Haphazard Linkages

Event-specific circumstances, sometimes, create interesting situations for deploying capital. The Indian Natural Gas sector presented one such instance; in Equities and Implied Volatility, this week.  Background note here .  IVs popped across the board, principally manifesting in Indraprastha Gas (Bloomberg: IGL IN, NSE: IGL), which was the chief victim in the melee. Reacting to the adverse regulatory pronouncement, other companies in the Natural Gas space too came under fire from investors, IVs spiked as stock prices swooned. IGL stock fell over 40% within minutes and other companies shed double digit percent. Petronet LNG (Bloomberg: PLNG IN, NSE: PETRONET ), however, should have escaped relatively unscathed, as the ruling is expected to have little impact on its earnings power. But fear is a pervasive force, which divorces with rationality in time of duress. Time eventually acts as an arbiter in the estrangement but the process is gradual and fraught with roadbloc...

It has been quite an eventful day for the Indian Natural Gas pack, which are quite effervescent as I write.  The ruckus was triggered by a ruling by the Petroleum and Natural Gas Regulatory Board (PNGRB), fixing new tariffs for natural gas players . The PNGRB lowered gas network tariffs and compression charges by over 60% each. This prompted a free fall in stock prices of Natural Gas companies, with Indraprastha Gas (Bloomberg: IGL IN, NSE: IGL) caving in 40% within minutes of market open, on the back of rampant selling, as sell-side analysts rapidly scaled down forecasts. Other stocks shed between 5-15%. A ruckus is generally kind to Volatility. Natural Gas Implied Volatility, which was quite tepid since mid-March '12, spiked reacting to the adverse newsflow. IV skews, which were flattish around the long weekend (April 4, 2012), have now turned into smirks as Puts have come into focus. The scramble for buying protection has pushed up Put prices. Spiking IVs offer attrac...

One cannot prove an investment idea or theme 'right'. A better way is to take an idea and try to falsify it as much as possible. The 'best' investment idea/theme then is the one that best withstands the test of falsification. Lets see how the "Long-Volatility-Around-Elections" trade played out.... Volatility exploded and how! Through the election months of April and May-2009, market participants grew increasingly nervous on the election outcome, resulting in a volatility spike. Volatility nearly doubled in the space of around two months. Long-volatility trades (straddles/strangles) worked out beautifully. Indeed some Long Straddles/Strangles nearly trebled in two months. While it is nearly impossible to time entry and exits to perfection, this theme would have resulted in an indecent return anyway! Another addition to my Investment History notebook! Time to stick my neck out. Where do we go from here? I can't see any significant volatility-expa...

My posts seem to have a direct relationship with liquidity and credit availability in the markets... both have dried up! In this post I draw insights from the beautiful, non-linear world of Options. The title is a grammatical mess but it captures the central idea behind this post. I make a case for increasing volatility over the next two months in the Indian markets and possible ways for investors to play this. I'm am azed at the near-term thinking manifesting even in the options world. The markets are so riveted on the near month expiry that th ey forget there's a next month...and a month after that. India will go to elections starting mid-April and the spectacle will be for everyone to see over a 1 month period. As always, this time will most likely see tugs-of-word wars and plenty of ego-massages as one party tried to outdo the other in gaining the coveted majority number. Pre -election opinions point to a fractured mandate and there's a very high probabili...