Weekly Outlook on Indian Stock Markets - 14th July to 18th July, 2008

In the background of economic turmoil, the Indian politics has reached its climax. Within a week’s time, the Indian Government ruled by Congress will be facing No-Confidence motion in the Parliament. With dark clouds of inflation, interest rates and slowdown looming over Indian economy, Indian stock market is wishing that government doesn’t fall down at this juncture.

But the fundamental concerns still remain the same whether this government remains or falls down. The inflation is inching up week-by-week. The economy is showing considerable slowdown. The latest example is the IIP data for the month of May that released last Friday, which indicates the decrease in industrial growth to 3.3% viz-a-viz 11% lat year. And the most important is the Crude Oil, which is showing no signs of relent.

The government is taking monetary steps, which is not enough. The government must clampdown on the hoarders who have been accumulating the commodity and then pushing up their prices. Mint published on Friday that Salt prices have been going up too. In country like India, where Mahatma Gandhi initiated the freedom struggle against Britishers in the name of Salt, the people (especially lower class) are again deprived of the basic item called Salt.

Anyways, back to the stock markets. What could be the strategy for the coming week? The best investment strategy seem to accumulate stocks but by hedging the index. The primary reason is the market sentiments. When markets go down, they pull down every stock, without any reason. Hence, to ensure, one doesn’t suffer any major losses, it is wise to either sell the July Nifty or buy 3800 Nifty Puts in a proportion of 70:30%. In other words, for every 100 Rs of stock you buy; also buy 30 Rs of Nifty Put (30 Rs is the contract value).

Another strategy that seems interesting is to buy Reliance Communication 400 Put and 500 Call Option. 400 Put is trading at around 9 Rs and 500 Call is trading at Rs 5. One can buy both the contracts to generate profits. Reliance Communication and MTN negotiation deadline is 21st July and contracts are expiring at 31st July this month. It is very likely that the stock may see some action around 21st.July.

If the deal goes through at favorable equity swaps ratio, the stock will see some tremendous trend. We must remember that it came down from 600 odd levels to 440 levels. If deal goes though, it can re-test the 500-550 levels. Hence, the 500 Call could fetch you more than 20 Rs. In such case, the net profit will be 20 – (9+5) = Rs 6 * number of shares.

On the contrary, if deal doesn’t go through, the stock could come down to 400 levels. In such case, the Put could be trading around 20-25 Rs again. Hence, the profit will again be Rs 6 * number of shares. Hence, the key factor that can generate profit in this strategy is the volatility in this stock. And the history is evident that ADAG stocks have been pretty good in this regard.

Wish you all a great trading week ahead!!!