"Buy Put" Stock Option Investment Strategy"

A stock option is a contract that gives investors the right, but not the obligation, to buy or sell 100 shares of stock at a strike price by a set expiration date. A "call option" enables investors to "lock-in" a price for a particular stock (the strike price) for a premium. If the stock price goes above the strike price by enough to cover the premium paid for the "call option" and any commission fees, the investor will make a profit. Should the stock price never reach that strike amount, the investor only loses the premium, and any commissions paid. In other words, "call options" have unlimited potential profit with minimal risk, which make them good investments during bull markets, where returns continue to outperform historical norms.

A "put option", however, is a better investment option during bear markets, when returns are below historical averages. A "put option" gives the holder the right (but not the obligation) to sell 100 shares of stock at the strike price to the writer of the option. In other words, the writer of the option is betting that the stock price will rise above the strike price. Using the "buy put" stock option investment strategy means that you are betting that stock prices will go down---and the lower the better!

The more "bearish" you feel about the market, the better the "buy put" stock option strategy becomes. Thus, for the price of the premium, the investor locks in the right to sell the 100 shares of stock reserved by the option to the writer at strike price.The lower the stock price goes, the more profitable the option becomes. The investor would be acquiring the 100 shares of stock at a cheaper price (if he/she does not already own it), but is guaranteed to sell the option to the writer for the (higher) strike amount. The larger the gap between the actual stock price and the strike amount (at time of expiration or when option is exercised), the greater the profit.

The maximum loss for an investor using the "buy put" stock option investment approach is the premium paid plus commission fees. If the expiration date arrives and the stock price remains above the strike price, then the loss is total, and the option is worthless. The break even point for a "buy put" option is the exercise amount of the stock, minus the premium and commissions.

"Buy put" options are also susceptible to decay, as their value continues to decrease as the expiration date grows nearer. The only variable that affects decay is the overall volatility of stock prices. When the market is more volatile, the rate of decay will slow. However, when prices are steady and consistent, the rate of decay will actually increase, since predictable prices mean that the time decay is also predictable. For investors who believe that they are in a bearish market, however, the "buy put" stock option investment strategy may be a good one with limited downside.

Price Deflator / GDP Deflator

What is a price deflator ?



A deflator is used to convert data compiled over a period into prices prevailing at an earlier point in time.for example,the current price of a television can be deflated to what it would cost say three years ago.Essentially,a deflator removes the effect of inflation from data,making it comparable across periods.


What is the role of price deflator in GDP calculations ?


Prices are always in a state of flux,but generally move upwards over time.Therefore,a change in prices can give the impression of an increase in the gross domestic product (GDP -- a measure of national income) even without an increase in the quantity of goods and services produced by an economy.The impact of prices has to be removed to arrive at a true measure of economic growth.A deflator is used to restate output estimates at current prices into what they would be if calculated with reference to prices in an earlier year.This will give an idea of the real growth in the economy,minus the price effect.


Why is GDP deflator considered a good measure of inflation ?


The ratio between the GDP at current prices and GDP at constant prices gives an idea of the increase in prices of all goods and services with reference to the base year.In that sense it is a more comprehensive measure of inflation than price indices,which are based only on a limited basket of goods collected from select centres.However,the deflator comes with a lag,which limits its usefulness.


How is it used in India ?


In India a combination of WPI and CPI is used as deflator.The usage is dependent on the particular estimate we are trying to deflate.There will be different deflators for private consumption and government consumption.There is a difference in the value of quarterly and year-end deflators.This is due to the fact that prices are not constant.At the year-end we have an overall measure of WPI/CPI,which is used appropriately.This is why year-end estimates of GDP are more reliable than quarterly estimates.

National Income Accounting/GDP Calculation

GROSS DOMESTIC PRODUCT: The gross domestic product (GDP) is the aggregate monetary value of all goods and services produced in the country during a period of time. The word domestic here assumes special importance as it highlights the fact that only goods & services produced within the confines of the country would be taken into account while calculating the GDP.


CALCULATING GDP: There are 3 ways for calculating a countrys GDP:
1 SUPPLY/PRODUCTION SIDE: The whole economy is divided into distinct water-tight segments-Agri,industry & services. The total value of output of goods and services & the value of inputs of raw materials & services used for production is estimated for each of these. The value added for each sector is arrived at by deducting from the total value of output the value of inputs of raw materials and services is attained.
2 DEMAND/EXPENDITURE SIDE: The income generated at production stage is finally spent on purchase of goods & services or is invested. GDP can, therefore, be also estimated from the expenditure by different segments namely government,private sector and investments. Private final consumption expenditure would include all household expenditure on goods and services except on land and buildings. GFCE would include the amount the government pays to its employees. The remaining part of expenditure would be classified under gross fixed capital formation, which would include various kinds of investments.Adding all three of the expen-ditures would give us a third estimate of GDP.
3 INCOME SIDE: Income generated during the production of goods & services is distributed between two factor inputs,labour & capital. Income is distributed among people who own the capital & those put in their labour.Through this exercise we get a second estimate of GDP.


Difference in the three sets of numbers: The differences arise due to the following reasons. We have a number of taxes/subsidies on various products.This should explain the differnces between the supply and demand estimates of GDP. Various estimation methods are used under different approaches,which also caused discrepancy in data.


Supply side widely followed: The supply side estimation of GDP is taken to be more accurate. The baseline figure for GDP growth put out by the CSO is based on the one derived from the supply/production side. Any revision in the expenditure side of the equation is therefore does not affect the headline. GDP The two sets of numbers helps policymakers/analysts to understand the current position of the industries and the overall demand picture.