Opportunities in Power grid..

Power-grid is about to come with its FPO shortly. PSU is expected to issue fresh 15 percent equity and 5 percent equity would be divested by Government of India. After 2010 FPO, it would be another equity raising by the company. Power grid is in capital-intensive business and it requires constant equity infusion. But should you buy Power grid in FPO ? Power grid is a kind of annuity business which is assured of constant ROE by Government. It is currently trading at reasonable valuations of 10-11 X of earnings. As a shareholder you might feel it moves very slowly and given the fact that last FPO price in 2010 was 90 and current price is 100, its return are below annual bank fixed deposit of 9 percent. I am expecting FPO price of closer to 100 but I won’t be a buyer in FPO. I am not a fan of PSU companies and they are never a part of my long-term portfolio. They have never generated consistent long-term wealth for shareholders. These can be trading bets from oversold levels but not long-term bets. Power-grid is my favorite trading stock. I keep selling Power-grid calls and buy covered calls in it (buy future and sell call). Given FPO overhang and 15 percent equity dilution I don’t expect share price to rise sharply in near future.

Disclaimer: Please take reasonable care while trading in options, especially while selling. I am not advising anyone to sell or buy options. My purpose of writing this blog is to highlight my trading strategies.

Volatile week ahead..

What a sharp bounce-back we had from the Nifty lows of 5120 couple of weeks back! May be, it was oversold markets bounce or Dr. Rajan effect or may be a combination of both. INR along with other emerging market currencies has also bounced back from its lows of 68.8. But there are two key events ahead which will decide further course of direction for Indian markets. US Fed will take decision about QE tapering which will have huge bearing on Emerging markets including Indian markets. Last week Non-farm payroll data was below market expectations and it might force Fed to go light on taper. In case Fed tapering is aggressive than US $ 10 billion per month, emerging market assets might sell-off again. After Fed decision, RBI monetary policy on 20th September will also be key for markets. There are a lot of expectations from RBI new Governor to announce growth oriented measures.

Implied volatility (IV’s) in option market are at 12 month high given the expectations of market movement either side after these two important events next week. Delta neutral hedge may be one of the strategy if you have underlying asset and sell options to benefit from higher vols. I have done the same in L&T. But apart from that I don’t have any other position in market currently and waiting for these events to pan out and then take a call. Buying strangle can be one more strategy to benefit from these events but given higher vol. I won’t do that.

Disclaimer: Please take reasonable care while trading in options, especially while selling. I am not advising anyone to sell or buy options. My purpose of writing this blog is to highlight my trading strategies.

Opportunities in Titan Industries..

Titan Industries has been big wealth creator for its shareholders for past decade. Company had a dream run for last several years under Mr. Bhaskar Bhat and successfully created brands like Fasttrack and Tanishq. Titan is trying to model itself as lifestyle company and trying to build other brands in different product categories. Its Jewellery division is the major contributor to both topline and bottomline. But with recent regulatory changes, company is facing the heat and stock price fell sharply on Friday. As per RBI Wednesday circular, Jewellers like Titan have to make full payment for import of gold. Earlier Titan was buying gold on lease rather than payment full upfront amount. Now titan will have to take price risk and in case it chooses to hedge, it will have to incur some costs. Moreover its working capital requirements and interest costs will increase and return ratios like ROCE will come down. Titan balance sheet is clean and doesn’t has much debt so taking on extra debt shouldn’t be a problem. But in the short term, RBI measures to control INR slide has added another uncertainty factor for Titan shareholders to cope up with apart from consumption slowdown in the economy.

I was selling Titan Industries calls before RBI Wednesday circular. I had sold 310 & 300 calls aggressively. But after Friday’s fall I have squared off 300-310 calls and moved down to 280-290 calls. For protection, I have also bought 250 call. It’s a ratio spread – for every 250 call bought, I have sold ten 280-290 calls.

Disclaimer: Please take reasonable care while trading in options, especially while selling. I am not advising anyone to sell or buy options. My purpose of writing this blog is to highlight my trading strategies.

Dream market for option writers

It’s a dream market for any option writer like me. It is extremely bipolar market where sectors like IT, Pharma & FMCG continue to see strong out-performance and everything else is under-performing. In fact, current Nifty levels are held due to strongly performing sectors otherwise rest of the market is below 2008 lows. Although now even these strong sectors are coming in for some selling. Accident continue to happen with heavily indebted companies like JP Associates and its group companies. There is carnage across mid-cap stocks. Infra major like L&T continue to struggle and report poor results. Capex cycle and new projects have completely stalled or postponed. Rupee continues to remain under pressure and RBI continues to douse fire over it. Indian Economy is in shambles and with each passing day , new data point continues to confirm that. Recent HSBC Services PMI also point towards contraction. May be it is just confirming the already known trend. I would be extremely surprised if GDP growth rate for FY13-14 is more than 5 percent.

After L&T quarterly results I had aggressively sold its call options. I have squared off these options and now moved onto other stocks like Titan, Ambuja cements and Power grid. Return wise August has been my best series till date.

Disclaimer: Please take reasonable care while trading in options, especially while selling. I am not advising anyone to sell or buy options. My purpose of writing this blog is to highlight my trading strategies.

Happy New Year 2013

Happy New Year 2013 to all. I hope that 2013 turns out to be happy and prosperous investing & trading year for all.

What sea-change can a year bring to the mindset of people. Start of 2012 was full of bearish predictions and opposite holds true for 2013. Lot of analysts are bullish on Indian Equity markets in 2013. With Interest rate cuts from RBI round the corner in its January meet, 15% returns expectations from Indian equity markets seems reasonable. Key risks would be Inflation remaining under control, Government of India acting on worsening Fiscal deficit situation. Fiscal deficit has already touched 80.4% of the budgeted target for full FY13. Yesterday released Current Account Deficit (CAD) numbers for Q2’FY13 also look shockingly bad at 5.4% of GDP. This is much higher than 4.2% CAD of Q2’FY12 and 3.9% of Q1’FY13. Poor CAD numbers should keep INR appreciation in check in 2013 despite strong inflows. Union budget would also be the key for equity markets in 2013. If GoI presents good budget with no sharp increase in subsidy and indication of tough measures on fiscal front, markets should see good inflows and continue their upward march.

I am expecting good returns from my equity holding of Ruchira Papers. It is a small paper company based out of Himachal Pradesh (H.P.). Given its financial performance in first half of FY12-13, it looks undervalued and I am expecting 50-60% returns in next 6 months.

I am also positive on Eros International which is into movie production and distribution. I had entered into eros at 162 odd levels and realized some profits at 205 levels.

NMDC follow up: CAG revenue loss report and rising Iron ore prices

Last week I had written about entering into covered call of NMDC (https://writingoptions.wordpress.com/2012/12/17/nmdc-covered-call/). I have squared off my December long and rolled over to January. Last week there was CAG report on potential revenue loss of Rs 746 crore from inappropriate pricing of iron ore during 2007-10 (http://articles.economictimes.indiatimes.com/2012-12-20/news/35933836_1_iron-ore-japanese-steel-mills-nmdc). After the release of this report, NMDC stock fell 3%. I don’t expect NMDC stock to fall much from current levels on account of CAG report.

Rising Iron ore prices should drive NMDC stock price (http://www.business-standard.com/india/news/iron-ore-steadies-at-5-12-month-high/496667/). Benchmark prices for 62 percent grade Iron ore has risen 56% from September low of USD 87/tonne. Markets have factored in Chinese demand recovery and restocking of Iron ore at Chinese ports. In case US fiscal cliff gets resolved in next one week, there might be relief rally in riskier assets across the world. This should also provide support to Iron ore prices and ultimately NMDC stock price.

I am playing NMDC for 6-7% rise till levels of 170-175. Somehow I am not comfortable holding PSU stocks for long term. Government intervention usually results in slow decision making, below par performance. Despite being in monopoly position, lot of these companies continue to lag private peers.

Will Diageo revise United Spirits open offer price ?

Diageo open offer for buying 26% equity stake from public shareholders will open on January 7 and close on January 18,2013. Open offer price is Rs. 1440 per share. Now the big question is who will tender shares in this open offer ? Given the fact that current share price is ruling at Rs 1934 (NSE Friday closing price), any sane individual will not tender shares (Unless share price drops drastically in next 2 weeks). Will World’s largest liquor producer increase its open offer price from 1440 ? As per Diageo management comments in analyst con-call, company will not raise open offer price. For now, Diageo is comfortable with its stake of 27.4 % in United Spirits after 10%  preferential allotment on expanded equity. But it goes without saying that Diageo will continue to look at creeping acquisition route in case of open offer failure. May be for now they are comfortable with 27.4% equity in USL, but for how long ?

Given all these factors USL will not rise much from current levels but will not fall much also. I have sold January series OTM calls of USL. One key risk in selling USL calls is Kingfisher Airlines-Etihad deal. In case this deal happens, it will lead to short-term rise in USL stock price. On the other hand there were news report that Government of India is planning sin tax on Alcohol & Tobacco (http://articles.timesofindia.indiatimes.com/2012-12-22/india/35968481_1_sin-tax-tobacco-people-in-india-drink). Decision on sin tax will be taken in 27th December National Development Council (NDC) meeting.  In case this tax is levied, it will put short-term pressure on USL stock.

IGL-PNGRB case next hearing deferred to March 2013..

It seems IGL-PNGRB case in Supreme court will take some more time for final verdict. Next hearing has been moved to 18th March’13 (http://www.moneycontrol.com/news/stocks-views/igl-has-strong-support-around-rs-245-sp-tulsian_797421.html). Court will hear all the affected parties together. This court case verdict has been big overhang on the IGL stock. In case court rules in favor of IGL, its stock will see big rally last seen after favorable Delhi high court verdict (https://writingoptions.wordpress.com/2012/06/01/igl-zooms-29-percent/). Large part of PNGRB order negatives has already been factored in share price. So, I don’t expect large negative reaction in case of negative verdict.

It gives opportunity to sell IGL OTM calls in January series. In case IGL stock goes down sharply on account of market correction, I might even go long or buy covered calls on IGL stock.

Cairn India production ramp up issues

On Friday, there were some news reports that Cairn India is struggling to ramp up its production in Bhagyam oil field at Barmer in Rajasthan (http://www.dnaindia.com/money/report_cairns-ramp-up-goes-kg-d6-way_1779944). Company has been looking to ramp up its production from 175,000 bpd to 240,000 bpd. Given the uncertain global economic environment, crude prices may not rise much from current levels. Inability to ramp up production & flat to declining trend in crude oil prices will ensure that Cairn India earnings remain more or less flat next year.

On every stock price rise, Cairn India will have overhang of stock supply from Cairn Plc residual stake. It gives good opportunity to sell some OTM calls in December & January series. One immediate risk to selling these calls will be US fiscal cliff resolution. In case there is any announcement on fiscal cliff front in the next one week, equities & commodities might rally. But I will sell Cairn India calls more aggressively into that rally.

Policy rates unchanged in RBI December credit policy

 

RBI has left CRR and repo rate unchanged at 4.25% and 8% respectively in its December credit policy. There was knee-jerk reaction in market as large number of market participants were expecting at-least CRR cut. But Central bank has taken more dovish stance and guided for a repo rate cut in its January policy.

I have squared off sold Bharti 360 calls and sold few Ambuja cements 220 call.