Fundsupermart is Singapore Online Unit Trusts Distributor and is a licensed financial dealer.

The case study is to find out how a small player like Fundsupermart is able to challenge with big players like banks to complete for the lucrative unit trusts markets?

The competitive edges of Fundsupermart from my observation are:

- They leverage on internet to reach out to the massess from retail to institutions

- They charge lower sales fees than banks

- They are open day & night and you can buy or sell your funds online at the comfort of your home. (In other words, they turn all computers into “ATM”)

- They offer larger pool of investment products to choose from.

- They provide Free Research, Market Updates & Magazine Publications

- They partner with SPH AsiaOne and DMG & Partners Securities as shareholders

On 17 November 2008, Singapore Media Powerhouse - Singapore Press Holdings (”SPH”) has completed the acquisition of the entire ShareInvestor.com for S$12 million and another S$6 million if financial targets are achieved. SPH will continue to retain the entire management staff of ShareInvestor.

ShareInvestor is an internet financial portal founded by ex-doctor Michael Leong.

The case study is why a financial portal like www.shareinvestor.com can worth a cool S$18 million?

1. ShareInvestor is a profitable internet financial services company with established based of subscribers.

2. Established since 1999, it is Singapore Largest Online Financial Portal that provide comprehensive company analysis (www.listedcompany.com) and advanced technical charting, live news, forums, events and publications.

3. Large pool of investor relationship network with Malaysia and Thailand.

4. High Internet Traffic of 69,592 page views and users on 3 month average. That means 23,197 users per month.

By merging with a bigger and stronger media company, ShareInvestor can leapfrog to the next level.

This post is a follow up of my previous post of option greeks dated 16 July 08.

Below are a few observations which I like to highlight to all traders:

1. Abnormal High Volatility

COBE Volatility Index

Attached is the COBE Volatility Index which I obtained from Yahoo Finance on 25 Nov 08.

The VIX reaches a record high of 79.13 on 20 Oct 08. This is the highest record since 1990!. Currently, it is at 64.70 which is still very high from normal condition.

What does this means? This means that the options have been priced so high for calls & puts that they are very expensive to buy.

The index has to come down to below 20.00 then it consider to be normal. But right now, the VIX is still far away from it.

2. Time Decay

time decay

Looking from the graph, the time decay most rapidly for options under 30 days left.

It is advisable to sell your options before they left with only 30 days.

3. Directional Risk

Nobody can predict 100% correctly the direction of the stock especially in this volatile and unstable market. You can do all the fundamental and technical analysis diligently, but the market need only 1 bad news to react against you.

4. Widening Spread

From Sept 08 onwards, I realised the spread between the ask and bid prices of options are getting widen. This means that the demand for options have reduced greatly mainly due to the economic recession, falling financial institutions and losing investor confidence.

Since there are so many odds against you from high volatility (vega) to time decay (theta) to direction risk (delta) and widening spread, it is going to be not easy for traders to profit.

There are many events that can trigger stock to gap either upward or downward. Examples are:

- Earnings Report
- Analyst Upgrade/Downgrade
- Account Scandal
- SEC Investigation
- Company Lawsuit
- Merger & Acquisition
- Stock Split
- FDA approval on drugs

But only Earnings Report are announced ahead of time to public. The rest of the events are Not released in advance.

In other words, you can prepare to position your trade prior company earning announcement to take advantage of the catalyst effect. However do bear in mind that not all stocks will gap significantly prior or upon announcement. And past performance does not necessarily mean future performance.

Therefore do your homework well and prepare to execute stop limit early if the market does not react against your favor. This will help you preserve your capital and perform your trade for the next opportunity.

You may be wondering since there are so many different option trading strategies you can deploy, which is the right one for you?

The good news is you do not need to know all of them. Just focus a few strategies which you can master and suitable to your risk profile.

Since different strategies apply to different market condition (bull, bear or consolidation), draw out the diagram is the key to understand the risk & reward of each strategy.

From the diagram, you can see visually the risk & reward level (limited or unlimited) as well as their break-even point the stock required to be profitable.

After you have understand the background and construction of the strategy, you can then devise the entry and exit rules before you enter the trade. Since different strategy have their own entry and exit rules, therefore it is important to focus only a handful that you specialized in order for you to become expert.

I have attached a long straddle template which you can download for your reference. All you have to do is just to key in the values in red. The rest of the data will be automatically calculated for you. You can copy and paste the template and repeat the steps for other stock. This will speed up your research time.
Click Here to download long-straddle template

Regardless of which strategy you deploy, always focus only a selected few to specialize and draw out the diagram (for example in excel) the understand the characteristics of the strategy and their risk & reward level.

Maybe you may be wondering whether there are similar characteristics or blueprint that successful trader exhibit?

After reading & understanding different successful trader, I realise they do share similar characteristics to become a successful trader.

Below are 3 traits that I will like to share with you all:

Discipline

Throughout the years of learning and trading experience, successful trader has developed a strong discipline and they will never allow their complacent to let their guard down.

This is because they understand the seriousness of 1 reckless trade which is enough to wipe out all their small winners which they have buildup. They are content with small winners and limit their losses early. They know that as long as their winners are greater than their losses, they will keep repeating the success consistently and positively.

They are patient, discipline and they respect the market. Since nobody can predict the direction of the market which can be so volatile and unpredictable, they are prepare for the potential loss and seek ways to reduce the risk before they enter a position. If their profit target is reached, they will exit the trade without second thought. In other words, they are able to accept both the winners and small losses.

Money Management

They understand the importance of capital preservation and diversification and only allocate a small percentage of their capital for trading purposes. They understand the maximum risk involved and they know how to limit their risk using stop loss.

They understand that as long as they keep their losses small, they will able to survive and will eventually succeed this trading game.

Follow the rules

Over the years of trading and experience accumulated, they have developed their won trading plan and they follow their rules for entering & exiting trade. They are trained so discipline that they will only enter a position if the stock passes all their trading criteria, otherwise they will simply move on and wait until the next opportunity arises.

They will keep track of all the trades they executed. In their trading log, they record down all the trade name, entry date, price, commission, market value, exit date and profit/loss.

They start with small contract size and slowly progress to bigger contract size as their trading skills and confidence level increases.

Similarly, as long as we trade with discipline, manage our money well and play by the rules we will have a higher probability of success.

In terms of mathematical finance, the Greeks are the components that are used to measure the risk of derivatives such as options. Each component of the Greeks measure different aspect of the risk and they are denoted by Greek Letters.

Today, I will like to highlight 3 Option Greeks:

Δ Delta
A measure of option’s sensitivity to the changes in the price of the underlying asset. It basically means that option with high delta will cost more than option with low delta and it has higher speed to increase its value as compare to low delta option and vice verse.

If you are looking of playing straight calls or puts, delta with 0.8 or 0.85 is a good benchmark in terms of option performance and cost. However,
if you are playing straddle option trading, try to look at ATM option with near 0 delta.

To increase your chances of success, look for tightening bollinger band from the technical chart. I highly recommend thinkorswim broker as it offers superior technical chart and competitive commission rate. Try out using their paper-trade platform and you will know what I mean.

ϒ Vega
A measure of an option’s sensitivity to the volatility of the underlying asset. Basically, it means that option that are more sensitive to volatility will cost higher as the market player “believe” that it has the potential to gap a lot. And likewise option that is less sensitive to volatility will cost lower as it is “believe” to gap less.

With that basic understanding, you can go to www.ivolatiltiy.com and look at their chart to identify stock that has reasonable implied volatility as compare to their historical volatility. This will increase your odds of winning.

Θ Theta
A measure of an option’s sensitivity to time decay.
The issue can be overcome by purchasing option that are more than 30 days. This is because option decay accelerates faster during the last 30 days countdown.

With a basic understanding of the 3 Greeks highlighted above, you will have a higher probability of winning and manage your risk.

Good luck in your trading success!