss is not a matter but

getting huge loss definitely matters.

30

REFLECTION OF STOCK TRAK

I started trading in the stock trak with lots of confusion, very hard to understand as it is new to

me. I started the game in the month of September and ended in the month of December. In the

beginning stage I made lot of losses and my portfolio value was very low. I started learning

various concepts and strategies and tried to implement in my own way.

In order to increase my liquidity position I used stack hedging while investing in the futures

market. Sometimes people in the class speak about ranking but I didn’t give much attention to

ranking. I felt that this is a game where we can learn more about the markets by getting profit or

loss learning matters positive. I tried to implement some of the strategies this stock trak game but

not all of them. At first I was afraid to play in this game because of negative thought that I will

lose in the market. After starting to trade actively I got positive attitude that I can sustain in the

market with some of my strategies. It is important that one should have their own way of trading

strategies. I developed my own strategies and I made myself comfortable with particular markets

for example, I became good in predicting future markets.

The stock trak game provided me wonderful opportunity to learn to trade, investing in the stocks,

options and the future markets. While playing this game I have visited more than 20 websites to

analyse each stock. This game made me to have an enlarged view. I had problems with the stock

trak when I trying to buy Future options. Although I had some problems stock trak is an

enjoyable experience.

In order to check frequent announcements and news of the stocks I installed many applications in

my mobile. Sometimes I forget to check the news and prices due to this I got much loss in the

game. I got to know how to select the stocks on what basis I have to do. This game made un-

knowledge person about the markets to a knowledge person.

I did not do much on short, cover and put, I did more buying the stocks and doing call options. I

became very good in this and comfortable I had a strategy of buying the stocks instead of

shorting with using fundamental as well as technical strategies. The most successful investor

Warren Buffet had his own principles of investing, he is a fundamental analyst.

31

After playing this game my prospects on trading analyst is changed, one should be very keen in

the market and knowing all the trade moves. In my future I wanted to be trading analyst this

stocktrak game gave me a career path.

WORD COUNT: 5,082

TUMBLR: ragavisinniah

32

REFERENCES

Derivatives (Report 2013). Office of the Comptroller of the Currency,U.S.

Keith, R (1996). Financial Derivatives: An Introduction to Futures, Forwards, Options and

Swaps. London: Prentice-Hall.

William, S. (1970). Portfolio Theory and Capital Markets. McGraw-Hill Trade.

Yougue, L. (1995). The Performance of Stocks: Professional Versus Dartboard Picks.

Journal Of Financial And Strategic Decisions

33