Lottery Effect is Behind the Rise in Options Trading

Many people are lured to buy lottery tickets for quick money. They spend lakhs despite knowing that their odds of winning are slim. Likewise in the stock market investors are drawn towards certain stocks as lotteries. The excitement of earning higher returns tempts investors to buy penny stocks with high beta and low prices. It's identical to how lottery players expect to win a fortune by putting in tiny sums.

What investors fail to understand is the sensitivity of owning lottery stocks. They present a very small probability of achieving a large payoff. These stocks are frequently the buzz of the town and are quick to respond to news and events, making them extremely volatile in the market. If the investments do not perform as anticipated, these lottery stocks can be a risky affair.

We are witnessing the same lottery effect in the options market too. We have seen a major shift in volume from the cash market to the options market in the last 7 years. This indicates a growing interest in highly leveraged instruments.

The data on NSE shows that index options premium turnover has soared significantly in comparison to the turnover of the cash market segment since 2016-17.

Once greed takes over, traders turn to options trading as the investment required is small but the potential reward is large. However, the chances of retail investors making money in the options market are slim.

The recent SEBI study of traders in the Equity F&O Segment proves this. The number of unique individual traders in the derivatives market increased by over 500% in FY22 compared to FY19. Amongst all, 98% of them traded in options.

The detailed representation can be seen below….

Individual Traders’ Participation in Equity F&O Segment All Individual Traders
FY19 FY22
Total number of individual traders (sample) 7,06,757 45,24,841
% of total 100% 100%
% of Loss makers during the year 85% 89%
% of Profit makers during the year 15% 11%

More importantly, nine out of 10 individual traders suffered net losses in the equity F&O segment in FY22.

This shows that even though the turnover of the options segment has gone up several times but the profitability has reduced. Despite this more and more retail investors are attracted to options because of the lottery effect.

One must always take calculated risks and stay away from lottery stocks or options if you don't understand them fully. Your mindset must be like a businessman rather than a lottery buyer. There are no shortcuts to success.

Technical Outlook

Nifty confirms failed breakout and bears were in the driver's seat for the entire week and prices continue to close in red for the straight seven days. The index on the weekly chart has formed a tall red candle that has engulfed its previous three weeks' candles, which indicates presently bears are having an upper in the market.The gap down opening on 22nd February has created a runaway gap at 17,775 levels on the daily chart and that unfilled gap will act as an immediate overhead resistance for the index. Index on the daily chart has slipped below its important averages (100 & 200 EMA), which indicates bears are in control.

Technically, the structure is shifting its momentum toward the bears, and the immediate support for the Nifty is placed at around 17,350 levels which is the Budget days low. In case prices drift below these levels, then 17,050 – 17,000 will be on the cards. Only a sustained close above the 17,750- 17,800 zone is likely to trigger bullish momentum toward the 18,100 – 18,200 levels.

The Real Reason Behind Crash in ACC and Ambuja Cements

When was the last time you witnessed the cumulative market cap of a business house stocks fall Rs 10 lakh crore in less than a month? In the past couple of years there has been no shortage of black swan events taking place. This incident adds its name to that infamous list.

After Hindenburg published its report there has been carnage in Adani group stocks. Amid this chaos, even the recently acquired ACC and Ambuja cement experienced deep cuts. These were good transparent businesses with healthy cash flows and a history of resilient performance. But still these stocks crashed along with rest of Adani pack. What could be the reason behind it?

This is a situation where the promoter is trapped in a fire that is slowly engulfing some of his companies. Promoters have only two options – get out of the burning house with minimal damage or bring water from other house which is still unaffected.

Which option the promoters chose decides the future course for ALL his companies. In the past, there have been many instances where promoters have fallen prey to the hope bias and disposition effect and paid a heavy price for it.

In the early 2010s, Anil Ambani’s Reliance Communication was in the middle of a lot of problems like huge debt, failed investments, lawsuits, and stiff competition. At one point in time, Anil Ambani owed over USD 700 million to Chinese banks. He finally declared bankruptcy in 2020 and stated he has no meaningful assets left.

Although his downfall was majorly due to only one of his group companies – Reliance Communication. But his other businesses like Reliance Infrastructure, Reliance Power and Reliance Capital went bust too. Too much of his resources (time, energy and money) were utilized by one company as a result his other companies paid the price of his negligence.

A similar situation was observed in Satyam’s case, where the promoter channelized its IT companies cash flows to fund its capital-intensive real estate business.

Promoters who don’t cut off the body part which is affected with gangrene allow the infection to spread in the whole body. The old trading adage of cut your losers and let your winner run is true even in running companies too. It sounds simple but is difficult to practice in trading as well as business.

Smart leaders understand the importance of this. Both the Birla and Tata group had made significant investments in telecommunication and were part of the telecom war. Both the groups burned their fingers but their timely exit and not using their cash cow businesses to fund this war potentially safeguarded them from a grim situation now.

Most of the Adani Group companies are involved in capital intensive and low margin business. They have to consistently deploy large sums of capital for growing. This controversy has impacted the reputation of the company which could make it difficult to raise funds. The flagship company was not able to raise funds though FPO.

Investors are worried that since the company is in the middle of a fire it might have to divert resources from businesses which are doing well. In this case the two cement stocks which are cash cows might have to bear the brunt in resolving this crisis.

Market knows history has not been kind to those who milk their good assets to fund the bad assets.

Technical Outlook

The Benchmark index on the daily chart is still restricted within the big Budget Day candle which was formed on 1st February. Nifty witnessed a range-bound price action throughout the week and formed a minor candle within its previous weeks range and closed 0.01% higher at 17,856.50 levels on a weekly closing basis.Nifty on the daily chart inching higher but failed to show much momentum to surpass 18,000 levels on the closing basis. An index is trading in the range of 50 DEMA and 200 DEMA (Daily Exponential Moving Average).

The momentum oscillator RSI (14) on the daily time frame is hovering near the 35 – 55 range with a bullish crossover near 50 levels. For the past three months, the oscillator is capped below 55 levels, which indicates a bearish to sideways tone for the prices.In the coming week, 17,600 will be sacrosanct support for the index, while 18,000 could be an immediate hurdle. A break above 18,000 levels will infuse buying towards 18,250 levels.

80C Investments Soon To Be a Thing of the Past!

The Finance Minister (FM) announced a simple and straightforward FY24 Union Budget. The government continued its thrust on Capital Expenditure by allocating an outlay of Rs.10 lakh crore. Having said that, the major highlight of the Budget was the government’s initiative to push the salaried class to the new income-tax regime.

The Government had announced the new tax regime in Budget 2020. However, there was a lackluster response from the salaried class to shift to the new tax regime, which was devoid of standard deductions, 80C, 80D and many other exemptions.

The FM’s move to increase the rebate u/s 87A to Rs.7 lakh and slab rates to ratchet in blocks of 3 lakhs might incentivize the middle class to migrate to the new scheme. This might lead to a negative impact on the trend of financialisation of savings. This is because there is no incentive for investments by way of a deduction for specified investments or expenses under Chapter VI-A. This migration could potentially kill the 80C investment industry.

Under the new regime, there would be no push for ELSS investments or availing housing loans due to interest deductions as these deductions and exemptions too have been expunged. The growth of the ELSS category has been slowing for the past few years and the new regime simply intensifies the hurdles on the growth road.

Next, the FM announced a proposal to tax the income received from Life Insurance Policies exclusive of Unit Linked Insurance Policy (ULIP) if premiums paid on such policies exceed Rs 5 lakh in a year (except in case of death benefit). This is expected to be detrimental to the insurance sector – as it will impact savings products and margin products (other than protection). However, smaller policies remain unfazed.

Insurance companies have already started facing the heat of this unforeseen announcement. The proposal is going to have an impact of 10-12% in the top-line of the Life Insurance companies.

Nonetheless, what is bad for the insurance industry actually acts as a blessing in disguise for the mutual fund (MF) industry. A lot of mis-selling was happening in the insurance industry where investors were sold a packaged investment-cum-insurance product as an endowment scheme or other schemes where premium outlay for investors in a financial year used to be Rs 5 lakh and above. So, they were actually sold some investment product with some insurance part in it.

Now, with the tax advantage of such schemes going away, such products will become less lucrative for investors and therefore, a large part of this money which would have otherwise been invested in insurance, will now flow either to MFs or fixed deposits (FDs) or equities.

The FM’s coax to migrate to the new tax regime implies that in the years to come, deductions under 80C would be a thing of the past now. The government’s move shifts the focus to consumption from savings. Investors must keep a close eye on quality names from the consumption space, heavy industrials, cement, green growth, and FMCG sectors with a long-term horizon, as they would be prime beneficiaries of the reforms announced in this Budget.

Technical Outlook

Nifty50 reversed from the support zone and managed to close above its 200 EMA which is placed at 17,550 levels on the daily time frame.

For the entire week, volatility was the main concern where the index continued to close within the range of 17,600 – 17,650 levels. Finally, the index on Friday’s session recovered strongly from 17,585 levels and closed positively above its 21 EMA which is placed at 17,775 levels.

Nifty50 stands at strong support near 50 EMA at 17,400 levels on the weekly chart. If prices fail to hold at the given level, then it's likely to see a further correction towards 17,200 – 17,000 levels. Only a sustained close above 18,250 levels is likely to trigger bullish momentum for 18,500 levels. On the weekly chart, there is a range contraction which suggests a strong directional move is on the cards.

Expectations for the week

The upcoming week will be jam-packed with significant events. To begin with, we have a balance of trade data of two major economies, the US, and the UK. China will report its MoM and YoY inflation rates. UK will also release GDP and 3-month average GDP numbers. This will be watched closely by investors globally as it will determine the trajectory for global indices.

Back home, the focus would be on the RBI’s interest rate decision. After three consecutive 50 bps rate hikes, the RBI increased it by 35 bps in December. The CPI for December stood at 5.72%, below the upper band of the central bank’s tolerance limit of 6%. Therefore, the Street expects a 25bps rate hike and a dovish tone from RBI. Given the number of key events coming up, investors are advised to be vigilant and cautious in their investment decisions.