On popular demand, we bring in an introduction to option pricing – a primer of sorts – and an explanation of VIX (the volatility index). Followed by an analysis of where we are right now. And of course, all at Marketvision. Enjoy the IPL final as it ends a very light week in terms of volumes and data on the markets.
The Vix is an interesting index – a volatility index that determines what option prices imply that our volatility is. A quick primer: Options give a buyer the right, but not the obligation to buy or sell a stock or index at a given price (“Strike price”) at or upto a given day (“Expiry Date”). Call options are when you get the right to buy and put options, to sell.
For example, a Nifty 5400 call option expiring June 30 (In India, they usually expire on the last Thursday of the month) was trading at Rs. 66 on Thursday, when the Nifty was at 5415. That means someone was willing to pay Rs. 66 to be able to buy the Nifty at 5500 till June 30. So his break even price is Rs. 5566.
(Note: Options are bought and sold before the “Expiry date”. You can buy Jun 30 options today at 66, and sell them tomorrow at 85, and realize the profit. You don’t have to wait till expiry. Who’s on the other side? Other people, who have the opposite view.)
But why 66? Since the Nifty is at 5415 today, how does he come about to the figure of 66 rupees? Why does it go up to 85 when the Nifty goes up to 5450?
There are many answers, but this has been studied since the 60s. Fischer Black and Myron Scholes eventually created a valuation method for options that is called the Black Scholes method. I won’t go into the details, but you can get to the price using these parameters:
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My point here is that although yields on Greek debt are indeed high, they’re not anywhere near the really distressed levels that we’d expect to see if the market was expecting a massive and imminent default. If you buy a bond at 71 cents on the dollar, that’s cheap, to be sure, but there’s also an enormous amount of downside: if Greece does default in anything but the gentlest possible manner, then you’ll end up losing money.
Before you start reading about sector fund – I would like to tell you clearly that this is the riskiest category in mutual fund. Time to time few of the sectors have given phenomenal returns but end of the day losers are more than winners when we talk about investors. My suggestion is they should never be part of your core portfolio but depending on the individual you may think about this in your satellite portfolio. In this article I have covered what are sector fund, best sector funds, benefits & risk associated with them and finally should you invest in sector fund.
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