My first derivatives trade

Though I have been trading derivatives (that too exotic ones) in my previous job, I never bet my personal money. However, I did my first derivatives trade today.

With terrible inflation figures out for India (for those of you still not aware, we are paying 11% more for our stuff compared to a year ago), the Nifty had a near free fall today. It went down by 159 points or approx. 3.5%. The bearishness has been growing tremendously in the recent past owing to the huge increase in oil prices (I am talking about the dollar-per-barrel; while the same has increased from $70 to $140, we are still paying only 10% more, courtesy GoI or should I say the Left) and the expected rise in interest rates (as a result of CRR hike and increase in repo rates by the RBI). All in all, a day for markets to fall.

I bought deep out of the money call options on Nifty@5000, expiring end July. Since the June options are going to expire next week, it did not make sense to purchase them. The ones I went long were at throwaway price (since I went long the market on a super-bearish day and the option is anyways at a 5000 strike, a near impossible one month target for Nifty); I know even that value can erode but thats the beauty of options. I just need a good temporary upswing in the market sentiment (No way am I long the market – I am just long the volatility). Downside – I loose all the money I have bet which is not too much as this is my first one. Upside – Can be huge in percentage terms. Lets see if the beginner’s luck works here!!

If the inflation persists at double digit levels, one really needs to figure out a way of saving the erosion. The aim now is not to make monstrous returns but with the increased cost of living, to make sure you do not loose (in “real” terms), what you have with you. Tough times are ahead!!