Expert players in options faced huge losses in market meltdown (The Economic Times 29th Jan 2008)The recent market meltdown has extracted a heavy price of retail and high net worth investors who had been rashly dabbling in stock and index futures without much thought to risk. But they could draw some comfort from the fact that many of the ‘expert’ players in the options segment — the more sophisticated side of the derivatives market — have been guilty of a similar sin, and have ended up blowing a huge hole in their pockets. The proprietary trading desks at a few domestic leading brokerage houses, who specialise in the F&O (futures and options) segment, recklessly wrote out put contracts on the Nifty for strike prices between 5800 and 6200 just before the market began its slide during the mid of this month. These investors had quietly accumulated these options betting on a reversal of the bullish trend. Writing a put option for these prices means that the writer of the put option will have to buy the index from the holders of the options at the price agreed in the contract. He is betting that the market will not fall much and his gain is limited to the premium he gains from writing those contracts. It is a very risky bet, considering that he can suffer unlimited losses if the market goes into a freefall, like it did last week. The Nifty dropped an unbelievable 1500 points between January 18 and 22, leaving the put writers devastated. More
Rising margins keep traders away from derivatives market (Live mint.com 29th Jan 2008)Traders are finding it difficult to take fresh positions on the derivaties market as brokerages have started refusing part-payments for derivative trade, fearing further increase in margins that have already moved up from 25% to 40-80% in past one week because of rising volatility. This, according to analysts, is turning the market illiquid and vulnerable to steep falls.
Sensex, India’s benchmark equity index, on Monday extended its volatile behaviour, dropping 918 points, or 5%, mid-morning in sync with global markets. But it recovered to close at 18,152.78, still down 208.88 points or 1.14%, even as other key Asian markets remained in the red. At the National Stock Exchange, the 50-stock Nifty index ended at 5274.10, down 109.25 points, or 2%. The recovery was aided by domestic institutions which net-purchased Rs597 crore worth of shares even as foreign institutions net sold Rs1,038 crore in the cash market.
The margins on index and stock futures are based on ‘value at risk’, computed by bourses on a daily basis, with volatility as a core factor. More
Rising margins keep traders away from derivatives market (Live mint.com 29th Jan 2008)Traders are finding it difficult to take fresh positions on the derivaties market as brokerages have started refusing part-payments for derivative trade, fearing further increase in margins that have already moved up from 25% to 40-80% in past one week because of rising volatility. This, according to analysts, is turning the market illiquid and vulnerable to steep falls.
Sensex, India’s benchmark equity index, on Monday extended its volatile behaviour, dropping 918 points, or 5%, mid-morning in sync with global markets. But it recovered to close at 18,152.78, still down 208.88 points or 1.14%, even as other key Asian markets remained in the red. At the National Stock Exchange, the 50-stock Nifty index ended at 5274.10, down 109.25 points, or 2%. The recovery was aided by domestic institutions which net-purchased Rs597 crore worth of shares even as foreign institutions net sold Rs1,038 crore in the cash market.
The margins on index and stock futures are based on ‘value at risk’, computed by bourses on a daily basis, with volatility as a core factor. More
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