What Would You Do?

Analysis and agility are two most critical factors working in the market these days. While analysis is crucial for avoiding any traps or stepping on mines, agility is critical to grab the correct prices. Well, undoubtedly keeping pace on both the things is a challenge and controlling bias is another challenge in itself. About analysis I would like to share an interesting thing today.

One of my seniors from whom I learnt derivative and quantitative research early in my career, used to put to me through a very interesting test. He would give me data of a stock and never tell me its name, sector or any such thing which would reflect what exactly it is. Finally, every such data is a time series, so why do you need the name, he used to say. Then he would ask me to analyse the data and give a view. This exercise was very interesting because till I did not know the name of the stock I would never get biased about the stock. There were instances when I would give a positive view and on hearing the name of the stock it would probably the stock that I have always avoided because of some other or the reasons (basically bias). Vice versa was also true many a times.

Today I will share with you some data points on a stock, you think about the view. I will not share the name of the stock till the end of this article. So the pointers are,

• The stock had seen decent move recently. Post that, it had been consolidating slowly with some downward bias.
• The stock had seen above average volumes and good deliveries during the upmove. The recent consolidation was market by average volumes and deliveries.
• The short positions on the futures side of which existed for a pretty long time got covered recently. Since then, the stock has been very low on futures open interest.
• On the options side the maximum Put build up is 3% below the current price while the maximum Call build up is 8% above the current price.
• The IVs are on the higher side as the results were in offing. There was obviously event risk as the quarterly results were on the next day.

So with these data points with you, what would you do?

To break the suspense, the name of the stock is SBI. Well, are the biases coming to you? Is it changing your view on the stock post hearing the name or is it confirming your view? Well either ways it is not the best thing.

As for me, I had bought 330 Call where the maximum Call build up stood a day before the results, at ~ Inr 8/-. The spot price than was ~310. Next day the initial reactions on the result were mixed to start with but the low slippages number helped the stock prices and it reached 335. The call price moved to ~Inr 17.

Undoubtedly, still bias exists every time I take a position. It is difficult to control it, but atleast one can minimize it. So, the impact of the bias on the overall trade decision is extremely low.

Happy Trading.

Cheers!!!