one of my all-time fav movies - Wall Street...njoy the snippet

Links: US equities continue declining, Marc Faber....

> US Equities declined further on Friday, extending the week's losses to over 5%. Read a bloomberg article on this here.

> Marc Faber's view on the drop in equities in the US and on sub-prime woes.

> Asian markets feel the tremors of a decline in the US. Read here.

> Map detailing the break-up / flow of the residential mortgage market in the US.

> Turmoil in the markets by the Economist.

Sea of Red on Stock Markets across the globe

Almost a no-brainer that the Indian equity juggernaut will receive a jolt today. Equity markets in India held on nicely in the last two days. That, I think was primarily because of yesterday's expiry on the F&O market. As the top traded options were primarily put options they had to expire worthless and they did. Read my previous blog entry on this.

But with the new expiry beginning today, markets are quite vulnerable to global shocks....and today is likely to one of those days. Hang on to your seats as we see volatility take centre stage over the next few sessions.

Where will Nifty end on expiry, can we guage from the Options market?

Have read on many occasions in the past that most of the options in the F&O market expire worthless. However, I dont have any data to support / test this claim. But, suppose if were to go by this claim and were to assume that most of the options do end being worthless, what can be guaged from this?

The first question that we need to ask is: Who are the sellers in the Options market?

I don't think its the retail investor. I think most of the option sellers are the supposedly smart investors. If that is the case, then it makes an interesting reading of the Options market, a day before the expiry.

Lets then try to build a hypothesis, based on the above:

1. Most of the Options on the F&O market expire worthless

2. Most of the Options are written by smart investors

3. Thus, we can say that Smart Investors write most of the options, which also happen to expire worthless

4. We know that every trade has a buyer and a seller. Thus, options with highest volumes are also the ones which have maximum Smart Investor interest, since they are the ones who write most options.

5. Since Smart Investor interest is the highest in top traded options, they must be on the sell-side, since it is highly unlikely for retail investors to sell options, in any case, and that too on the penultimate day.

6. Thus, top traded options on the penultimate day reflect Smart Investor's outlook for the market, the following day.

The top traded options on 25-July-07 (for July expiry) were:

1. CE 4600 (SP) - 36,802 contracts
2. PE 4600 (SP) - 29,542
3. PE 4500 (SP) - 16164
4. PE 4550 (SP) - 13023
5. CE 4300 (SP) - 11669

Put contract dominate Call contracts by a margin of around 10,000 contracts. If looked at more closely, between the SP range of 4,500-4,600, there are close to one lac contracts traded with close to 60k on the put side. Thus, it is quite likely that most of these contract will expire worthless, i.e. Nifty will end above 4,600. Infact, almost all these contracts will expire worthless if the Nifty closes exactly at 4,600 today.....we will see that in about 15 hrs from now....

contradictions / contributions, as always are most welcome !!

Readings: Bill Gross and Gavekal

> Interesting note on the subprime debacle and its 'possible' effect on equities by Gavekal. (Got the link from Kaushik Gala's blog.)

> Investment Outlook by the bond king - Bill Gross of Pimco.