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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
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
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
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