Ayodhya Verdict and Markets

On Thursday, the Allahbad High court will deliver its judgement in the 60-year old Ramajanambhoomi- Babri Masjid case and I believe even though the verdict will be out after the market hours, there could be an opportunity for traders to capitalize on the outcome.

The verdict, which no one is aware of could be:

• In the favor of the the Hindu community or the Muslim community
• Or the court might also deliver a kind of a neutral verdict and ask the parties involved to have an out of the court settlement (A dream outcome for most of peace loving people)

I believe that the way markets should react on Friday morning depends precisely on this verdict. If the verdict is in favor of any of the community, then the other will reach or is expected to react violently and thus bringing politically instability to the system and could lead to an sell off in the markets.

However, if its an neutral verdict asking for out of the court settlement (very low probability) then the markets which are expecting a sell off would react positively and should gain higher momentum.

In, either of the scenarios, what is common and is expected on Friday is UNCERTAINTY or high VOLATILITY. Thus, in order to capitalize on this active traders could use options to buy volatility.

The implied volatilities are also quite low and the strategy to buy a straddle (buying an at the money Nifty call and put options, around 6000 levels) or a strangle (buying an 6200 call and a 5800 put) could lead to a decent returns, if markets as expected remains volatility.

Thus, ones who have traded in the options in the past and are aware of the inherent risk in trading in derivatives should go ahead and execute the strategy, however freshers or novice in trading should avoid derivatives.

Happy Trading...!!! (For the first time :D )

YEN Movement Tells a LOT

One of the major indicators that could help investors/traders understand the direction of the global equity markets is the movement Dollar-Yen Movement.

A currency in general appreciates if the interest rates offered by the government is high compared to the interest rate offered by the government of the counter currency. Moreover, the currencies of the developed nations also appreciate against their developing counterparts because they are more liquid and accepted globally vis-a-vis the developing market currencies which are not highly liquid.

However, the one peculiar character YEN has that it is also regarded as a safe heaven currency. In the time of economic crisis investors want to hold yen as a flight for quality investments. Over the last few months the way YEN has appreciated despite the fact that the currency offers least amount of returns to the investors. The fundamental reason behind this is that the Japanese economy is gripped with negative inflation is also a net creditor to the world, thus its currency is much more stronger and hence at the time of crisis it offers good reasons for capital preservation.

The only thing this suggests the fact that the investors from all over the world (except India) are in a continuous process of booking their profits form all the risky asset classes that has given a tremendous run up over the last 1.5 years and probably parking their investments in YEN.

Moreover, the current one week rally especially in the Indian markets has also gone parallel with a over 2% depreciation in YEN. Thus, I strongly believe that one should keep a strong vigil on the USD-JPY movement and should start booking profits if yen strengthens form here, the level of 85 should act as a good level to act on.