11 April 2007
Pre flight:
Slept at 11pm and woke by 3am; cab was delayed - stuffed some things at the last minute into my two bags and in the pitch black darkness we were off to the airport.
7:10am IST:
Everything was smooth as of now - helpful British airways staff everywhere (helpful and pretty I might add!) who ensure that you can't take a wrong step or land up in the wrong queue. I also The only place there really was a queue was at the immigration area. It was nice to hear a couple of typical Engish voices behind me discussing a gamut of topics ranging from the Bush administration to Afghanistan to carrying vodka! After immigration was the security check and that was a snap - you look in awe at the cabin crew and pilots who walk past queues without any prompts.
There was a good amount of time for the flight - spent my time loitering around the departure area reading a John Grisham book "The Broker". Also overheard a couple of middle aged ladies chatting about their fights to the Gulf. Time sped quickly and soon there was a call "The BA flight is ready for boarding - passengers needing assistance on wheelchairs will board first followed by the elderly, passengers with infants and then passengers on rows 26-40 followed by rows 21-25. Exclusive club travellers can board at any time. Please remain seated till further notice".
No sooner had the announcement finished when a huge queue formed - actually a double queue and the people in the queue didn't seem to require any assistance or carrying infants. The next announcement came, "those needing wheelchair assitance can now start boarding. Other passengers are requested to remain seated till further notice". Not many were seated - the queue was there to stay and it appeared as if people were very enthusiastic to sit in the airplane than in the departure lounge. Everyone seemed to have the attitude of "early worm catches the bird" in situations where it didn't matter much. We are anyway going to get our seats and there will surely be space on board for everyone's cabin baggage - so why hurry; we could just follow the airline instructions rather than forming long queues and waiting for longer times.
8:00am
When I entered the flight I almost immediately realized the disadvantage of having a window seat (something that I had asked for while getting the boarding pass). Beside the window seat where two more seats - so to get to the aisle or to even get out from the seat I would have to disturb two fellow passengers to stand up as well; and my fellow passengers were a couple of elderly ladies - one English and one Indian. I struggled with finding overhead space for my cabin baggage - and realized that the smaller bag you carry the more easier it is to find space. Eventually just as they announce please take your seats I found a vacant overhead cabin.
And off we went in the morning; departing the shores of my homeland - first time in seven years. Was a nice feeling - the takeoff was really smooth and my ears didn't even get blocked during the takeoff. I kept the novel in hand thinking I would read it but for most of the time was engrossed with the inflight entertainment system (you have a mini TV on the back of every seat for which you have your own remote control and on each channel a specific movie is played). I saw the movie "Incredibles" completely and slept off for a couple of hours. I didn't want to disturb the two ladies to the right and timed my walking/toilet breaks such that I had only 3 during the 10 hour flight. I usually hate the food on flights when I was small but used to love them when I came home and ate it. This time the breakfast and lunch was pretty decent and I ate most of it. Towards the last couple of hours of the trip is started feeling miseable - flight sick I guess where that flight food smell was nauseating; mentally I probably felt tired due to lack of sleep (slept only 4 hours before the night of the travel and then during the flight only for a couple of hours), felt my head throbbing a litte and felt simply miserable. I wandered into philosophical mood and wondered "What are we doing in this world? Why are we here? How would it be if there were no earth at all - where would we be?" "Why are we so obsessed with money, matter and looks when everything is just temporary? Where is the world heading to? Does everyone know their purpose in life?"
The flight began its descent and somehow my philosophical mood kind of made me feel better.
Sunday, April 15, 2007
Sunday, April 08, 2007
Ramblings of 8th April...
I've been spending my time learning about semaphores and processes and threads - probably something that I should've learnt by now; but as they say 'better late than never'. It is quite a fascinating topic.
It was nice to watch a supposedly weak team topple the number one team in the cricket world cup. The passion and enthusiasm in the players is something that stirs even a passive spectator. Bangladesh batted beautifully in the last ten overs playing some cheeky shots and scoring runs at will. South Africa was at the receiving end and a total of 250 against any team isn't a cakewalk. And so Bangladesh have done their second killer act in this world cup; who knows, they might have more in store!
I read an interesting news article about a research being conducted somewhere in Europe regarding "what women want". The results are really depressing news for highly ambitious guys; it seems girls don't prefer the highly ambitious, high life bachelor since these hi fi guys might not spend enough time with family and won't help sustain the relationship. What a pity :-(
It was nice to watch a supposedly weak team topple the number one team in the cricket world cup. The passion and enthusiasm in the players is something that stirs even a passive spectator. Bangladesh batted beautifully in the last ten overs playing some cheeky shots and scoring runs at will. South Africa was at the receiving end and a total of 250 against any team isn't a cakewalk. And so Bangladesh have done their second killer act in this world cup; who knows, they might have more in store!
I read an interesting news article about a research being conducted somewhere in Europe regarding "what women want". The results are really depressing news for highly ambitious guys; it seems girls don't prefer the highly ambitious, high life bachelor since these hi fi guys might not spend enough time with family and won't help sustain the relationship. What a pity :-(
Wednesday, April 04, 2007
What is the option in options? How options work?
Just thought of writing a series on the stock markets, finance and related concepts - hope you enjoy the series...Stock market terminologies are bolded
What is the option in options? How options work?
You must've heard of derivatives with respect to te stock market; Futures and Options (F&O as they are called) are a form of derivative. We'll take a look at that later.
So let's say there is a piece of land up for sale. Owner demands 5 Lakhs. You really want to own that property but can't afford it right now. You want to buy it after a couple of months. But the owner is bound to sell it to someone else by then - after all, everyone is into real estate business now. So you talk to the owner and tell him, "I really want to buy this land in a couple of months".
Owner: I can't keep waiting for two months; what guarantee do I have that you will buy it after 2 months. Two months is a long way away.
After a long pause the owner says, "Ok, we'll do one thing. You pay me an advance amount now - like a reservation fee to block the land for you. If you don't buy it then at least I would get the reservation fee".
"And if you do buy the land, then I'll give it to you for the same price of Rs. 5 lakhs itself irrespective of the market price at the end of two months".
This sounds a fair enough deal. We pay a non-refundable advance to the owner and at the end of the second month we have the option to buy the land at the current price. We have a gut feeling that the price of the land will most likely shoot up by 2 months.
Note: It is an option given to us by the owner and not a compulsion for us to buy the land at the end of two months. Let's say the advance amount is 10% of the total value = Rs. 50,000
This amount is the the premium.
Now at the end of the second month two scenarios can arise because of various factors:
1.) Price of land shoots up (say to Rs. 6 lakhs).
2.) Price drops to Rs. 3 lakhs.
Case I: If case 1 happens, then we will gladly buy the land at the promised rate of Rs. 5 lakhs - we don't need to pay the current market price because the owner promised to give it to us at the old rate of Rs. 5 lakhs.
So now we can buy the land at the old rate and resell it to make a profit of Rs. 50,000.
Profit = Selling price - (premium paid + price of land)
= 6,00,000 - (50,000 + 5,00,000) = Rs. 50, 000
The owner who gave us the option has actually suffered a loss. If he hadn't sold us the option, or if he had charged a higher premium he could have made more money because the land price now has shot up.
Case II: Now if we buy the land then we stand to lose Rs. 2,50,000.
Loss = 3,00,000 - (50,000 + 5,00,000) = Rs. 2,50,000.
Here the owner actually make a good profit while we suffer a loss. But wait; we never promised the owner that we will surely buy the land after 2 months - it was just an option. So now we will decide not to enforce the option in which case we won't buy the land and we will lose the premium we paid for the option - a loss of Rs. 50,000 only. Land owner earns Rs. 50,000 because the land price went down.
So we were the buyer of the option and the land owner was the seller of the option (called the writer). The buyer of the option has limited liability (maximum loss is the premium paid) but the seller has unlimited liability (the higher the land price goes at the end of the second month the greater the loss the seller suffers).
At the end of the second month we had the choice to either enforce the option (called exercising the option - in which case we buy the land at the promised rate) or ignore the option (in which case we lose the premium).
Apply the same concept to stocks and you'll understand what are "options" in terms of stocks. Instead of the land here the underlying asset is the stock of a company. Typically stock options are traded in lots - one lot is usually 100 stocks but it could vary depending on the price of the stock (sometimes a lot is 3000 stocks).
Note: Seller of the option feels the price will go down while the buyer feels the price will go up.
We'll end with a puzzle:
A colleague made a whopping Rs. 15,000 in one day by trading in options. He did so without exercising the option. Any guess as to how he did it?
What is the option in options? How options work?
You must've heard of derivatives with respect to te stock market; Futures and Options (F&O as they are called) are a form of derivative. We'll take a look at that later.
So let's say there is a piece of land up for sale. Owner demands 5 Lakhs. You really want to own that property but can't afford it right now. You want to buy it after a couple of months. But the owner is bound to sell it to someone else by then - after all, everyone is into real estate business now. So you talk to the owner and tell him, "I really want to buy this land in a couple of months".
Owner: I can't keep waiting for two months; what guarantee do I have that you will buy it after 2 months. Two months is a long way away.
After a long pause the owner says, "Ok, we'll do one thing. You pay me an advance amount now - like a reservation fee to block the land for you. If you don't buy it then at least I would get the reservation fee".
"And if you do buy the land, then I'll give it to you for the same price of Rs. 5 lakhs itself irrespective of the market price at the end of two months".
This sounds a fair enough deal. We pay a non-refundable advance to the owner and at the end of the second month we have the option to buy the land at the current price. We have a gut feeling that the price of the land will most likely shoot up by 2 months.
Note: It is an option given to us by the owner and not a compulsion for us to buy the land at the end of two months. Let's say the advance amount is 10% of the total value = Rs. 50,000
This amount is the the premium.
Now at the end of the second month two scenarios can arise because of various factors:
1.) Price of land shoots up (say to Rs. 6 lakhs).
2.) Price drops to Rs. 3 lakhs.
Case I: If case 1 happens, then we will gladly buy the land at the promised rate of Rs. 5 lakhs - we don't need to pay the current market price because the owner promised to give it to us at the old rate of Rs. 5 lakhs.
So now we can buy the land at the old rate and resell it to make a profit of Rs. 50,000.
Profit = Selling price - (premium paid + price of land)
= 6,00,000 - (50,000 + 5,00,000) = Rs. 50, 000
The owner who gave us the option has actually suffered a loss. If he hadn't sold us the option, or if he had charged a higher premium he could have made more money because the land price now has shot up.
Case II: Now if we buy the land then we stand to lose Rs. 2,50,000.
Loss = 3,00,000 - (50,000 + 5,00,000) = Rs. 2,50,000.
Here the owner actually make a good profit while we suffer a loss. But wait; we never promised the owner that we will surely buy the land after 2 months - it was just an option. So now we will decide not to enforce the option in which case we won't buy the land and we will lose the premium we paid for the option - a loss of Rs. 50,000 only. Land owner earns Rs. 50,000 because the land price went down.
So we were the buyer of the option and the land owner was the seller of the option (called the writer). The buyer of the option has limited liability (maximum loss is the premium paid) but the seller has unlimited liability (the higher the land price goes at the end of the second month the greater the loss the seller suffers).
At the end of the second month we had the choice to either enforce the option (called exercising the option - in which case we buy the land at the promised rate) or ignore the option (in which case we lose the premium).
Apply the same concept to stocks and you'll understand what are "options" in terms of stocks. Instead of the land here the underlying asset is the stock of a company. Typically stock options are traded in lots - one lot is usually 100 stocks but it could vary depending on the price of the stock (sometimes a lot is 3000 stocks).
Note: Seller of the option feels the price will go down while the buyer feels the price will go up.
We'll end with a puzzle:
A colleague made a whopping Rs. 15,000 in one day by trading in options. He did so without exercising the option. Any guess as to how he did it?
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