Bear call ladder

September 29, 2022July 27, 2022 by Rohansharma

Background of Bear Call ladder

Basics of stock market

• Induction
• Bull call spread
• Bull put spread
• Call ratio Back Spread
• Bear call ladder
• Synthetic long & Arbitrage
• Bear put spread

• Bear call spread
• put ratio back spread
• Long straddle
• Short straddle
• Max pain & PCR ratio
• Iron condor

4.1 – Background of Bear Call ladder

You shouldn’t be misled into thinking that the “Bear” in “Bear Call Ladder” refers to a bearish strategy. Since the Bear Call Ladder is a variation on the Call ratio back spread, you should use it only if you are unabashedly bullish on the stock or index.

In fact, In a Bear Call Ladder, selling an “in the money” call option covers the cost of buying call options. Additionally, the Bear Call Ladder is typically configured for a “net credit,” where the cash flow is always superior to the cash flow of the call ratio back spread. But keep in mind that while both of these strategies exhibit comparable payoff structures, their risk structures differ just a little.

4.2 – Strategy Notes

The Bear Call Ladder is a 3 leg option strategy, usually setup for a “net credit”, and it involves –

Selling 1 ITM call option
Buying 1 ATM call option
Buying 1 OTM call

This setup, which uses a 1:1:1 ratio, is known as the Bear Call Ladder. The bear Call Ladder must be executed in a ratio of 1:1:1, meaning that for each ITM Call Option sold, an ATM Call Option and an OTM Call Option must be purchased. Other combinations, such as 2:2:2 or 3:3:3, are possible.

Let’s use an example where the Nifty Spot is at 7790 and you predict it will reach 8100 by expiration. This is unmistakably a market bullish outlook. To put the Bear Call Ladder into practice:

Sell 1 ITM Call option
Buy 1 ATM Call option
Buy 1 OTM Call option

Ensure that
The Call options have the same expiration date.
has the same underlying foundation.
The ratio stays the same.

The trade setup is as follows:

The premium received for this 7600 CE, one lot short, is Rs. 247.
The premium for this option is Rs. 117 for 7800 CE, one lot long.
The premium for this option is Rs. 70/- for 7900 CE, one lot long.
247 – 117 – 70 = 60 would be the net credit.

The bear call ladder is executed using these trades. Let’s examine what would happen to the strategies’ overall cash flow at various levels of expiry.

Please keep in mind that because the strategy payoff is quite flexible, we need to assess it at different levels of expiry.

Scenario 1 – Market expires at 7600 (below the lower strike price)

We know the intrinsic value of a call option (upon expiry) is –

Max [Spot – Strike, 0]

The 7600 would have an intrinsic value of

Max [7600 – 7600, 0]

= 0

Due to the fact that we sold this option, we are able to keep the premium received, which is Rs. 247.

The intrinsic value of the 7800 CE and 7900 CE would both be zero, so we would forfeit the premium payments of Rs. 117 and Rs. 70, respectively, that were made.

Net cash flow would be superior. Paid a premium and received

= 247 – 117 – 70

= 60

The market expires at 7660 in Scenario 2 (lower strike plus received net premium).

The 7600 CE would be worth – on an intrinsic level.

Spot – Strike Max [0]

The 7600’s intrinsic worth would be

Max [7660 – 7600, 0]

= 60

We will subtract 60 from 247 due to the 7600 CE’s shortness, keeping the balance.

= 247 – 60

= 187

The value of the 7800 and 7900 CE would expire, so we would forfeit the premiums paid—117 and 70, respectively.

The full strategic benefit would be:

= 187 – 117 – 70

= 0\

The Put Ratio Back Spread is used in these trades. Let’s examine what would happen to the strategies’ overall cash flow at various levels of expiry.

5.3 – Strategy Generalization

Based on the scenarios discussed above, we can draw a few conclusions:

Technically speaking, this is a ladder and not a spread. The first two option legs, however, produce a traditional “spread” in which we sell ITM and buy ATM. It is possible to interpret the spread as the difference between ITM and ITM options. It would be 200 in this instance (7800 – 7600).
Net Credit equals Premium collected from ITM CE minus Premium paid to ATM and OTM CE
Spread (difference between the ITM and ITM options) – Net Credit equals the maximum loss.
When ATM and OTM Strike, Max Loss occurs.
When the market declines, the reward equals Net Credit.
Lower Strike plus Net Credit equals Lower Breakeven.
Upper Breakeven is equal to the sum of the long strike, short strike, and net premium.

Take note of how the strategy loses money between 7660 and 8040 but ends up profiting greatly if the market rises above 8040. You still make a modest profit even if the market declines. However, if the market does not move at all, you will suffer greatly. Because of the Bear Call Ladder’s characteristics, I advise you to use it only when you are positive that the market will move in some way, regardless of the direction.

In my opinion, when the quarterly results are due, it is best to use stocks (rather than an index) to implement this strategy.

5.4 – Effect of Greeks

Firstly, Greeks have a similar impact on this strategy as they do on Call Ratio Back spread, particularly in terms of volatility. I’ve copied the discussion on volatility from the previous chapter for your convenience.

undoubtedly, Three colored lines show the relationship between the change in “net premium,” or the strategy payoff, and the change in volatility. These lines give us insight into how an increase in volatility affects the strategy while keeping the time until expiration in perspective.

Blue Line: According to this line, the Bear Call Ladder spread benefits from higher volatility when there are still 30 days until expiration. As we can see, when volatility rises from 15% to 30%, the strategy’s payoff increases from -67 to +43. This obviously implies that when there is enough time before expiration, in addition to being accurate about the direction of the stock or index, you also need to have a view of volatility. Due to this, even though I’m optimistic about the stock, I

would be hesitant to use this strategy at the beginning of the series if volatility is higher than average (say more than double of the usual volatility reading)

Green line – This line suggests that, although not as much as in the preceding case, an increase in volatility is advantageous when there are roughly 15 days until expiration. As we can see, when volatility rises from 15% to 30%, the strategy payoff increases from -77 to -47.

Red line: This result is intriguing and illogical. The strategy is negatively impacted by an increase in volatility when there are only a few days left until expiration! Consider the possibility that a rise in volatility when there are few days left before expiration

As a result of the option’s OTM expiration, the premium drops. So, if you are bullish on a stock or index with a few days left until expiration and you anticipate that volatility will rise during this time, proceed with caution.

I assume you are already familiar with these graphs. The following graphs demonstrate the profitability of the strategy taking into account the time until expiration; as a result, these graphs assist the trader in choosing the appropriate strikes.

Clearly, The best strikes to choose are deep ITM and slightly ITM, i.e., 7600 (lower strike short) and 7900, if you expect the move during the second half of the series and you expect it to happen within a day (or within 5 days, graph 2). (higher strike long). Please take note that this is an ITM and ITM spread rather than the traditional combination of an ITM + OTM spread. In actuality, none of the other combinations work.

Graphs 3 (bottom right) and 4 (bottom left): The best strategy is to use these graphs if you anticipate a move during the second half of the series and that it will occur within 10 days (or on the expiry day, graph 4).Deep ITM and slightly ITM strikes, such as 7600 (lower strike short) and 7900, are the best options (higher strike long). This is in line with what graphs 1 and 2 indicate.

Please keep in mind that because the strategy payoff is quite flexible, we need to assess it at different levels of expiry.

At last, The blue line indicates that a rise in volatility with plenty of time left before expiration (30 days) is advantageous for the put ratio back spread. As we can see, when volatility rises from 15% to 30%, the strategy payoff increases from -57 to +10. This obviously implies that when there is enough time before expiration, in addition to being accurate about the direction of the stock or index, you also need to have a view of volatility. Because of this, even though I am bearish on the stock, I might be hesitant to use this strategy at the beginning of the series if volatility is higher than average (say more than double the usual volatility reading)

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P&L Statement

September 29, 2022July 26, 2022 by Bala gumber

Fundamental Analysis

• Introduction
• Investor’s mindset
• Annual report reading
• P&L statement
• Balance sheet
• The cash flow

• The financial ratio
• Investment due diligence
• Equity research
• DCF primer
• Notes

Overview of the financial statements

The financial accounts can be viewed from two different perspectives:

From the viewpoint of the creator
From the viewpoint of the user

Financial reports are created by a maker. He frequently has a background in accountancy. His duties include creating ledger entries, matching invoices and receipts, calculating inflows and outflows, auditing, and more. The ultimate goal is to create transparent financial reports that accurately reflect the company’s financial situation. There are specific abilities needed to construct such a financial statement. Typically, these abilities are obtained through the rigorous training that chartered accountants must complete.

However, the user only needs to be able to comprehend what the producer has planned. He merely utilizes the financial statements. He is not required to fully understand the audit process or the specifics of the journal entries. Reading what is being said and using it to inform his decisions is his major priority.

To put this in perspective, consider Google. The majority of us are unable to comprehend Google’s intricate backend search algorithm. We all understand how to use Google, though. This is the difference between those who create financial statements and those who use them.

Market participants frequently mistakenly believe that the fundamental analyst must be well-versed in the principles of financial statement creation. While it obviously helps to be aware of this, it is not strictly necessary. Being the user, rather than the expert, is necessary to be a basic analyst.

A corporation presents three primary financial accounts to illustrate its performance.

1. The Statement of Profit and Loss

2. Ledger Balance

3. Statement of cash flows

We will analyze each of these claims from the viewpoint of the user over the course of the following chapters.

The Profit and Loss statement

Popular names for the profit and loss statement include the income statement, statement of operations, and statement of earnings. The Profit and Loss statement reveals what has happened during a specific period of time. The P&L statement provides details regarding:

The company’s earnings for the specified time period (yearly or quarterly)
the outlays incurred to produce the income
Depreciation and tax
the value of the earnings per share

According to my experience, the best way to understand financial statements is to look at the real statement and determine the information. Consequently, the Amara Raja Batteries Limited P&L statement is provided below (ARBL). Let’s examine each item in detail.

The Top Line of the company (Revenue)

You may have heard analysts discuss a company’s top line. They are talking to the revenue side of the P&L statement when they say this. The revenue side makes up the company’s first set of figures in the P&L.

Before we begin to grasp the revenue side, take note of the following items that are listed in the P&L statement’s header:

The heading reads as follows:

This is an annual statement rather than a quarterly statement because it is the P&L statement for the fiscal year that ended on March 31, 2014. Additionally, it is clear from the date that it is as of March 31, 2014, that the statement pertains to the financial year 2013–2014, sometimes known as the FY14 statistics.
The unit of money is the Rupee Million. Note: Ten lakh rupees are equal to one million rupees. Which unit the corporation prefers to use to express its numbers is entirely up to them.
All of the statement’s major headings are displayed in the particulars. The note section contains any related notes to the details (also called the schedule). The note has a corresponding number assigned to it (Note Number)
Companies often put the current year’s number in the largest column of the financial statement and the previous year’s figure in the next column when reporting financial data. The figures in this situation are from FY14 (the most recent) and FY13 (previous)

The Sale of is the name of the first line item on the revenue side is products.

We are negotiating with a battery manufacturer, as we are aware. The Rupee worth of all the batteries the company sold during FY14 is clearly meant by the term “selling of products.” Sales currently total Rs. 38,041,270,000, or roughly Rs. 3,804 Crore. The company sold batteries for Rs. 3,294 Cr. in the FY13, prior fiscal year.

Please take note that I’ll repeat all of the figures in Rupee Crore because I think it’s easier to grasp.

The excise duty is the following line item. The revenue must be adjusted because this is the amount (Rs. 400 Crs.) the company would pay to the government.

The company’s net sales are the revenue that has been adjusted after the excise duty. For FY14, ARBL’s net sales totaled Rs. 3403 Cr.

For FY13, it was Rs. 2943 Crs.

In addition to selling products, the business also offers services. This can take the form of yearly battery maintenance. For FY14, the revenue from the selling of services was Rs. 30.9 crores.

Additionally, the company reports “other operational revenues” of Rs. 2.1 crores.

This could be income from the sale of goods or services that are unrelated to the business’s core activities.

The company’s total operating revenue is calculated by adding the revenue from the sale of goods, the sale of services, and all other operating revenues. For FY14 and FY13, this was reported at Rs. 3436 Crs. and Rs. 2959 Crs. It’s interesting that there is a remark with the number 17 under “Net Revenue from Operations” that will assist us in looking into this matter further.

The notes obviously provide a more in-depth view of how operating revenue is divided up (does not include other income details). As you can see under the particulars, section “a” discusses how sales of products are divided up.

Storage battery sales in the form of finished items totaled Rs. 3523 crores in FY14 as opposed to Rs. 3036 crores in FY13.
In FY14, storage battery sales (stock in trade) totaled Rs. 208 Crs., up from Rs. 149 Crs. When finished commodities from the prior fiscal year are sold during the current fiscal year, they are said to be “stock in trade.”
Home UPS sales (stock in goods) were Rs. 71 Cr. in FY14 as opposed to Rs. 109 Cr. in FY13.
Net sales from sales of goods after deducting excise taxes total Rs. 3403 Cr., which is the same amount as that shown in the P&L statement.
You may also see how the revenue from services is divided up. The P&L statement’s stated number and the revenue figure of Rs. 30.9 agree.
The corporation claims in the note that the “Sale of Process Scrap” brought in Rs. 2.1 Cr. Keep in mind that the sale of process scrap is a byproduct of the company’s activities and is therefore reported as “Other operational revenue.”
The net revenue from operations is equal to Rs. 3436 Cr. when all of the company’s revenue sources are added together, or Rs. 3403 Cr. plus Rs. 30.9 Cr. plus Rs. 2.1 Cr.
Similar divisions are also available for FY13.

If you look at the P&L statement, ARBL also declares “Other Income” of Rs. 45.5 Crs. in addition to net revenue from operations.

As we can see, income that is unrelated to the company’s primary operation is included in other income. It includes dividends, insurance payouts, interest on bank accounts, interest from royalties, etc. The other revenue often makes up (and should make up) a tiny fraction of the total income. A significant amount of “other income” typically raises suspicion and necessitates more research.

The total revenue for FY14 is therefore Rs. 3482 Cr. after adding the revenue from operations (Rs. 3436 Crs.) and other income (Rs.3482 Crs.)

The Expense details

We learned about a company’s sales in the previous chapter. As we continue our discussion of the profit and loss statement, we will now take a closer look at the expense side of the P&L statement and its accompanying notes in this chapter. Generally, expenses are categorized based on their purpose, often known as the cost of sales technique, or based on the expense type. The profit and loss statement or the notes must include an analysis of the expenses. The extract below shows that practically every line item has a note attached to it.

The first line item on the expense side is ‘Cost of materials consumed’; this is invariably the raw material cost that the company requires to manufacture finished goods. As you can see, the cost of raw material consumed/raw material is the company’s largest expense. This expense stands at Rs.2101 Crs for FY14 and Rs.1760 Crs for FY13. Note number 19 gives the associated details for this expense; let us inspect the same.

As you can see, note 19 provides information about the substance consumed. Lead, lead alloys, separators, and other products totaling Rs. 2101 Cr. are used by the company.

Purchases of Stock in Trade and Change in Inventories of Finished Goods, Work-in-Process, and Stock-in-Trade are the two line items that follow. These two line items are linked to the same note (Note 20).

All purchases of finished goods made by the corporation for the purpose of operating its business are referred to as purchases of stock in the trade. This costs 211 Cr. rupees. I’ll explain this line item in more detail later.

The term “change in finished goods inventory” relates to manufacturing expenses incurred by the business in the past, but the goods produced in the past were sold in the present/current financial year. For FY14, this amounts to (Rs. 29.2) Crs.

The company manufactured more batteries in FY14 than it was able to sell, as indicated by a negative number. The cost incurred in producing the extra goods is subtracted from the current year’s costs to provide a sense of proportion (in terms of sales and sales costs). When the business is able to sell these additional products at some point in the future, they will add this cost. This expense, which the business later deducts, will be shown under the “Purchases of Stock in Trade” line.

The information provided in the extract above is clear-cut and simple to comprehend. It might not be essential to go further into this letter at this point. Knowing where the sum stands are advantageous. However, we shall go more deeply into this topic when we take up “Financial Modeling” as a distinct module.

Employee Benefits Expense is the following line item under expenses. This makes sense because it covers costs related to salaries paid, provident fund contributions, and other employee welfare costs. The amount for FY14 is Rs. 158 Crs. Look at note 21’s excerpt, which describes the “Employee Benefits Expense.”

I’ll give you something to consider: Only Rs.158 Cr., or 4.5 percent of total sales, or Rs. 3482 Cr. are spent on staff by the corporation. In fact, most businesses exhibit this tendency (at least non-IT). Maybe it’s time to give that idea of starting your own business another look.

The “Finance Cost / Finance Charges/ Borrowing Costs” line item appears next. An entity pays finance costs, such as interest and other expenses, when it borrows money. The company’s lenders receive interest payments. Banks or private lenders could be the lenders. The cost of financing for the company in FY14 is Rs. 0.7 Crs.

The next line item after the finance cost is “Depreciation and Amortization” charges, which total Rs. 64.5 Cr. We must comprehend the idea of tangible and intangible assets in order to grasp depreciation and amortization.

A tangible asset, such as a laptop, printer, automobile, plant, piece of machinery, building, etc., has a physical shape and offers economic value to the business.

Intangible assets, such as brand value, trademarks, copyrights, patents, franchises, customer lists, etc., lack a physical form yet nonetheless have economic value to the business.

Over the course of its useful life, an asset—tangible or intangible—must be depreciated. The term “useful life” refers to the time frame in which an asset can help the business financially. A laptop’s useful life, for instance, might be 4 years. Let’s use the example below to better understand depreciation.

A stockbroking company, Zerodha, earns Rs. 100,000 from its stockbroking operations. However, Zerodha had to pay Rs. 65,000 for the acquisition of a powerful computer server. The server’s estimated economic life (useful life) is 5 years. Now, if you were to investigate Zerodha’s earning potential, it would seem that on the one hand, Zerodha made Rs. 100,000 but on the other, spent Rs. 65,000 and only kept Rs. 35,000. This distorts the data on current-year earnings and obscures the company’s true earning potential.

Keep in mind that even though the item was purchased this year, it will continue to generate financial benefits throughout its useful life. Spreading the cost of acquiring the asset throughout its useful life makes sense as a result. It’s known as depreciation. This implies that the corporation can display a smaller amount distributed over the asset’s useful life rather than an upfront lump sum expense (towards the purchase of an asset).

Thus, Rs. 65,000 will be dispersed during the server’s five-year useful life. The depreciation would therefore be 65,000/5 = Rs. 13,000 over the following five years. We stretch out the initial expense by depreciating the asset. As a result, Zerodha would now list the price of its earrings as Rs. 100,000 – Rs. 13,000 = Rs. 87,000/- after the depreciation calculation.

For non-tangible assets, we can perform a comparable exercise. Amortization is the non-tangible asset equivalent of depreciation.

This is a crucial concept: Zerodha amortizes the cost of acquisition of an asset over the course of its useful life. In actuality, however, Rs. 65,000 was really paid toward the asset purchase. However, it appears that the P&L is no longer recording this outflow. How can we as analysts feel the movement of cash? The cash flow statement, which we will comprehend in the next chapters, records the cash movement.

“Other expenses” are the final line item on the expense side, costing Rs. 434.6 Cr. This enormous sum is listed under “other expenses.” Therefore, it merits a thorough examination.

It is evident from the comment that other expenses also cover things like manufacturing, selling, and administrative costs. The message mentions the specifics. Amara Raja Batteries Limited (ARBL), for instance, spent Rs. 27.5 Cr. on advertising and promotional efforts.

Amara Raja Batteries appears to have spent Rs. 2941.6 Cr. after adding together all the expenses listed on the expense side of the P&L.

The Profit before tax

It speaks of the net operating income that remains after operating costs are subtracted but before taxes and interest are subtracted. As we continue to look at the P&L statement, we notice that ARBL has provided their profit before tax and unusual item statistics.

Profit before tax (PBT) is defined as:

Total Revenues – Total Operating Expenses = Profit before Tax.

= Rs.3482 – Rs.2941.6

=Rs.540.5

However, it appears that an Rs. 3.8 Cr. exceptional or extraordinary item needs to be subtracted. Exceptional or extraordinary items are out-of-the-ordinary costs incurred by a business that is not anticipated to be reoccurring. In the P&L statement, they, therefore, address it individually.

Therefore, the profit before tax and unusual items will be:

= 540.5 – 3.88

= Rs.536.6 Crs

Net Profit after tax

After taxes, the net operating profit is the operating profit less the tax obligation. Now let’s examine the profit after tax, the last section of the P&L statement. The P&L statement’s bottom line is another name for this.

As you can see from the image above, we must subtract all applicable tax charges from the PBT in order to calculate the profit after tax (PAT). The corporate tax that is in effect at a given time is called the current tax. This costs Rs. 158 Cr. In addition, the business has paid additional taxes. The total amount of all taxes is Rs. 169.21 Cr. The profit after tax (PAT), which is calculated by deducting the tax from the PBT of Rs. 536.6, is Rs. 367.4 Cr.

So, PBT minus applicable taxes is Net PAT.

The P&L statement’s final line discusses basic and diluted earnings per share. One of the most used statistics in financial analysis is the EPS. The EPS is used to evaluate the management and stewardship duties carried out by the company directors and managers. The earnings per share (EPS), which measures the company’s earnings in relation to the nominal value of ordinary shares, is a highly revered figure. It appears that each share of ARBL is earning Rs. 21.51.

According to the firm, there are 17,081,2500 shares outstanding. We can calculate earnings per share by dividing the total profit after tax by the number of outstanding shares. In this instance.

Rs.367.4 Crs divided by 17,08,12,500 yields Rs.21.5 per share.

CONCLUSION

The financial statement conveys the company’s financial situation and provides information.
The Profit & Loss Account, Balance Sheet, and Cash Flow Statement make up a complete set of financial statements.
A fundamental analyst must be aware of the information provided by the creator of the financial statements because he uses them.
The company’s profitability for the year in question is revealed by the profit and loss statement.
The P&L statement contains an estimate because the corporation may update the figures in the future. Additionally, businesses automatically post statistics for the current year and the year prior side by side.
The top line of the business is another name for the revenue side of the P&L.
The company’s primary source of income is through operations.
Revenue from the business’s incidentals is included in other operating income.
Revenue from non-operating sources is included in the other income.
“Net revenue from operations” is calculated as the sum of operating revenue (less duty) and other operating income.
All of the expenses that the business incurred over the fiscal year are detailed in the expense section on the P&L statement.
Each expense has a note that can be read in order to find out more details.
The cost of an asset can be spread out over the course of its useful life through depreciation and amortization.
the interest and other fees that the business pays when borrowing money for capital investments.
PBT is the sum of total revenue, total costs, and exceptional items (if any)
PBT – relevant taxes equals net PAT.
The earnings per share (EPS) of a firm represent its earning potential. Profit after taxes and preferred dividends are considered earnings.
EPS is calculated as PAT / total outstanding common shares.

Understanding the P&L Statement

September 10, 2022July 26, 2022 by Bala gumber

Fundamental Analysis

• Introduction
• Investor’s mindset
• Annual report reading
• P&L statement
• Balance sheet
• The cash flow

• The financial ratio
• Investment due diligence
• Equity research
• DCF primer
• Notes

3.1 – What is an Annual Report?

Every year, the corporation publishes an annual report (AR), which is distributed to shareholders and other interested parties. The annual report is released by the conclusion of the fiscal year, and all the information it contains is current as of March 31. The AR is often accessible as a PDF document on the company’s website (in the investor area), or one can get in touch with the business to obtain a paper copy of the same.

Since the AR is the company’s annual report, everything stated there is taken as official. Any falsification of information in the annual report can therefore be used against the corporation. To put things in perspective, the audit report (AR) includes the auditor’s certificates, which are sealed, signed, and dated.

The major recipients of the annual report are current shareholders and prospective investors. The most important facts should be included in annual reports, together with the main message. The annual report should always be the first place an investor looks for information about a company. Of course, a lot of media websites make the claim to provide financial data about the company; however, investors should steer clear of these sources while looking for information. Keep in mind that information obtained straight from the annual report is more trustworthy.

You could wonder why the media website would distort corporate information. They might not be doing it on purpose, but they might be forced to because of other circumstances. For example, the company may like to include ‘depreciation’ in the expense side of P&L, but the media website may like to include it under a separate header. While this would not impact the overall numbers, it does interrupt the overall sequencing of data.

3.2 – What to look for in an Annual Report?

There are numerous areas of the annual report that provide insightful information about the business. When reading the annual report, one must exercise caution because there is a fine line between the company’s facts and the marketing material that the corporation wants you to read.

Let’s quickly go through each area of an annual report to better grasp the message the organization is attempting to convey. I’ve selected the Amara Raja Batteries Limited Annual Report from the Financial Year 2013-2014 as an example. Amara Raja Batteries Limited produces industrial and automotive batteries, as you may know. Here (https://www.amararajabatteries.com/Investors/annual-reports/), you can download ARBL’s FY2014 AR.

Please keep in mind that the goal of this chapter is to provide you with a quick introduction to reading annual reports. It is not feasible to read through every page of an AR, but I would like to provide some tips on how I would personally browse through one to determine what information is necessary and what information we can overlook.

I strongly advise you to read the Annual Report of ARBL while we are reading this chapter in order to better comprehend.

The annual report of ARBL is divided into the following 9 sections:

monetary highlights
The Management Declaration
Analysis and Discussion of Management
Highlights of the financial year 2010
Corporate Knowledge
Manager’s Report
Corporate governance report
Section Financial, and
Notice

Notably, no two annual reports are the same; each is tailored to the needs of the company while taking into account the sector in which it operates. Some of the sections of the annual report, though, are present in all annual reports.

The Financial Highlights portion of ARBL’s AR is the first section. The financials of the company for the previous year are summarised in Financial Highlights. This section’s content can be shown as a table or as data visualization. The operations and business results from various years are typically compared in this portion of the annual report.

The financial Highlights section information is essentially an excerpt from the company’s financial statement. The business may additionally include a few financial ratios it has calculated on its own in addition to the extracts. I don’t think I prefer to spend a lot of time on this area, but I glance through it quickly to gain an overview. I’m only going to skim this section because I’d already computed these and many other ratios on my own and would learn more about the business and its financials as a result. We will learn how to read and comprehend its financial statements over the course of the following chapters, as well as how to compute the financial ratios.

The “Management Statement” and “Management Discussion & Analysis” parts that follow are quite significant. I take my time reading these passages. You can get a sense from these sections of what the company’s management thinks about its operations and the market as a whole. Every word said in these parts matters whether you are an investor or a potential investor in the company. In reality, these two sections of the AR contain some of the information pertaining to the “Qualitative features” (covered in chapter 2).

I specifically recall one instance where I read the chairman’s message of a reputable tea manufacturing company. The chairman mentioned a revenue gain of around 10% in his message. The past revenue figures, however, indicated that the company’s revenue increased by 4-5 percent. It is obvious that in this situation, a growth rate of 10% felt like a celestial development. I made the decision not to invest in the company since this also suggested that the individual in charge might not be entirely in touch with reality. In hindsight, I realize that staying out of the market was probably the best course of action.

This is Amara Raja Batteries Limited, and I’ve highlighted a few sentences that I find particularly intriguing. I strongly advise you to read the Annual Report’s whole message.

The “Management Discussion & Analysis,” or “MD&A,” part comes next. One of the most significant passages in AR, in my opinion, is this one. The most common way for any corporation to begin this part is by discussing the broad economic trends. They talk about the nation’s overall economic activities as well as the mood in the corporate world regarding business. If the business is heavily dependent on exports, they may even discuss the state of the world economy and business climate.

Following this, the businesses often discuss market trends and their projections for the coming year. This is a crucial section since it explains how the company views the dangers and possibilities facing the sector. In order to determine whether the company has an advantage over its competitors, I read this and compared it to them.

For instance, if Exide Batteries Limited is a firm of interest, I would study their AR as well as this section if Amara Raja Batteries Limited is.

Keep in mind that up to this point, the Management Debate & Analysis’s discussion has been broad and general (global economy, domestic economy, and industry trends). The organisation would, nevertheless, talk about numerous business-related topics in the future. It discusses the performance of the company throughout its various divisions, how it compares to the prior year, etc. In fact, the business provides detailed figures in this section.

The annual report comprises a number of other reports, such as – the Human Resources report, R&D report, Technology report, etc., after reviewing these in “Management Discussion & Analysis.” In the context of the sector that the company operates in, each of these reports is significant. For instance, if I were reading an annual report for a manufacturing company, I would be very interested in the human resources report to determine whether the business had any labor issues. Serious labor problems could cause the factory to close, which would be bad for the company’s shareholders.

3.3 – The Financial Statements

The company’s financial statements are included in the last section of the AR. You would probably agree that the financial statements are among the most significant components of an annual report. The corporation will provide the following three financial statements:

The Statement of Profit and Loss
Financial Statements and
Statement of cash flows

Over the course of the following chapters, we shall thoroughly comprehend each of these claims. It’s crucial to realize that the financial statements at this point arrive in two different formats.

solo figures and a standalone financial statement
Simply put, consolidated data or a consolidated financial statement.

We must comprehend the organisational structure of a corporation in order to distinguish between standalone and consolidated data.

A reputable business typically has numerous subsidiaries. These businesses also serve as holding corporations for a number of other well-known businesses. I’ve used the shareholding structure of CRISIL Limited as an example to assist you better comprehend this. The yearly report of CRISIL has the same information. As you may already be aware, CRISIL is an Indian business that specialises in providing corporate credit rating services.

As shown in the shareholding arrangement above:

A 51 percent share in CRISIL is owned by the US-based rating firm Standard & Poor’s (S&P). S&P is therefore the “Holding firm” or “Promoter” of CRISIL.
The remaining 49% of CRISIL shares are held by public and other financial organisations.
S&P, however, is a wholly owned subsidiary of The McGraw-Hill Companies, a different business.

1. This indicates that S&P is wholly owned by McGraw Hill, and S&P controls 51% of CRISIL.

4. Additionally, another firm called “Irevna” is entirely owned (100 percent shareholding) by CRISIL.

Consider this fictitious circumstance while keeping the aforementioned in mind.
Let’s say that during the 2014 fiscal year, CRISIL experiences a loss of Rs. 1000 crore and Irevna, its sole subsidiary, experiences a profit of Rs. 700 crore. What do you think the general profitability of CRISIL?

Irevna, a subsidiary of CRISIL, had a profit of Rs. 700 Crs., hence the company’s entire P&L is (Rs. 1000 Crs.) + Rs. 700 Crs., which is pretty straightforward (Rs.300 Crs).

Because of its subsidiary, CRISIL’s loss is down from a staggering loss of Rs. 1000 Crs. to Rs. 300 Crs. Another way to look at it is to say that while CRISIL lost Rs. 1000 crore on a standalone basis, it lost Rs. 300 crore on a consolidated basis.

As a result, standalone financial statements only include the company’s financials as a whole, excluding those of its subsidiaries. The company’s (i.e., standalone financials) financial statements as well as those of its subsidiaries are included in the consolidated numbers.

To better understand the financial status of the company, I personally like to review the consolidated financial accounts.

3.4 – Schedules of Financial Statements

When the corporation releases its financial accounts, it often does so in its entirety and is followed by a thorough explanation.

Line items are the names given to each detail in the financial statement. For instance, the share capital is the first line item under Equity and Liability on the balance sheet (as pointed out by the green arrow). If you look closely, the share capital is accompanied by a note number. These are referred to as the financial statement’s “Schedules.” Based on the aforementioned assertion, ARBL reports that the share capital is Rs. 17.081 billion (or Rs.170.81 Million). Naturally, as an investor, I’m curious about how ARBL arrived at its share capital of Rs. 17.081 Cr. To determine this, one must examine the related timetable.

Of course, lingo like “share capital” makes sense given that you might be unfamiliar with financial reporting. The financial statements are simple to understand, though, and throughout the course of the following chapters, you will learn how to read them and understand what they mean. But for the time being, keep in mind that the main financial statement just provides a summary, while the related schedules provide more specific information on each line item.

CONCLUSION

A firm’s annual report, or AR, is an official message from the company to its shareholders and other interested parties.
Since AR is the best resource for company-related information, investors should always turn to it first when looking for that information.
The AR is divided into numerous sections, each of which emphasizes a different facet of the company.
The AR is also the ideal resource for learning about the company’s qualitative elements.
One of the most crucial elements of AR is management discussion and analysis. It includes the management’s viewpoint on the economy as a whole, their assessment of the sector they work in for the previous year (what worked and what didn’t), and their predictions for the upcoming year.
Three financial statements are included in the AR: a profit and loss statement, a balance sheet, and a cash flow statement.
The financial data for just the company under examination is included in the solo statement. The financial data for the company and its subsidiaries is included in the consolidated numbers.

Open Interest

October 4, 2022July 26, 2022 by Bala gumber

Forward Market

• Forwards market
• Futures contract
• Future trades
• Leverage & payoff
• Margin & M2M
• Margin calculator
• Open interest

• How to short
• Nifty futures
• Nifty futures
• Futures pricing
• Hedging with futures
• Notes

12.1 – Open Interest and its calculation

We must answer one of the often asked issues, “What is Interest (OI),” “How is it different from Volumes,” and “How can we benefit from the Volumes and interest data,” before we wrap up this lesson on “Futures Trading.” In this chapter, I’ll try to respond to these queries and more. You will be able to evaluate OI data in conjunction with Volumes after reading this and use it to make better trading decisions. Additionally, I advise you to review Volumes from this point forward.

The term ” interest” (OI) refers to the quantity of futures (or options) contracts in the market at any given time. Always keep in mind that there are two parties to any transaction: a buyer and a seller. Say the seller gives the buyer one contract. On the same contract, the seller is to be short and the buyer is to be long. In this scenario, there is reportedly only one interest.

Let me use an illustration of OI. Assume there are 5 traders who trade NIFTY futures on the market. Arjun, Neha, Varun, John, and Vikram are their given names. Let’s examine their daily trading activities and track changes in interest. Please keep in mind that grasping the sequence of events below requires patience; otherwise, you risk becoming irritated.

Let’s get going.

On Monday, Arjun and Varun each purchase six futures contracts, but Neha sells all ten of them. Following this transaction, there will be a total of 10 contracts, 10 of which will be on the long side (6 + 4) and 10 on the short side, making the total interest equal to 10.

Tuesday: Neha wants to cancel 8 of the 10 contracts she currently has, and she does so. When John enters the market, she gives him 8 short contracts. You must understand that no new contracts were into the market as a result of this transaction. Transferring it from one person to another was straightforward. Consequently, the OI will remain at 10.

Wednesday: John wants to add 7 additional short positions to the existing 8 short contracts, and Arjun and Varun both decide to expand their long holdings at the same time. As a result, John sold Arjun 3 contracts and Varun 2 contracts. Note that these are 5 newly established contracts. Neha makes the decision to fill up her posts. She essentially moved two of her short contracts to John by going long on two of them, leaving Neha with no contracts left to hold.

By Wednesday night, the market had 15 long (9+6) and 15 short positions, making the overall position size (15) 15.

On Thursday, 25 contracts are sold in the market by a huge man named Vikram. In order to liquidate 10 contracts, John decides to buy 10 contracts from Vikram, transferring his 10 contracts to Vikram in the process. Varun ultimately agrees to purchase the final 5 contracts from Vikram after Arjun adds 10 more contracts from him. In conclusion, the system now contains 15 additional contracts. I would is currently at 30.

Friday: Vikram chooses to settle twenty of the twenty-five contracts he has previously sold. He then buys 10 contracts from Varun and Arjun, respectively. This implies that 20 contracts in the system were off, resulting in a 20-contract reduction in OI. 30-20 = 10 is the new OI.

I’ll keep on; hopefully, the discussion above has given you a good idea of what Interest (OI) is all about. The OI data only shows how many positions are currently available in the market. As of now, you ought to have observed this. If you provide a +ve sign to a long position and a -ve sign to a short position in the “contracts held” column then sum up the long and short positions, it always equals zero. In other words, no new wealth is ; rather, wealth is exchanged between buyers and sellers (or vice versa) (like if you hold a stock and the stock price appreciates, then everyone makes money). Because of this, derivatives are frequently referred to as a zero-sum game!

OI on Nifty futures is around 2.78 Crores as of March 4th, 2015. There are 2.78 crore Long Nifty positions and 2.78 crore Short Nifty positions, according to this. Additionally, today saw the addition of around 55,255 (or 0.2 percent over 2.78Crs) new contracts. OI is a great tool for figuring out how liquid the market is. The market is more liquid the larger the interest. Consequently, it will be simpler to initiate or exit trades at attractive ask/bid rates.

12.2 – OI and Volume interpretation

The number of open and active contracts is by open interest information. The number of trades that were on a given day is by volume, on the other hand. Volume equals 1 for every 1 buy and 1 sell. For instance, if 400 contracts were that day and 400 were sold, the volume for that day would be 400 rather than 800. Despite the numbers and open interest appearing to be comparable, they are clearly two separate things. The volume counter begins the day at zero and increases as and when new trades take place. As a result, the volume of data always grows during the day.

Take note of the daily variations in OI and volume. The volume now has no bearing on the volume tomorrow. For OI, it is not valid, though. OI and volume numbers are both essentially worthless when seen separately. However, traders frequently link these figures to prices in order to make assumptions about the market.

Contrary to volumes, the change in open interest does not really indicate a market direction. Between bullish and bearish situations, it does, however, convey a sense of strength.

Be careful if there is an unusually high OI accompanied by a sharp rise or fall in price. This merely indicates that the market is becoming increasingly euphoric and leveraged. In circumstances like this, even a minor trigger could cause significant market panic.

And with that, I’d want to put an end to this futures trading module. I sincerely hope you had as much fun reading this lesson as I did writing it!

Now let’s move on to Option Theory!

CONCLUSION

The amount of open contracts in the market is by the term “Open Interest” (OI).
When new contracts are added, OI rises. When contracts are off, OI falls.
When contracts are transferred from one party to another, OI remains unchanged.
OI is continuous data in contrast to volumes.
OI and Volume information does not transmit information when seen independently, hence it is advisable to link them with prices in order to fully grasp the implications of each variable’s volatility.
Extremely high OI suggests excessive leverage; avoid such circumstances.

Call ratio Back spread

September 27, 2022July 26, 2022 by Rohansharma

Call ratio Back spread

Basics of stock market

• Induction
• Bull call spread
• Bull put spread
• Call ratio Back Spread
• Bear call ladder
• Synthetic long & Arbitrage
• Bear put spread

• Bear call spread
• put ration back spread
• Long straddle
• Short straddle
• Max pain & PCR ratio
• Iron condor

4.1 – Background of call ratio back spread

A fascinating options strategy is the Call Ratio Back Spread. Considering how easy it is to implement and the kind of payoff it offers the trader, I consider this to be interesting. This should undoubtedly be included in your toolbox of tactics. In contrast to bull call spreads and bull put spreads, which are used when one is only mildly bullish on a stock (or index), this strategy is used when one is outright bullish on it.

When using the Call Ratio Back Spread, you will primarily experience the following:

Unlimited profit if the market goes up
Limited profit if market goes down
A predefined loss if the market stay within a range

In simpler words you can get to make money as long as the market moves in either direction.

The Call Ratio Back Spread is typically used for a “net credit,” which means that money starts to arrive in your account as soon as you execute the strategy. In contrast to what you anticipated, the “net credit” is what you earn if the market declines (i.e market going up). On the other hand, if the market does increase, you could stand to gain an endless amount of money. This should also clarify why purchasing a call ratio spread rather than a standard call option is preferable.

So let’s investigate how this operates right away.

4.2 – Strategy Notes

As it involves purchasing two OTM call options and selling one ITM call option, the Call Ratio Back Spread is a three-legged option strategy. This is the standard 2:1 combination. The call ratio back spread must actually be executed in a 2:1 ratio, which means that two options must be purchased for everyone option sold, four must be purchased for every two options sold, and so on.

Let’s use an example where the Nifty Spot is at 7743 and you predict it will reach 8100 by expiration. This is unmistakably a market bullish outlook. In order to use the Call Ratio Back Spread:

Sell one lot of 7600 CE (ITM)
Buy two lots of 7800 CE (OTM)

Make sure –

The Call options belong to the same expiry
Belongs to the same underlying
The ratio is maintained

The trade set up looks like this –

7600 CE, one lot short, the premium received for this is Rs.201/-
7800 CE, two lots long, the premium paid is Rs.78/- per lot, so Rs.156/- for 2 lots
Net Cash flow is = Premium Received – Premium Paid i.e 201 – 156 = 45 (Net Credit)

The call ratio back spread is used in these trades. Let’s examine what would happen to the strategies’ overall cash flow at various levels of expiry.

Please keep in mind that because the strategy payoff is quite flexible, we need to assess it at different levels of expiry.

The market expires in scenario 1 at 7400. (below the lower strike price)

We are aware that a call option’s intrinsic value (upon expiration) is:

Spot – Strike Max [0]

The 7600’s intrinsic worth would be

Max [7400 – 7600, 0]

= 0

Given that we sold this option, we are entitled to keep the premium received, which is Rs. 201.

Since the intrinsic value of the 7800 call option would also be zero, we would forfeit the entire premium, which works out to 78 rupees per lot or 156 rupees for two lots.

Net cash flow would be superior. Paid a premium and received

= 201 – 156

= 45

Scenario 2 – Market expires at 7600 (at the lower strike price)

Both of the call options, 7600 and 7800, would have zero intrinsic value and would therefore expire worthless.

The premium, which amounts to Rs. 201 for the 7600 CE, is ours to keep; however, we forfeit Rs. 156 for the 7800 CE, leaving us with a net reward of Rs. 45.

Situation 3: The market closes at 7645 (at the lower strike price plus net credit)

If you’re wondering why I chose the level of 7645, it’s because this is where the strategy break even is.

7600 CE’s intrinsic value would be:

Spot – Strike Max [0]

= [7645 – 7600, 0]

= 45

Since we sold this option for 201, the option’s net profit would be

201 – 45

On the other hand, we spent an additional 156 to purchase two 7800 CE. We lose the entire premium because it is obvious that the 7800 CE will expire worthless.

The net payoff is:

156 – 156

= 0

Scenario 3 – Market expires at 7700 (half way between the lower and higher strike price)

The 7600 CE would be intrinsically worth 100, while the 7800 would be worthless.

On the 7600 CE, we keep 101 instead of losing 100 from the 201 premium we received, which is 201 – 100 = 101.

The entire Rs. 156 premium on the 7800 CE is lost, so the strategy yields a total payoff of

= 101 – 156

= – 55

Scenario 4 – Market expires at 8100 (higher than the higher strike price, your expected target)

The intrinsic values of the 7600 CE and 7800 CE will be 500 and 300 respectively.

The final result would be:

Premium Paid for 7800 CE – Premium Received for 7600 CE – Intrinsic Value of 7600 CE + (2* Intrinsic Value of 7800 CE)

= 201 – 500 + (2*300) – 156

= 201 – 500 + 600 -156

= 145

Here are some additional levels of expiration and the strategy’s ultimate reward. Keep in mind that as the market rises, so do the profits, but when the market falls, you still make some money, albeit a small amount.

4.3 – Strategy Generalization

Going by the above discussed scenarios we can make few generalizations –

Spread = Higher Strike – Lower Strike
Net Credit = Premium Received for lower strike – 2*Premium of higher strike
Max Loss = Spread – Net Credit
Max Loss occurs at = Higher Strike
The payoff when market goes down = Net Credit
Lower Breakeven = Lower Strike + Net Credit
Upper Breakeven = Higher Strike + Max Loss

Here is a graph that highlights all these important points –

4.4 – Welcome back the Greeks

Before understanding the graphs above, note the following –

Nifty spot is assumed to be at 8000
Start of the series is defined as anytime during the first 15 days of the series
End of the series is defined as anytime during the last 15 days of the series
The Call Ratio Back Spread is optimized and the spread is created with 300 points difference

The market is predicted to increase by about 6.25 percent, or from 8000 to 8500. In light of the move and the remaining time, the graphs above indicate that –

Top left on Graph 1 and top right on Graph 2 – The most profitable strategy is a call ratio spread using 7800 CE (ITM) and 8100 CE (OTM), where you would sell 7800 CE and buy 2 8100 CE. This is because you are at the beginning of the expiry series and you anticipate the move over the next 5 days (and 15 days in the case of Graph 2) Do keep in mind that even though you would be correct about the movement’s direction, choosing other far OTM strikes call options usually results in losses.

Graphs 3 and 4 (bottom left and bottom right, respectively) – A Call Ratio Spread using 7800 CE (ITM) and 8100 CE (OTM) is the most profitable option if you are at the beginning of the expiry series and anticipate the move in 25 days (and expiry day in the case of Graph 3). In this scenario, you would sell 7800 CE and buy 2 8100 CE.
You must be wondering why the number of strikes is the same regardless of the time remaining. In fact, this is the key: the call ratio back spread functions best when you sell slightly ITM options and buy slightly OTM options with plenty of time left before expiration. In actuality, all other combinations are in the red, particularly those that include far OTM options.

The best strikes to choose are deep ITM and slightly ITM, i.e., 7600 (lower strike short) and 7900, if you expect the move during the second half of the series and you expect it to happen within a day (or within 5 days, graph 2). (higher strike long). Please take note that this is an ITM and ITM spread rather than the traditional combination of an ITM + OTM spread. In actuality, none of the other combinations work.

Three colored lines show the relationship between the change in “net premium,” or the strategy payoff, and the change in volatility. These lines give us insight into how an increase in volatility affects the strategy while keeping the time until expiration in perspective.

The blue line indicates that a rise in volatility with plenty of time left before expiration (30 days) is advantageous for the call ratio back spread. As we can see, when volatility rises from 15% to 30%, the strategy’s payoff increases from -67 to +43. This obviously implies that when there is enough time before expiration, in addition to being accurate about the direction of the stock or index, you also need to have a view of volatility. Because of this, even though I believe the stock will rise, I would be a little hesitant to use this strategy at the beginning of the series if volatility is higher than average (say more than double the usual volatility reading)

Green line – This line suggests that, although not as much as in the preceding case, an increase in volatility is advantageous when there are roughly 15 days until expiration. As we can see, when volatility rises from 15% to 30%, the strategy payoff increases from -77 to -47.

Red line: This result is intriguing and illogical. The strategy is negatively impacted by an increase in volatility when there are only a few days left until expiration! Consider that a rise in volatility near the expiration date increases the likelihood that the option will expire in the money, which lowers the premium. So, if you are bullish on a stock or index with a few days left until expiration and you anticipate that volatility will rise during this time, proceed with caution.

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Bull Put Spread

September 29, 2022July 26, 2022 by Rohansharma

3.1 – Why Bull Put Spread?

Basics of stock market

• Introduction
• Bull call spread
• Bull put spread
• Call ration Back Spread
• Bear call ladder
• Synthetic long & Arbitrage
• Bear put spread

• Bear call spread
• put ration back spread
• Long straddle
• Short straddle
• Max pain & PCR ratio
• Iron condor

3.1 – Introduction - Why Bull Put Spread?

First of all The Bull Put Spread, which has two legs like the Bull Call Spread, is used when the market outlook is “moderately bullish.” In terms of payoff structure, the Bull Put Spread is comparable to the Bull Call Spread, but there are some differences in terms of strategy execution and strike choice. The bull put spread involves using put options rather than call options to create a spread (as is the case in bull call spread).

At this point, you might be asking yourself why one should choose one strategy over another when the payoffs from both a bull call spread and a bull put spread are comparable.

Well, this really depends on how attractive the premiums are. While the Bull Call spread is executed for debit, the bull put spread is executed for credit. So if you are at a point in the market where –

The markets have declined considerably (therefore PUT premiums have swelled)
The volatility is on the higher side
There is plenty of time to expiry

In fact, If you have a moderately bullish outlook looking ahead, then it makes sense to invoke a Bull Put Spread for a net credit as opposed to invoking a Bull Call Spread for a net debit. Apart from this, Personally, I do prefer strategies that offer net credit rather than strategies that offer net debit.

3.2 – Strategy Notes

Firstly, The bull put spread is a two-leg spread strategy traditionally involving ITM and OTM Put options. However, you can create the spread using other strikes as well.

To implement the bull put spread –

Buy 1 OTM Put option (leg 1)
Sell 1 ITM Put option (leg 2)

When you do this ensure –

All strikes belong to the same underlying
Belong to the same expiry series
Each leg involves the same number of options

For example –

Date – 7^th December 2015

Outlook – Moderately bullish (expect the market to go higher)

Nifty Spot – 7805

Bull Put Spread, trade set up –

Purchase 7700 PE by paying a premium of Rs. 72; keep in mind that this is an OTM option. This is a debit transaction because money is being taken out of my account.

Selling 7900 PE will earn you Rs 163/- in premium; keep in mind that this is an ITM option. This is a credit transaction because I receive money.

Clearly, The difference between the debit and credit, or the net cash flow, is 163 minus 72, or +91. Since this is a positive cash flow, my account has a net credit.

Undoubtedly, A bull put spread is also known as a “Credit spread” because, generally speaking, there is always a “net credit” in them.

Generally, The market may move in any direction and expire at any level after we place the trade. In order to understand what would happen to the bull put spread at various levels of expiry, let’s consider a few scenarios.

Situation 1: The market closes at 7600 (below the lower strike price i.e OTM option)

The intrinsic value of the Put option determines its value at expiration. If you remember from the previous module, a put option’s intrinsic value at expiration is –

The strike-spot Max

The intrinsic value of 7700 PE would be –

Max [7700 – 7600 – 0]

= Max [100, 0]

= 100

By investing a premium of Rs. 72 and becoming long on the 7700 PE, we would make

= Value at Risk – Premium Paid

= 100 – 72

= 28

Similar to the 7900 PE option, which has an intrinsic value of 300 but was sold or written at Rs. 163,

Refund for the 7900 PE In this case,

163 – 300

= – 137

broader strategy

The overall strategy’s results would be:

+ 28 – 137

= – 109

The market expires in scenario 2 at 7,700 (at the lower strike price i.e the OTM option)

Since the 7700 PE won’t have any intrinsic value, we will forfeit the entire premium we paid, or Rs. 72.

The intrinsic value of the 7900 PE will be Rs. 200.

The strategy’s net payoff would be:

Premium from the sale of 7900 PE less the intrinsic value of 7900 PE less the premium for 7700 PE

= 163 – 200 – 72

= – 109

Situation 3: The market closes at 7900 (at the higher strike price, i.e ITM option)

Since both 7700 PE and 7900 PE have zero intrinsic value, both potions would be worthless when they expired.

The strategy’s net payoff would be:

Received premium for 7900 PE

= 163 – 72

= + 91

Situation 4: The market closes at 8000 (above the higher strike price, i.e the ITM option)

In short, The total strategy payoff would be 7700 PE and 7900 PE since both options would expire worthlessly.

The premium for 7900 PE received minus the Premium for 7700 PE paid

= 163 – 72

= + 91

To sum it up:

Importantly, Three things should be obvious to you after reading this analysis:

When the market moves higher, the strategy is profitable.

Otherwise, No matter how much the market declines, the maximum loss is only Rs. 109, which also happens to be the difference between the strategy’s “Spread and net credit.”

There is a 91 percent profit cap. This also happens to be the strategy’s net credit.
The “Spread” can be described as”

3.3 – Other Strike combinations

By the way, Keep in mind that the spread is the difference between the two strike prices. However, the strikes that you select can be any OTM and any ITM strike. The Bull Put Spread is always created with 1 OTM Put and 1 ITM Put option. The spread increases with strike distance, and the potential reward increases with spread size as well.

Consider the following examples while the spot is at 7612:

Lastly, The key takeaway from this is that you can combine any number of OTM and ITM options to create a spread. However, the risk-reward ratio varies depending on the strikes you select (and consequently, the spread you create). In general, go ahead and create a larger spread if you have a strong conviction in your “moderately bullish” view; otherwise, stick to a smaller spread.

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Bull call spread

September 29, 2022July 26, 2022 by Rohansharma

Bull Call Spread

Basics of stock market

• Induction
• Bull call spread
• Bull put spread
• Call ration Back spread
• Bear call ladder
• Synthetic long & Arbitrage
• Bear put spread

• Bear call spread
• put ration back spread
• Long straddle
• Short straddle
• Max pain & PCR ratio
• Iron condor

2.1 – Background

One of the simplest option strategies a trader can use is the spread strategy. Spreads are multi-legged strategies with at least two options. When I refer to multi-leg strategies, I mean that at least two option transactions are necessary.

The best time to use a spread strategy like the “Bull Call Spread” is when your outlook on the stock or index is “moderate” and not particularly “aggressive.” For instance, the outlook for a specific stock might be described as “moderately bullish” or “moderately bearish.”

The following are some typical circumstances that can cause your outlook to change to “moderately bullish”:

From a fundamental standpoint, Reliance Industries is anticipated to announce its Q3 quarterly results. You are aware that the Q3 results are anticipated to be better than both the Q2 and Q3 of last year based on the management’s Q2 quarterly guidance. You are unsure of exactly by how many basis points the outcomes will be better, though. This is obviously the piece of the puzzle that is missing.

Given this, you anticipate that the stock price will rise after the results are announced. However, the market may have partially taken the news into account because the guidance was provided in Q2. This makes you believe that the stock’s potential upside is constrained.

Technical Perspective – The stock that you are tracking has been in the down trend for a while, so much so that it is at a 52 week low, testing the 200 day moving average, and also near a multi-year support. Given all this there is a high probability that the stock could stage a relief rally. However you are not completely bullish as whatever said and done the stock is still in a downtrend.

Quantitative Perspective – The stock is consistently trading between the 1^st standard deviation both ways (+1 SD & -1 SD), exhibiting a consistent mean reverting behavior. However there has been a sudden decline in the stock price, so much so that the stock price is now at the 2^nd standard deviation. There is no fundamental reason backing the stock price decline, hence there is a good chance that the stock price could revert to mean. This makes you bullish on the stock, but the fact that it there is a chance that it could spend more time near the 2^nd SD before reverting to mean caps your bullish outlook on the stock.

The point is that any theory, whether fundamental, technical, or quantitative, could be used to develop your perspective, and you could end up with a “moderately bullish” outlook. In actuality, this also holds true for a “moderately bearish” outlook. You can easily use a spread strategy in this situation to set up your option positions in a way that

You defend yourself in the negative (in case you are proved wrong)
Additionally, the amount of profit you make is predetermined (capped)
You receive the opportunity to participate in the market for less money as a trade-off (for capping your profits).

2.2 – Strategy notes

The bull call spread is one of the most widely used spread strategies. When you have a moderately bullish outlook for the stock or index, the strategy is useful.

A two-leg spread strategy called the bull call spread typically uses ATM and OTM options. However, you can also use other strikes to make the bull call spread.

To implement the bull call spread –

Buy 1 ATM call option (leg 1)
Sell 1 OTM call option (leg 2)

When you do this ensure –

All strikes belong to the same underlying
Belong to the same expiry series
Each leg involves the same number of options

For example –

Date – 23^rd November 2015

Outlook – Moderately bullish (expect the market to go higher but the expiry around the corner could limit the upside)

Nifty Spot – 7846

ATM – 7800 CE, premium – Rs.79/-

OTM – 7900 CE, premium – Rs.25/-

Bull Call Spread, trade set up –

Buy 7800 CE by paying 79 towards the premium. Since money is going out of my account this is a debit transaction
Sell 7900 CE and receive 25 as premium. Since I receive money, this is a credit transaction
The net cash flow is the difference between the debit and credit i.e 79 – 25 = 54.

Generally speaking in a bull call spread there is always a ‘net debit’, hence the bull call spread is also called referred to as a ‘debit bull spread’.

After we initiate the trade, the market can move in any direction and expiry at any level. Therefore let us take up a few scenarios to get a sense of what would happen to the bull call spread for different levels of expiry.

Scenario 1 – Market expires at 7700 (below the lower strike price i.e ATM option)

The value of the call options would depend upon its intrinsic value. If you recall from the previous module, the intrinsic value of a call option upon expiry is –

Max [0, Spot-Strike]

In the case of 7800 CE, the intrinsic value would be –

Max [0, 7700 – 7800]

= Max [0, -100]

= 0

Since the 7800 (ATM) call option has 0 intrinsic value we would lose the entire premium paid i.e Rs.79/-

The 7900 CE option also has 0 intrinsic value, but since we have sold/written this option we get to retain the premium of Rs.25.

So our net payoff from this would be –

-79 + 25

= 54

Do note, this is also the net debit of the overall strategy.

2.3 – Strike Selection

How would you rate the moderate bullishness or bearishness? Would a move of 5% on the Infosys stock qualify as moderately bullish, or should it be a move of 10% or more? What about the Nifty 50 and Bank Nifty indices? What about stocks with mid-caps like Yes Bank, Mindtree, Strides Arcolab, etc.? There is obviously no one size fits all answer to this problem. By analysing the stock/index volatility, one can try to quantify the move’s “moderate-ness.”

I have developed a few rules based on volatility; they seem to work for me, but you might want to improvise further. If the stock is highly volatile, I would classify a move of 5-8 percent as “moderate.” However, I might think about going under 5% if the stock is not very volatile.

What strikes should you choose for the bull call spread given that you have a “moderately bullish” view on the Nifty 50 (sub 5% move)? Is the ATM + OTM combination the ideal spread?

Theta, oh faithful Theta, holds the key to the solution!

You can use the following collection of graphs to determine the best possible strikes based on the remaining time.

The best strikes to choose are far OTM, i.e., 8600 (lower strike long) and 8900, if you expect a moderate move during the second half of the series and you expect the move to happen within a day (or two) (higher strike short).

The best strikes to choose are far OTM, i.e., 8600 (lower strike long) and 8900, if you anticipate a moderate move during the second half of the series and you anticipate the move to occur over the next 5 days (higher strike short). Be aware that while Graphs 1 and 2 both suggest the same strikes, the profitability of the strategy decreases due to Theta’s effect.

The best strikes to choose are slightly OTM in Graph 3 (bottom right), if you anticipate a moderate move during the second half of the series and that it will occur over the next 10 days (1 strike away from ATM)

Graph 4 (bottom left) – The best strikes to choose are ATM, i.e., 8000 (lower strike, long) and 8300, if you anticipate a moderate move during the second half of the series and you anticipate the move to occur on expiry day (higher strike, short). Keep in mind that even if the market rises, far OTM options lose money.

2.4 – Creating Spreads

Here is something you should be aware of: the higher the potential profit is, the wider the spread, but as a trade-off, the breakeven point also rises.

For instance:

The first day of the December series is today, November 28. Nifty is currently trading at 7883; consider these 3 bull call spreads.

The key takeaway is that the risk-reward ratio varies according to the strikes you select. However, don’t let the risk-reward ratio solely determine the strikes you take. Be aware that you can create a bull call spread with just two options, for instance, by buying two ATM and selling two OTM.

Do take the Greeks into account when trading options, and Theta in particular!

I suppose the foundation for understanding fundamental “spreads” has been laid in this chapter. I’ll assume going forward that you are aware of what a moderately bullish or bearish move would entail, so I’ll probably start with the strategy notes.

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Annual Report Reading

October 4, 2022July 26, 2022 by Bala gumber

Fundamental Analysis

• Introduction
• Investor’s mindset
• Annual report reading
• P&L statement
• Balance sheet
• The cash flow

• The financial ratio
• Investment due diligence
• Equity research
• DCF primer
• Notes

3.1 – What is an Annual Report?

3.2 – What to look for in an Annual Report?

There are numerous areas of the annual report that provide insightful information about the business. When reading the annual report, one must exercise caution because there is a fine line between the company’s facts and the marketing material that the corporation wants you to read.

Let’s quickly go through each area of an annual report to better grasp the message the organization is attempting to convey. I’ve selected the Amara Raja Batteries Limited Annual Report from the Financial Year 2013-2014 as an example. Amara Raja Batteries Limited produces industrial and automotive batteries, as you may know. Here (https://www.amararajabatteries.com/Investors/annual-reports/), you can download ARBL’s FY2014 AR.

Please keep in mind that the goal of this chapter is to provide you with a quick introduction to reading annual reports. It is not feasible to read through every page of an AR, but I would like to provide some tips on how I would personally browse through one to determine what information is necessary and what information we can overlook.

I strongly advise you to read the Annual Report of ARBL while we are reading this chapter in order to better comprehend.

The annual report of ARBL is divided into the following 9 sections:

monetary highlights
The Management Declaration
Analysis and Discussion of Management
Highlights of the financial year 2010
Corporate Knowledge
Manager’s Report
Corporate governance report
Section Financial, and
Notice

Notably, no two annual reports are the same; each is tailored to the needs of the company while taking into account the sector in which it operates. Some of the sections of the annual report, though, are present in all annual reports.

The Financial Highlights portion of ARBL’s AR is the first section. The financials of the company for the previous year are summarised in Financial Highlights. This section’s content can be shown as a table or as data visualization. The operations and business results from various years are typically compared in this portion of the annual report.

The financial Highlights section information is essentially an excerpt from the company’s financial statement. The business may additionally include a few financial ratios it has calculated on its own in addition to the extracts. I don’t think I prefer to spend a lot of time on this area, but I glance through it quickly to gain an overview. I’m only going to skim this section because I’d already computed these and many other ratios on my own and would learn more about the business and its financials as a result. We will learn how to read and comprehend its financial statements over the course of the following chapters, as well as how to compute the financial ratios.

The “Management Statement” and “Management Discussion & Analysis” parts that follow are quite significant. I take my time reading these passages. You can get a sense from these sections of what the company’s management thinks about its operations and the market as a whole. Every word said in these parts matters whether you are an investor or a potential investor in the company. In reality, these two sections of the AR contain some of the information pertaining to the “Qualitative features” (covered in chapter 2).

I specifically recall one instance where I read the chairman’s message of a reputable tea manufacturing company. The chairman mentioned a revenue gain of around 10% in his message. The past revenue figures, however, indicated that the company’s revenue increased by 4-5 percent. It is obvious that in this situation, a growth rate of 10% felt like a celestial development. I made the decision not to invest in the company since this also suggested that the individual in charge might not be entirely in touch with reality. In hindsight, I realize that staying out of the market was probably the best course of action.

This is Amara Raja Batteries Limited, and I’ve highlighted a few sentences that I find particularly intriguing. I strongly advise you to read the Annual Report’s whole message.

The “Management Discussion & Analysis,” or “MD&A,” part comes next. One of the most significant passages in AR, in my opinion, is this one. The most common way for any corporation to begin this part is by discussing the broad economic trends. They talk about the nation’s overall economic activities as well as the mood in the corporate world regarding business. If the business is heavily dependent on exports, they may even discuss the state of the world economy and business climate.

Following this, the businesses often discuss market trends and their projections for the coming year. This is a crucial section since it explains how the company views the dangers and possibilities facing the sector. In order to determine whether the company has an advantage over its competitors, I read this and compared it to them.

For instance, if Exide Batteries Limited is a firm of interest, I would study their AR as well as this section if Amara Raja Batteries Limited is.

Keep in mind that up to this point, the Management Debate & Analysis’s discussion has been broad and general (global economy, domestic economy, and industry trends). The organisation would, nevertheless, talk about numerous business-related topics in the future. It discusses the performance of the company throughout its various divisions, how it compares to the prior year, etc. In fact, the business provides detailed figures in this section.

The annual report comprises a number of other reports, such as – the Human Resources report, R&D report, Technology report, etc., after reviewing these in “Management Discussion & Analysis.” In the context of the sector that the company operates in, each of these reports is significant. For instance, if I were reading an annual report for a manufacturing company, I would be very interested in the human resources report to determine whether the business had any labor issues. Serious labor problems could cause the factory to close, which would be bad for the company’s shareholders.

3.3 – The Financial Statements

The company’s financial statements are included in the last section of the AR. You would probably agree that the financial statements are among the most significant components of an annual report. The corporation will provide the following three financial statements:

The Statement of Profit and Loss
Financial Statements and
Statement of cash flows

Over the course of the following chapters, we shall thoroughly comprehend each of these claims. It’s crucial to realize that the financial statements at this point arrive in two different formats.

solo figures and a standalone financial statement
Simply put, consolidated data or a consolidated financial statement.

We must comprehend the organisational structure of a corporation in order to distinguish between standalone and consolidated data.

A reputable business typically has numerous subsidiaries. These businesses also serve as holding corporations for a number of other well-known businesses. I’ve used the shareholding structure of CRISIL Limited as an example to assist you better comprehend this. The yearly report of CRISIL has the same information. As you may already be aware, CRISIL is an Indian business that specialises in providing corporate credit rating services.

As shown in the shareholding arrangement above:

A 51 percent share in CRISIL is owned by the US-based rating firm Standard & Poor’s (S&P). S&P is therefore the “Holding firm” or “Promoter” of CRISIL.
The remaining 49% of CRISIL shares are held by public and other financial organisations.
S&P, however, is a wholly owned subsidiary of The McGraw-Hill Companies, a different business.

1. This indicates that S&P is wholly owned by McGraw Hill, and S&P controls 51% of CRISIL.

4. Additionally, another firm called “Irevna” is entirely owned (100 percent shareholding) by CRISIL.

Consider this fictitious circumstance while keeping the aforementioned in mind.
Let’s say that during the 2014 fiscal year, CRISIL experiences a loss of Rs. 1000 crore and Irevna, its sole subsidiary, experiences a profit of Rs. 700 crore. What do you think the general profitability of CRISIL?

Irevna, a subsidiary of CRISIL, had a profit of Rs. 700 Crs., hence the company’s entire P&L is (Rs. 1000 Crs.) + Rs. 700 Crs., which is pretty straightforward (Rs.300 Crs).

Because of its subsidiary, CRISIL’s loss is down from a staggering loss of Rs. 1000 Crs. to Rs. 300 Crs. Another way to look at it is to say that while CRISIL lost Rs. 1000 crore on a standalone basis, it lost Rs. 300 crore on a consolidated basis.

As a result, standalone financial statements only include the company’s financials as a whole, excluding those of its subsidiaries. The company’s (i.e., standalone financials) financial statements as well as those of its subsidiaries are included in the consolidated numbers.

To better understand the financial status of the company, I personally like to review the consolidated financial accounts.

3.4 – Schedules of Financial Statements

When the corporation releases its financial accounts, it often does so in its entirety and is followed by a thorough explanation.

CONCLUSION

A firm’s annual report, or AR, is an official message from the company to its shareholders and other interested parties.
Since AR is the best resource for company-related information, investors should always turn to it first when looking for that information.
The AR is divided into numerous sections, each of which emphasizes a different facet of the company.
The AR is also the ideal resource for learning about the company’s qualitative elements.
One of the most crucial elements of AR is management discussion and analysis. It includes the management’s viewpoint on the economy as a whole, their assessment of the sector they work in for the previous year (what worked and what didn’t), and their predictions for the upcoming year.
Three financial statements are included in the AR: a profit and loss statement, a balance sheet, and a cash flow statement.
The financial data for just the company under examination is included in the solo statement. The financial data for the company and its subsidiaries is included in the consolidated numbers.

Mindset of an Investor

October 4, 2022July 26, 2022 by Bala gumber

Fundamental Analysis

• Introduction
• Investor’s mindset
• Annual report reading
• P&L statement
• Balance sheet
• The cash flow

• The financial ratio
• Investment due diligence
• Equity research
• DCF primer
• Notes

2.1– Speculator Vs Trader Vs Investor

Firstly, You can opt to speculate, trade, or invest in the market depending on how you would like to get involved. Each of the three participation options is distinct from the others. One must decide what kind of market participant one wants to be. Clarifying this can have a significant influence on his profit and loss statement as well.

Let’s take a look at a hypothetical market event and determine how each market participant (speculator, trader, and investor) would respond in order to help you understand it better.

SCENARIO

The RBI is anticipated to meet over the next two days to discuss its most recent stance on monetary policy. The RBI increased interest rates throughout the previous four monetary policy reviews in response to the strong and persistent inflation. As is well known, a rise in interest rates will result in less favorable growth prospects for Corporate India, which will have an adverse effect on corporate profitability.

Assume that Sunil, Tarun, and Girish are the three market players. Each of them would act differently in the market as a result of how they each see the aforementioned circumstance. Let’s examine their way of thinking.

Sunil: After carefully analyzing the scenario, he comes to the following conclusions:

He believes that the current level of interest rates is unsustainable.
High lending rates impede India’s corporate sector’s expansion.
Additionally, he thinks that RBI has increased interest rates to an all-time high and that it would be very difficult for RBI to do so again.
He looks at what the well-known TV analysts are saying about the situation, and he is pleased to see that his ideas and theirs are identical.
He comes to the conclusion that absent a change in policy, the RBI would probably lower interest rates.
He anticipates that the market will rise as a result.

He purchases State Bank of India call options to put his ideas into action.

Tarun: He views the matter from a somewhat different perspective. His thinking goes like this:

He believes it is unrealistic to expect the RBI to lower interest rates. He believes that no one can accurately forecast what RBI is going to do.
He also notes that there is a lot of market volatility. As a result, he thinks that the premiums on options contracts are quite expensive.
He is aware from prior experience and backtesting that the volatility would probably drop significantly just after the RBI announces its decision.

He sells 5 lots of Nifty Call options to put his ideas into action, and he plans to close off the position right before the announcement.

Girish: He owns 12 equities in his portfolio, which he has held for more than two years. Despite being a close observer of the economy, he has no opinion on the likely course of action for the RBI. Also unconcerned about the policy’s outcome is the fact that he intends to keep his shares for a very long time. Therefore, from this vantage point, he believes that the monetary policy is just another short-term passing market trend and will not significantly affect his portfolio. He has the time and patience to hang onto his stock even if it does.

Girish does intend to increase his stock purchases if the market overreacts to the RBI news and his portfolio equities experience a sharp decline after the announcement.

Now, we don’t care what the RBI decides in the end or who profits. The objective is to distinguish between a trader, an investor, and a speculator based on their cognitive processes. All three men appear to have a rationale for their market actions. Please be aware that Girish’s decision to take no action constitutes market action.

Sunil’s market actions are focused on a rate drop because he appears to be very certain about what the RBI will do. It is actually quite difficult to predict what the RBI (or any regulator, for that matter) would do. These are difficult issues that require comprehensive analysis. Making a judgment based only on blind faith without any logic is conjecture. It appears that Sunil did exactly that.

Based on a plan, Tarun has determined what must be done. If you have any experience with options, he is only putting up a trade to profit from the high options premium. It is obvious from his lack of speculation that he does not care what RBI will probably do. His perspective is straightforward: when volatility is high, premiums for option sellers are appealing. He anticipates a decrease in volatility immediately before the RBI decision.

Is he making a wager that the volatility will decline? Not so, as he appears to have previously backtested his plan for situations comparable to this one. A trader does not merely guess at results; he designs all of his trades.

On the other side, Girish, the investor, doesn’t appear to be overly concerned about what the RBI is anticipated to do. He views this as brief market noise that might not have a significant effect on his portfolio. Even if it did, he thinks his portfolio will eventually bounce back from it. Markets only provide one luxury: time and Girish is eager to take full advantage of this gift. In fact, he is ready to add to his stock portfolio in the event that the market overreacts. His goal is to maintain his position for a considerable amount of time and not be influenced by swift changes in the market.

Each of the three of them has a unique mindset, which causes them to respond to situations differently. The purpose of this chapter is to explain why Girish, the investor, has a long-term outlook and isn’t very concerned with short-term changes in the market.

2.2 – The compounding effect

Understanding how money accumulates can help you understand why Girish chose to keep his investments and not really respond to short-term market movements. Simply said, compounding is the ability of money to increase when reinvested for year 2.

Consider investing Rs. 100, for instance, which is predicted to grow at 20% each year (recall this is also called the CAGR). The money is projected to increase to Rs. 120 at the conclusion of the first year. You have two possibilities at the end of the first year:

Let the Rs. 100 initial investment and the Rs. 20 profit remain invested.
Withdraw the 20 rupee profit.

Instead of taking your Rs. 20 profit, you choose to reinvest it for a second year. After two years, Rs. 120 becomes Rs. 144. By the third year’s conclusion, Rs. 144 has increased to Rs. 173. I could go on forever.

In contrast, consider removing Rs. 20 in profits each year. If you had chosen to withdraw 20 rupees annually, your profits at the conclusion of the third year would have been only 60 rupees.

However, because you chose to keep your investment, the gains after three years are Rs. 173. You chose to do nothing and elected to stay invested, which resulted in a good Rs.13 or 21.7 percent over Rs.60 being created. The compounding effect refers to this.

The growth of Rs. 100 invested at a 20 percent rate over a ten-year period is depicted in the graph above. If you look closely, it increased from Rs. 100 to Rs. 300 over the course of roughly 6 years. But the subsequent Rs. 300 was made in just 4 years, from the 6th to the 10th year.

The compounding effect’s most intriguing characteristic is, in fact, this. The money will work harder (and faster) for you the longer you keep it invested. Girish made the decision to maintain his investment precisely for this reason: to take advantage of the market’s luxury of time.

All fundamental analysis-based investments demand long-term commitment from the investors. While making his investment decision, the investor must cultivate this mindset.

2.3 – Does investment work?

Consider a sapling: Would it not grow if given the correct care, manure, and water? Naturally, it will. Consider a successful company that has strong sales, excellent profitability, cutting-edge goods, and moral leadership. Is it not evident that such companies’ stock prices will rise? Remember the Eicher Motors chart from the previous chapter? In some cases, the price appreciation may be delayed, but it will always increase. This has often occurred in marketplaces all around the world, including in India.

An investment in a solid business with investable grade characteristics will always pay off. To digest short-term market volatility, one must, nevertheless, grow an appetite.

2.4 – Investible grade attributes? What does that mean?

An investible grade company has a few distinguishing qualities, as we briefly reviewed in the last chapter. The “Qualitative aspect” and the “Quantitative aspects” are two categories under which these traits might be grouped. Examining each of these factors is part of the process of determining if a company is fundamentally sound. In my own personal investment approach, I really give the qualitative aspects a little more weight than the quantitative aspects.

Understanding the non-numerical facets of the business is the key responsibility of the qualitative component. This includes a number of things, including:

Background of the management team: Who they are, what their experience and education are, whether they are qualified to run the company, whether there have been any legal proceedings against the promoters, etc.
The management’s involvement in fraud, bribery, and unfair business practices is a matter of corporate ethics.
Appointment of directors, organizational structure, openness, etc. is all examples of corporate governance.
Minority shareholders: How does the management treat them? Do they take their interests into account when making business decisions?
Share transactions refer to when management uses shady promoter networks to buy or sell company shares.
Related party transactions: Is the corporation giving financial favors to well-known people at the expense of the shareholders’ money, such as the promoter’s friends, family members, and vendors?
Salaries paid to promoters – Does the management pay itself a sizable salary? Typically, this is done with a portion of the revenues.
Stock operator activity: Does the price of the stock exhibit anomalous price behavior, particularly when the promoter is trading in the shares?
Who are the company’s major shareholders, or those who own more than 1% of the outstanding shares, according to the shareholders’ perspective?
Political allegiance – Is the business or those who promote it too linked to a certain political party? Does the company need ongoing political support?
Promoter lifestyle: Are the promoters’ showy and obnoxious lifestyle choices too obvious? Do they enjoy flaunting their wealth?

When any of the aforementioned elements do not line up properly, a warning sign is raised. For instance, if a business engages in too many transactions with related parties, it could be seen as favoritism and misconduct. In the long run, this is bad. Therefore, even if a corporation has large profit margins, misconduct is unacceptable.

Because they are such delicate issues, qualitative elements are difficult to identify. A careful investor, however, can quickly ascertain this by paying attention to the annual report, management interviews, news stories, etc. Throughout this module, we’ll emphasize a variety of qualitative elements.

Financial figures are a part of the quantitative features. While some of the quantitative parts are simple, others are not. For instance, cash kept in inventory is simple; inventory number of days, on the other hand, is not. It is necessary to compute this metric. Quantitative factors receive a lot of attention in the stock markets. Several examples of quantitative aspects include the following:

the expansion of profitability
Margin and its expansion
earnings and their expansion
issues pertaining to costs
working effectiveness
Price influence
issues pertaining to taxation
dividends are paid
Cash flow from a variety of sources
Long-term and short-term debt
working capital administration
asset expansion
Investments
monetary ratios

Surely, We will learn how to read the fundamental financial statements that are included in the annual report over the course of the following several chapters. As you may already be aware, all the computations needed to analyze quantitative features come from the financial statement.

CONCLUSION

Firstly, A trader and an investor have quite different mindsets.
But, If the investor is serious about investing, he needs to establish an investment attitude.
Definitely, For the gains to compound, the investor should keep their investment in place for a long time.
The longer you invest, the faster your money will double, usually at an exponential rate. One of the characteristics of compounding is this.
Each investment must be assessed from both a qualitative and a quantitative standpoint.
The company’s non-numerical information is the focus of qualitative aspects.
In the quantitative components, numerical data analysis is included. Finding quantitative data can often be found in financial statements.

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Introduction to Fundamental Analysis

October 4, 2022July 26, 2022 by Bala gumber

Fundamental Analysis

• Introduction
• Investor’s mindset
• Annual report reading
• P&L statement
• Balance sheet
• The cash flow

• The financial ratio
• Investment due diligence
• Equity research
• DCF primer
• Notes

1.1 – Overview

Fundamental Analysis (FA) is a comprehensive method of business analysis. It becomes crucial to comprehend a firm from multiple angles when an investor wants to invest in it for the long term (let’s say 3 to 5 years). It is crucial for an investor to focus on the underlying business success rather than the daily, short-term noise in the stock prices. In fact, A fundamentally sound company’s stock prices often increase over time, generating wealth for its investors.

However, Such instances abound in the Indian market. One can consider businesses like Infosys Limited, TCS Limited, Page Industries, Eicher Motors, Bosch India, Nestle India, TTK Prestige, etc. as a few examples. For more than ten years, each of these businesses has produced an average compounded annual growth return (CAGR) of above 20 percent. To give you an idea, at a 20 percent CAGR, the investor would double his money in around 3.5 years. The wealth growth process moves more quickly a higher the CAGR. Some businesses, like Bosch India Limited, have produced CAGRs close to 30%. You may therefore envision the size and rate at which money might be created if one were to invest in fundamentally sound businesses.

Here are long-term charts of Bosch India, Eicher Motors, and TCS Limited that can set you thinking about long-term wealth creation. Do remember these are just 3 examples amongst the many that you may find in Indian markets.

You could be thinking at this point that I am prejudiced because I only show charts that are visually appealing. You might be curious to see what Suzlon Energy, Reliance Power, and Sterling Biotech’s long-term charts would look like.

Undoubtedly, These are only three of the many money destroyers you could encounter in Indian markets.

Separating investment-grade businesses that build money from those that destroy it has always been the trick. All investment-grade businesses share a few distinguishing characteristics that make them unique. Similarly, all wealth destroyers share a few characteristics that are obvious to a discerning investor.

By assisting you in recognizing these characteristics of organizations that create wealth, fundamental analysis is a strategy that provides you the confidence to invest for the long term as well.

1.2 – Can I be a fundamental analyst?

You can be, of course. It is a frequent misperception that only those with backgrounds in commerce and chartered accounting can be effective fundamental analyzers. This is completely untrue. To make sure that 2 and 2 equal 4, a fundamental analyst adds them together. You’ll need the following core abilities to work as a fundamental analyst:

Recognizing the fundamental financial statements
Learn about industries from which enterprises operate.
Addition, subtraction, division, and multiplication are fundamental arithmetic operations.

At last, The goal of the Fundamental Analysis module is to make sure you acquire the first two skill sets.

1.3 – I’m happy with Technical Analysis, so why bother about Fundamental Analysis?

Firstly, You can quickly and easily make short-term returns using technical analysis (TA). It aids in market timing for better entry and exit. However, TA is a poor strategy for generating wealth. Only wise long-term investment decisions can lead to wealth. However, your market approach must incorporate both TA and FA.

Let’s imagine a market participant decides in 2006 to invest his money in Eicher Motors after determining it to be a fundamentally sound stock to do so. You can observe that between 2006 and 2010, the stock’s movement was comparatively minimal. Only in 2010 did Eicher Motors begin to actually move forward. This also suggests that between 2006 and 2010, an FA-based investment in Eicher Motors did not generate any substantial returns for the investor. It would have been wiser for the market participant to engage in short-term trading at this time. The investor can place short-term trading bets with the use of technical analysis. Therefore, as part of your market strategy, both TA and FA should coexist. In reality, this introduces us to a crucial capital allocation method known as “The Core Satellite Strategy”.

A market participant, let’s say, has a corpus of Rs. 500,000. This corpus can be divided into two halves that aren’t equal; for instance, the split could be 60 to 40. The essential strength of the 60 percent of capital, Rs 300,000, can be invested for a long time. The core of the portfolio is made up of this 60% of the investments. The core portfolio should expand by at least 12 to 15 percent CAGR on an annual basis.

weighing in You can use Rs. 200,000, or 40% of the total, for active short-term trading on stocks, futures, and options utilizing technical analysis. Every year, the Satellite portfolio should produce an absolute return of between 10% and 12%.

1.4 – Tools of FA

The majority of the basic tools needed for fundamental analysis are free to use. You would require the following specifically:

The business’s yearly report The yearly report contains all the data you require for FA. The annual report is freely downloadable on the business’ website.
Industry-specific data To determine how the company under consideration is performing relative to the industry, you will require industry data. Basic information is normally supplied for free on the website of the industry’s association.
Having access to news You may keep up with the most recent advancements in your industry and the firm you are interested in with the help of Daily News. You may stay informed by using Google Alert or a decent business publication.
MS Excel – While not free, MS Excel can be very beneficial for simple computations.

One can create a basic analysis that can compete with institutional research using just these four tools. You can take my word for it when I claim you don’t need any other equipment to conduct sound fundamental research. In reality, the goal is to maintain the research rationale and clear even at the institutional level.

CONCLUSION

First of all, Investments with a lengthy time horizon are made using fundamental analysis.
Next, Wealth is created by investing in a firm with strong fundamentals.
An investment-grade company can be distinguished from a junk company using fundamental analysis.
There are some characteristics that all investment-grade companies share. Similarly, all rubbish removal businesses have characteristics.
Analysts can recognize these qualities with the aid of fundamental analysis.
As part of your market strategy, technical analysis and fundamental analysis should coexist.
One doesn’t need any specialized knowledge to become a basic analyst. All that is needed is a little bit of business savvy, some common sense, and elementary math.
A wise market strategy is to allocate money using a core-satellite technique.
The majority of the basic tools needed for FA are free to use and are available online.

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Basics of stock market

4.1 – Background of Bear Call ladder

4.2 – Strategy Notes

The Bear Call Ladder is a 3 leg option strategy, usually setup for a “net credit”, and it involves –

Selling 1 ITM call option

Buying 1 ATM call option

Buying 1 OTM call

This setup, which uses a 1:1:1 ratio, is known as the Bear Call Ladder. The bear Call Ladder must be executed in a ratio of 1:1:1, meaning that for each ITM Call Option sold, an ATM Call Option and an OTM Call Option must be purchased. Other combinations, such as 2:2:2 or 3:3:3, are possible.

Let’s use an example where the Nifty Spot is at 7790 and you predict it will reach 8100 by expiration. This is unmistakably a market bullish outlook. To put the Bear Call Ladder into practice:

Sell 1 ITM Call option

Buy 1 ATM Call option

Buy 1 OTM Call option

Ensure that

The Call options have the same expiration date.has the same underlying foundation.The ratio stays the same.

The trade setup is as follows:

The premium received for this 7600 CE, one lot short, is Rs. 247.The premium for this option is Rs. 117 for 7800 CE, one lot long.The premium for this option is Rs. 70/- for 7900 CE, one lot long.247 – 117 – 70 = 60 would be the net credit.

The bear call ladder is executed using these trades. Let’s examine what would happen to the strategies’ overall cash flow at various levels of expiry.

Please keep in mind that because the strategy payoff is quite flexible, we need to assess it at different levels of expiry.

Scenario 1 – Market expires at 7600 (below the lower strike price)

We know the intrinsic value of a call option (upon expiry) is –

Max [Spot – Strike, 0]

The 7600 would have an intrinsic value of

Max [7600 – 7600, 0]

= 0

Due to the fact that we sold this option, we are able to keep the premium received, which is Rs. 247.

The intrinsic value of the 7800 CE and 7900 CE would both be zero, so we would forfeit the premium payments of Rs. 117 and Rs. 70, respectively, that were made.

Net cash flow would be superior. Paid a premium and received

= 247 – 117 – 70

= 60

The market expires at 7660 in Scenario 2 (lower strike plus received net premium).

The 7600 CE would be worth – on an intrinsic level.

Spot – Strike Max [0]

The 7600’s intrinsic worth would be

Max [7660 – 7600, 0]

= 60

We will subtract 60 from 247 due to the 7600 CE’s shortness, keeping the balance.

= 247 – 60

= 187

The value of the 7800 and 7900 CE would expire, so we would forfeit the premiums paid—117 and 70, respectively.

The full strategic benefit would be:

= 187 – 117 – 70

= 0\

The Put Ratio Back Spread is used in these trades. Let’s examine what would happen to the strategies’ overall cash flow at various levels of expiry.

5.3 – Strategy Generalization

5.4 – Effect of Greeks

Firstly, Greeks have a similar impact on this strategy as they do on Call Ratio Back spread, particularly in terms of volatility. I’ve copied the discussion on volatility from the previous chapter for your convenience.

undoubtedly, Three colored lines show the relationship between the change in “net premium,” or the strategy payoff, and the change in volatility. These lines give us insight into how an increase in volatility affects the strategy while keeping the time until expiration in perspective.

would be hesitant to use this strategy at the beginning of the series if volatility is higher than average (say more than double of the usual volatility reading)

Green line – This line suggests that, although not as much as in the preceding case, an increase in volatility is advantageous when there are roughly 15 days until expiration. As we can see, when volatility rises from 15% to 30%, the strategy payoff increases from -77 to -47.

Red line: This result is intriguing and illogical. The strategy is negatively impacted by an increase in volatility when there are only a few days left until expiration! Consider the possibility that a rise in volatility when there are few days left before expiration

As a result of the option’s OTM expiration, the premium drops. So, if you are bullish on a stock or index with a few days left until expiration and you anticipate that volatility will rise during this time, proceed with caution.

Fundamental Analysis

Overview of the financial statements

The Profit and Loss statement

The Top Line of the company (Revenue)

You may have heard analysts discuss a company’s top line. They are talking to the revenue side of the P&L statement when they say this. The revenue side makes up the company’s first set of figures in the P&L.

Before we begin to grasp the revenue side, take note of the following items that are listed in the P&L statement’s header:

The heading reads as follows:

The unit of money is the Rupee Million. Note: Ten lakh rupees are equal to one million rupees. Which unit the corporation prefers to use to express its numbers is entirely up to them.

All of the statement’s major headings are displayed in the particulars. The note section contains any related notes to the details (also called the schedule). The note has a corresponding number assigned to it (Note Number)

Companies often put the current year’s number in the largest column of the financial statement and the previous year’s figure in the next column when reporting financial data. The figures in this situation are from FY14 (the most recent) and FY13 (previous)

The Sale of is the name of the first line item on the revenue side is products.

Please take note that I’ll repeat all of the figures in Rupee Crore because I think it’s easier to grasp.

The excise duty is the following line item. The revenue must be adjusted because this is the amount (Rs. 400 Crs.) the company would pay to the government.

The company’s net sales are the revenue that has been adjusted after the excise duty. For FY14, ARBL’s net sales totaled Rs. 3403 Cr.

For FY13, it was Rs. 2943 Crs.

In addition to selling products, the business also offers services. This can take the form of yearly battery maintenance. For FY14, the revenue from the selling of services was Rs. 30.9 crores.

Additionally, the company reports “other operational revenues” of Rs. 2.1 crores.

This could be income from the sale of goods or services that are unrelated to the business’s core activities.

The notes obviously provide a more in-depth view of how operating revenue is divided up (does not include other income details). As you can see under the particulars, section “a” discusses how sales of products are divided up.

Storage battery sales in the form of finished items totaled Rs. 3523 crores in FY14 as opposed to Rs. 3036 crores in FY13.

In FY14, storage battery sales (stock in trade) totaled Rs. 208 Crs., up from Rs. 149 Crs. When finished commodities from the prior fiscal year are sold during the current fiscal year, they are said to be “stock in trade.”

Home UPS sales (stock in goods) were Rs. 71 Cr. in FY14 as opposed to Rs. 109 Cr. in FY13.

Net sales from sales of goods after deducting excise taxes total Rs. 3403 Cr., which is the same amount as that shown in the P&L statement.

You may also see how the revenue from services is divided up. The P&L statement’s stated number and the revenue figure of Rs. 30.9 agree.

The corporation claims in the note that the “Sale of Process Scrap” brought in Rs. 2.1 Cr. Keep in mind that the sale of process scrap is a byproduct of the company’s activities and is therefore reported as “Other operational revenue.”

The net revenue from operations is equal to Rs. 3436 Cr. when all of the company’s revenue sources are added together, or Rs. 3403 Cr. plus Rs. 30.9 Cr. plus Rs. 2.1 Cr.

Similar divisions are also available for FY13.

If you look at the P&L statement, ARBL also declares “Other Income” of Rs. 45.5 Crs. in addition to net revenue from operations.

The total revenue for FY14 is therefore Rs. 3482 Cr. after adding the revenue from operations (Rs. 3436 Crs.) and other income (Rs.3482 Crs.)

The Call options have the same expiration date.
has the same underlying foundation.
The ratio stays the same.

The premium received for this 7600 CE, one lot short, is Rs. 247.
The premium for this option is Rs. 117 for 7800 CE, one lot long.
The premium for this option is Rs. 70/- for 7900 CE, one lot long.
247 – 117 – 70 = 60 would be the net credit.