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Asit Baran Pati

7 Oct, 12 tweets, 2 min read

Since Earning season around the corner, just thought to share something basic. Not sure how many of you are into valuations. All my corporate career was spent in different IBs. The core working of the IBD is to prepare this heavy deck called Pitch Book

2. which gets circulated through all the MDs & Eds and we had to crunch the numbers and have to work against time for finishing the book in time. Which is basically comprised off Company profiles, Quants and Valuations (Comps-DSCFs / DDMs, SOTPs) etc. One of the core objectives

3. is to derive the fair pricing and this going in for Deals discussions with prospective clients. It was fun till it lasted but there was no life with 14 hours of slogging on daily basis. Reason for me to getting into trading. More on this on some other time.

4. Let me summaries why Fundamentally do stock price move! Below are the major reasonings

1.Earnings per share (EPS)
2.Earnings growth
3.Risk-free interest rate
4.Equity risk premium

All the last three components gets into DCF valuation along with terminal value to derive

5. at fair value.

EPS: A stock acquires value through its ability to make money for its holders in the EPS: A stock acquires value through its ability to make money for its holders in the
present and a promise to do so in the future. So, the higher the EPS is, the higher the

6. stock price goes up.

Earnings Growth: Future expectations also affect stock prices: for example, the growth rate of the EPS predicts the sizeIn practice, rapidly growing companies reflect rapidly increasing EPS. This is why earnings growth is important as well

7. Risk-free Interest Rate: also an important factor in the stock market. It controls price through fixing the interest rate on bonds and other instruments.

8. Companies generally need to obtain finance from the market for investment purposes at some point in their development, and that influences the firms’ EPS and hence stock price.

Equity Risk Premium: The basic rule is that if market sentiment is strong, the equity risk premium

9. is small. A strong market sentiment means that the investor will be pleased with a low equity risk premium. If the investor buys a stock or other risky security instead of a risk-free security, he or she wants compensation for the risk involved. The equity risk premium is

10. simply the expected extra return, which means the price is adapting in such a way:

Expected return = Risk-free rate + Equity risk premium

Relationships between price and reasons (4 reasons) may be positive or negative. Those determine the fair valuation of pricing.

+ve / -ve relationship between EPS & P
+ve / -ve relationship between the Earnings Growth & P
+ve / -ve relationship between the risk-free interest rate & P
+ve / -ve relationship between the equity risk premium and price

11. If wealth is to be made from market through investments these factor play a decisive role in picking the stocks for long term play. In case anyone interested for valuations following books are the best

Damodaran on Valuation
Valuation by McKinsey

Hope it was worth ur time.

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More from @asitbaran

Asit Baran Pati

@asitbaran

29 Jul

1 - An old dear friend of me called me last weekend and wanted my advice for starting his career in trading. He wanted to know the tricks of the trade without even knowing what preparation need to be done. Lost his job, and now wants to be full time trader.

2 - Spoke to him at length and persuaded him not to get in till he understands what’s in there. Thought of sharing it with you all, if any of you are contemplating!!

Here is a write-up for wishing all the new traders who have got into the market thinking, its easy out there.

3 - I too felt the same when I had started out.

In my opinion a new era in the market has started, with all the new rules and we have to figure out how best to adapt to it. But that's the thing just because something has worked and was successful in the past not necessary it

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Asit Baran Pati

@asitbaran

19 Jul

Brief write-up on Gamma. Hope you hv few takeaways

1 - Gamma is one of the Option Greeks. It measures the rate of change of the Delta of the option with respect to a move in the underlying asset. Specifically, the Gamma of an option tells us by how much the delta of an option

2 -would increase by when the underlying moves by 1 unit. Since Delta is a first derivative, Gamma is a second derivative of the price of the option.

A : Gamma Characteristics:

Gamma is a +ve function. If we own options, we own Gamma. If we are short options, we must have

3 - short Gamma.
Gamma is what makes Delta go from mild to ferocious, from small to large. The instability of that Delta depends on the option’s Gamma

a) Long Option Benefits of Gamma

Gamma is friendliest to long option holders. It accelerates profits for every 1point, the

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Asit Baran Pati

@asitbaran

17 Jul

The markets are not sympathetic to the meek. Few professions require as much courage as trading does. Came across this Tweet that somebody has lost 74% of his capital, by taking an earnings' trade suggested by some expert. Not sure if its true or not. 1/

But if it is then, it’s really sad. I feel for the person who has lost it. I can relate to the person as I myself took trades, like these given by INDORE advisory firm (and what a name EPIC Research :)). But in the end I came to terms its me who has done the blunder no point 2/

blaming anybody else. Holding onto SynicateBank 150 CE for 20 days, losing almost 50-60% of capital. Had bought Straddle before Infy result (many seasons back), just to realize lost 4-5l, (out of 20l capital) next morning, in no time, and was 3/

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Asit Baran Pati

@asitbaran

5 Jul

As requested, this thread is on IV: The Power of Implied Volatility

IV shows the market’s opinion of the stock’s potential moves, but it doesn’t forecast direction. If the IV is high, the market thinks the stock has potential for large price swings in either direction, just as

2. low IV implies the stock will not move as much by option expiration.

IV can be used to predict whether a market is likely to move higher or lower and it can warn traders against buying options that are too expensive. IV is a powerful tool and if used correctly

3. it will add another dimension to trading and remove the element of guesswork and discretion

Unfortunately, many novice futures and options traders do not factor in IV as part of their trading plan. It is, in effect, a measure of supply and demand for an option. If you measure

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Asit Baran Pati

@asitbaran

4 Jul

Over a period of last few weeks, there are lot of queries to me abt my max drawdowns over a period of time. So below are few shame-filled days where I was on the receiving end, and lost big; because of I was less skillful / disciplined / prepared / matured as a trader 1/

But these are the events that prepared me for better .Here are some of my biggest memorable one day losses

Brexit: 16l
Demon / Trump: 14l
CESC Demerger: 9l
WockPharma Crack: 8l
US - Iran Tension: 9.5l
US - Korea Tension: 12l
Nifty 10% freeze: 19l (after making 14l profit) 2/

Have lost counts of occasions where I've lost 1-3 lacs on daily basis

Learnings:

1 - We don't need to trade every day and every hour. Where and which zones "NOT TO TRADE" is a much needed skillset just like reading charts and data. It gave me the much required trading edge 3/

Read 6 tweets

Asit Baran Pati

@asitbaran

25 Jun

1. Received quite a few messages asking abt Options Guidelines. This is to all those who don’t know the beast nd its characteristics that well. Trading options can be risky business at best and disastrous at worst. Here, are few points how to handle it. Took a while to put it..

2. Bit lengthy but am sure it'll add value. A guideline for people to understand the nuances of the instrument.

Way back in 2013, I traded Options for the first time, without even knowing anything about Greeks and almost lost around 70% of capital in no time trusting Friends

3. from Indore. Little did I know back then, Options will be my bread and butter down the line. So here it goes.

A. Learn Option Theory and strategies and the Greek risks (Don't believe the experts who say Greeks don't matter)

Acquire an option theory education

Read 34 tweets

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