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 :-(
Sunday, April 08, 2007
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?
Sunday, March 18, 2007
Heights of stupidity...
It was shocking to hear a person calling up a TV channel during one of the post-match analysis shows and say, "He is a stupid captain".
And on another news channel a well educated person (with a baby in hand) comments, "He doesn't even know how to hold the bat".
Wondering who they are talking about? None other than a couple of cricketers from our world cup squad after the shock defeat the team suffered at the hands of Bangladesh. I am no great fan of the Indian team but I felt sorry for the players and disgusted with the way 'the so called fans' voice their opinion; and that too saying such words on public television is crossing the limits.
What aroused me was the fact that there are so many people who criticize Indian cricketers and pass comments saying they can do this, they can practice on their weakness, they are mentally weak, they don't have aggression, they don't have the will to win, they are playing rash shots and getting out etcetera etcetera. How many of these 'fans' do any introspection into their own lives; how many of them have told themselves 'never give up', how many of them have fought in adversity, how many of them have tried to change things around them, how many of them have been in pressure cooker situations, how many of them have been perfect in life never committing a mistake, how many of them have the strength to resist temptation, how many of them have the energy to motivate others?
Just any X, Y or Z throws comments in public as if they are Mr. Perfect or as if they have represented India at the national level. Why don't they get into the national side and prove themselves instead of passing such comments in public. Freedom of speech is good but it should't be used to mock someone. Fans might get emotional over the way their team performs and if they do badly there is limit to the kind of words used. Feeling disappointed is fine, but getting angry and personally attacking someone is downright horrible. I really wish the same people would look into their own lives and change themselves; I wish people would become more critical of themselves, scrutinize their lives and change rather than keep pointing finger at someone else. It is so easy to point fingers at someone and say "they are doing wrong", but it is so difficult to do the same to ourselves. It hurt seeing educated people talk like that in public - you learn subjects like moral science but what use is all that if you don't have basic respect for another fellow human being.
To end on a lighter note, it was a really spirited performance by the minnows Ireland and Bangladesh in the world cup - I enjoyed the way they played; especially the effort and commitment showed in their fielding and on the day they played better and deserved to win.
And on another news channel a well educated person (with a baby in hand) comments, "He doesn't even know how to hold the bat".
Wondering who they are talking about? None other than a couple of cricketers from our world cup squad after the shock defeat the team suffered at the hands of Bangladesh. I am no great fan of the Indian team but I felt sorry for the players and disgusted with the way 'the so called fans' voice their opinion; and that too saying such words on public television is crossing the limits.
What aroused me was the fact that there are so many people who criticize Indian cricketers and pass comments saying they can do this, they can practice on their weakness, they are mentally weak, they don't have aggression, they don't have the will to win, they are playing rash shots and getting out etcetera etcetera. How many of these 'fans' do any introspection into their own lives; how many of them have told themselves 'never give up', how many of them have fought in adversity, how many of them have tried to change things around them, how many of them have been in pressure cooker situations, how many of them have been perfect in life never committing a mistake, how many of them have the strength to resist temptation, how many of them have the energy to motivate others?
Just any X, Y or Z throws comments in public as if they are Mr. Perfect or as if they have represented India at the national level. Why don't they get into the national side and prove themselves instead of passing such comments in public. Freedom of speech is good but it should't be used to mock someone. Fans might get emotional over the way their team performs and if they do badly there is limit to the kind of words used. Feeling disappointed is fine, but getting angry and personally attacking someone is downright horrible. I really wish the same people would look into their own lives and change themselves; I wish people would become more critical of themselves, scrutinize their lives and change rather than keep pointing finger at someone else. It is so easy to point fingers at someone and say "they are doing wrong", but it is so difficult to do the same to ourselves. It hurt seeing educated people talk like that in public - you learn subjects like moral science but what use is all that if you don't have basic respect for another fellow human being.
To end on a lighter note, it was a really spirited performance by the minnows Ireland and Bangladesh in the world cup - I enjoyed the way they played; especially the effort and commitment showed in their fielding and on the day they played better and deserved to win.
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