- Wealth PMS (50L+)
Now I’m getting off the soap box to tell you what I did. I drove from Bangalore to Mumbai, where I am today. I drove on Friday the 19th, and on the way, near Hubli I got an SMS from a friend saying, “If you can see this message, note that Nifty has crashed 200 points or so”. It was 3 PM, and I felt good about the four positions I had – 100 short Mini Nifty at 5940, 100 of Nifty 5800 put at Rs. 60, and two ICICI bank puts around the 1260/1290 levels for about 20 Rs. a piece. I’d held these for a while, keeping things thin as I had no intention of extending myself over my transfer.
I decided to hold on to the short positions and not trade (I could tele-trade if I wanted to) and later, wrote a blog post in the hotel room at Hubli, saying that my advise was to sell, regardless. If anyone felt really bad about selling, they might wait for a rally instead.
On Monday as the packers were moving our stuff in, I had no time to look at the markets, until around 3 PM, when I saw the 1000 point + drop on the Sensex. The Nifty was now at 5400. Fantastic, I thought – I just made my trip cost in one days move! I was long nearly nothing, with most of my portfolio being sold before I left – I had the puts to cover my mutual fund investments and some other shares I owned.
Tuesday was a murder for the markets. After opening circuit down and trading halted for the day, the Nifty moved to 4500 before moving back up. By Tuesday evening the positions I had were partly covered, and I was up with a profit of over 1.5 lakhs. On a net short investment of about 1.2 lakhs or so. I had to put on a few other positions to cover profits. Since the ICICI options were thinly traded and I didn’t want to exercise, I could book the profit by simply buying a future at a good point, say 1170, which effectively resulted in about 35K of profits for an investment of about Rs. 6,000. But the Reliance Money site was so slow, and my connection was also quite horrendous, which resulted in huge slippages and basically bad fills on the orders. Anyways, the profit was so wide I wasn’t unhappy.
I eventually covered all shorts at around the 5,000-5,100 levels on the Nifty, and netted my profits like so:
100 Mini Nifty Short sell: Sold at 5940, bought around 5100, profits of 80K or so for an investment of about 80K.
100 Nifty 5800 put: Bought at 60, Sold around 700, a 70K profit for a net investment of 6,000.
350 ICICI Put: Bought at Rs. 20, sold at Rs. 100 (net sell with a future offset), profit of around 28K for an investment of 7K.
There were about two trades I haven’t mentioned here, which resulted in a 10K loss or so, but the net result was about 1.6 lakhs in profit.
While this was good, you should consider that this does not happen every week (although nowadays it seems to!) and you can lose heavily if you are on the other side of the move. But it indicates one thing – falls can be sudden and far deeper than you imagine.
Buying deep-out-of-the-money puts can be immensely profitable in such situations. I bought the Nifty 5800 put when the index was at 6200, for Rs. 60. I sold them at over Rs. 700. That means if I had bought a 8% cover-put (meaning a put that covers me beyond an 8% drop) every month I would have broken even if there was a crash every 12 months! And as we have seen, there have been at least two-three such crashes every year – meaning that buying deep-otm puts have been profitable. (Not to say that they will *remain* profitable, because the landscape has now changed, and the premiums for such options has gone up considerably)
Where option premiums are ridiculously high, it may be better to write options (sell them) than to buy them. For instance, today is expiry day, and yesterday the Nifty closed around 5160. The 5300 call was priced at Rs. 30, and the 5000 put at Rs. 40 – this has some phenomenally high implied volatility! Which means, if you wrote both these options, you would be covered for ONE day range of 4930 to 5370. And the max profit (between 5000 to 5300) would be Rs. 70 – that is Rs. 7,000 for a 120K investment if you sold 2 contracts each way. But the point is – it’s for ONE DAY. If you’re willing to foot the risk (which is actually a lot lesser than it seems) this could be quite profitable. (Heck, let me wait and see the end of today if things did pan out to be profitable!)
(Note: Do not try this at home. This is purely information and you should consider it fiction.)