Stock track Report on Trading

2014/2015

School of Business

MSc in Global

Financial Information

Systems (GFIS)

2014/2015 Rok Piletic

PAPER ASSIGMENT REPORT ON TRADING

Module: Financial Derivatives

Module Facilitator: Mr. Franck Conway

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STATEMENT OF ORIGINAL AUTHORSHIP

All coursework submitted for assessment must be accompanied by a suitably completed, signed copy of this sheet.

NAME: Rok Piletic CLASS: MSc in Global Financial Information Systems STUDENT ID: TITLE OF ASSIGNMENT: Stock track Report on Trading – Paper assignment DATE OF SUBMISSION: 16.12.2014 FORMAT: Academic paper - format (Page Numbers 27) I certify that this is my own work and that the use of material from other sources has been

properly and fully acknowledged in the text. I understand that the normal consequence of cheating in any element of an examination or assessment, if proven, is that the relevant Faculty Members will be directed to take penalizing action against the student with regards to final marks.

NOTE: You are reminded that you should retain all coursework in your portfolio as it will be required for inspection by

Faculty Members at the time of finals.

SIGNED: DATE: Waterford, 16.12.2014

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Contents

Introduction ...................................................................................................................................... 3

How to trade..................................................................................................................................... 4

How to read financial data ............................................................................................................... 5

Strategies in trading ....................................................................................................................... 10

Stocks .......................................................................................................................................... 10

Options ....................................................................................................................................... 10

Futures ........................................................................................................................................ 12

Buy and Hold Account .................................................................................................................... 13

Trading Account ............................................................................................................................. 15

Tumbler blog .................................................................................................................................. 19

Conclusion ...................................................................................................................................... 19

Bibliography .................................................................................................................................... 20

Appendix ..................................................................................................................................... 20

Figures

Figure 1: Dictionary of surfing .......................................................................................................... 3 Figure 2: Global stock markets ......................................................................................................... 4 Figure 3: Descriptive ......................................................................................................................... 5 Figure 4: Fundamental ..................................................................................................................... 5 Figure 5: Technical ............................................................................................................................ 5 Figure 6: Different over view options ............................................................................................... 6 Figure 7: All the filters of the screener and the output of 10 stock by alphabetical order .............. 6 Figure 8: News and Blogs of financial derivatives traded in stock market ....................................... 7 Figure 9: 3D map .............................................................................................................................. 7 Figure 10: Chart of the ING Group stock in 3D map ......................................................................... 8 Figure 11: ING group full report on the stock .................................................................................. 8 Figure 12: A candlestick .................................................................................................................... 9 Figure 13: Four basic option trades ................................................................................................ 11 Figure 14: Combination of basic strategies of trading options ...................................................... 11 Figure 15: Operating costs of the oil production global ................................................................. 12 Figure 16: Stocks – Buy and Hold 1 ................................................................................................ 13 Figure 17: S&P 500EFT .................................................................................................................... 14 Figure 18: Europe EFT ..................................................................................................................... 14 Figure 19: Portfolio returns ............................................................................................................ 15 Figure 20: Future options ............................................................................................................... 16 Figure 21: Futures ........................................................................................................................... 16 Figure 22: S&P 500 Index................................................................................................................ 17 Figure 23 : Ratio Shape ................................................................................................................... 17 Figure 24: Alpha/Beta ..................................................................................................................... 18 Figure 25: S&P 500 EFT 3 months................................................................................................... 18 Figure 26: Europe ETF 3 months .................................................................................................... 18

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Introduction

The new wave of trading emerged as WEB 2.0 started and as searching for the right information

on the web we use term ‘surfing’ I would like to present a model of financial trading as a surfing environment as they have both a lot in common.

Trading is like surfing the waves, you have to know how to get on the wave and how to get of

the wave. Mostly traders do like to get on but is really more risky and needs a lot of knowledge and skills on how to slide down the waves. If you are an investor you look for the whole bay of waves to catch in your portfolio to get slowly with a nice ride to the beach but if there is a bad judgment the storm can throw you on the bay losing everything in the process and even get some bumps. As a life style of surfers doesn’t much differ from the brokers or investors they have a dress code, slang, gestures that makes communication in the group possible and most of all attitude to take risks riding the big waves. To achieve your goals you can use different tools like wind surf, wave surf or kite, as in investment you can buy a boat. Maneuvering the needs special skills and touch as there is no wave same as previous but the y have some common characteristics or patterns of movement that we usually keep track of and try to make best of it by earning money on them, as surfers try make best moves seen in Figure 1, to ride them.

Figure 1: Dictionary of surfing

(Source: http://telmapdesign.blogspot.ie/, 15.12.2014)

In our trading assignment we had to do both roles as a trader and as an investor having two

trading accounts on stocktrack.com simulation platform. For investor we had Buy-and-Hold account purchasing 20 stocks for a time of three months to hold and Trading account to openly trade stocks, options, futures and future-options in three months.

http://telmapdesign.blogspot.ie/

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How to trade

There are many different schools techniques that teach you skills but there is no one who can

predicts the strength and the way it will move. As there could be some sentimental attachments or distractions that can push your emotions to do the decisions as they might be not the right one. But if the market is showing good effort and steady predictable movement a crowd could join in and do the trading. The trading is easy that and anyone can join in and do the trading, but there are limits to what you can trade and do.

We currently have several markets around the world where there is trading done but most known are from New York, London, Frankfurt, Dubai, Hong Kong, Shanghai and Tokyo, see Figure 2. As they operate in different time zones the working hours of investors and specially brokers differ from every day working hours.

Figure 2: Global stock markets

(Source: http://finviz.com/map.ashx?t=geo, 15.12.2014)

In these markets you can trade different derivative (Wilmott, et al., 1995): Stocks ( Sectors :Technology, Services, Basic Material, Financial, Consumer goods, Industrial

goods, Healthcare, Utilities, Conglomerates ), Bonds, Commodities, Currencies, Interest rates, and Market indexes.

In trading of all those derivatives in a stock market in a history of trading emerged some tools

and methods on how to trade in a stock market. As trading become complex and there are a lot of stocks and other instruments of derivatives some markets became specialized in trading just one.

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How to read financial data

Using FINVIZ.COM platform can give you different option to monitor and keep track of the

financial data. The screener can give you three main options to look over the data of stocks traded in US stock markets (Source: www.finviz.com):

Descriptive (Figure 3), Fundamental (Figure 4), Technical (Figure 5).

Figure 3: Descriptive

(Source: www.finviz.com(15.12.2014))

Figure 4: Fundamental


Figure 5: Technical


You can later chose even different over view as seen in Figure 6, for more detailed view of the stocks you get by giving filters on the data of trades and financial data of the stocks. There are several overviews:

General Valuation Financial Ownership Performance Technical Custom Charts

http://www.finviz.com/



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Tickers Quotes Basic TA News Snapshots The total number of the stocks trading

Figure 6: Different over view options


When you chose the criteria’s in filters on the financial data it gives you the stocks the meet that criteria seen in Figure 7.

Figure 7: All the filters of the screener and the output of 10 stock by alphabetical order

. (Source: www.finviz.com(15.12.2014))

This screener was very helpful on analytics to buy stocks for Buy-and-Hold account as there was no time in one week to use proper corporate evaluation methods of the companies to decide which stocks to buy. It also helped in day-to-day trading as to look for more information than just from the charts and the graphs of the stocks movement.



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The very important factor on analytics was to read the news of the stock market as see in Figure 8.

Figure 8: News and Blogs of financial derivatives traded in stock market


For day-to-day trading I was very fond of using 3D map for tracking the movement of stocks in

that day as seen in Figure 9, it shows you sectors of stocks names of ticker’s of the stock and ho is performing on the day of the trade. Black no change, read decrease in price, green increase in price and the third dimension size of the square shows the size of the stock being traded and the height of the square how big was the movement in the price of the stock.

Figure 9: 3D map


As you click on the chosen stock in 3D map the chart of the stock appears to give you more detail

of the stock history as see in Figure 10, for the ING Group stock.



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Figure 10: Chart of the ING Group stock in 3D map


When you double click you get the full report on the stock report as see in Figure 11, it gives you

the chart of the stock movements with different analytics shown on the graph, it gives you the full name of the company in which sector it is and from which country it is. You also have all the filters with different data on the stock and news-blog report links of important events of the stock in the market.

Figure 11: ING group full report on the stock




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The charts can tell you a lot of information on history movement of the stock it could show you1: Support and Resistance Trend lines Gaps and gap analysis Chart patterns (Shoulders, Head, Neckline and bulls & bears demand, etc. )

Different types of the charts2 are being used:

Arms Candle Volume Candle Volume Elder Impulse System Equi Volume Heikin-Ashi Kagi Charts Renko Charts Three Line Brake Charts Point And Figure Charts Relative Rotation Graphs (RRG Chatrs)

And different tools can be used on those charts3:

Andrews’ Pitchfork Cycle Fibonacci Retracements Fibonacci Arcs Fibonacci Fans Fibonacci Time Zones Quadrant Lines Raff Regression Channel Speed Resistance Lines

One of the most used chart indications is candlestick that can give you a lot of trading

information if you know how to read it, see Figure 12. There are different versions on how to interpret them for the trading strategies that we use in day-to-day trading.

Figure 12: A candlestick

(Source: Investopedia.com; <http://www.investopedia.com/articles/technical/02/121702.asp>; (15.12.2014))

1 Chart analysis - <http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis>; (15.12.2014)

2 Chart types - <http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis>; (15.12.2014)

3 Chart tools - <http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis>; (15.12.2014)

http://www.investopedia.com/articles/technical/02/121702.asp

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Strategies in trading

As we trade with different derivatives in different markets we usually have to acknowledge

different risks to make right decisions to buy financial derivatives (NAPF, 2013). As there are many approaches how to do that will be presented in following points for stocks, option and futures that are most common derivatives being traded.

Stocks

Stock is a capital raised by a company or corporation trough the issue and subscription of shares and are treated as equities of the company.

Biggest trader in the world use their own secret trading strategies but all somehow relate to: Benjamin Graham’s Formula4 Schiller P/E5

They both give you calculation comparisons of stock values in certain period in relation to the

movement of the stocks market in the same period.

Options

Options are contracts that give you right to buy or sell something at a pre-agreed strike price at

certain time mark in the future. The cost of option is the seller’s premium which a buyer must pay to claim the right of an option. We have a put and a call option:

Call – a buyer has a right to buy and a sell has an obligation to sell the option in the future at the strike price pre-agreed.

Put- a buyer has a right to sell and a seller has an obligation to buy the option in the future at the strike price pre-agreed.

In combination of this two we have four basic option trades, see Figure 13, and in combination we get a lot of different variations of trading and with option risk, see Figure 14, Appendix 1, Appendix 2 and Appendix 3. . With graphical overview of mostly used combinations see

4 Benjamin Graham’s Formula - < http://www.oldschoolvalue.com/blog/valuation-methods/value-stocks-benjamin-graham-

formula/ >; (15.12.2014) 5 Schiller P/E - < http://www.gurufocus.com/shiller-PE.php >; (15.12.2014)

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Figure 13: Four basic option trades

Source: Option Strategies (Cohen, 2005)

Figure 14: Combination of basic strategies of trading options

(Source: Strategy future & option guide (CME, 2014))

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Futures

Are exchange contracts for future for a price in trading agreed today for pre-determined asset to

be delivered on the pre-agreed date. The buyer makes margin payments in reflection of the value of transaction. Trades are made in6:

Indices Bonds Metals Energy Grains Softs Meats Currencies

The futures have a different trading cycles as in months or in quarters or half years as therefore have certain trading codes. The strategies used in future trading are similar to option but the difference is that in futures buyer or the seller has an obligation to deliver pre-determined agreed commodities settled in contract.

Currently the hottest commodity is oil as the price of the crude oil has fallen in last five months from $105,00 per barrel to $55,00 per barrel. As we see in Figure 15 the market price is quickly approaching the cost price of production of main producers.

Figure 15: Operating costs of the oil production global

(Source:www.uk.Businessinsider.com (UDLAND, 2014))

6 Futures <http://finviz.com/futures.ashx>; (15.12.2014)

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Buy and Hold Account

The trading started in September of 2014 ant we had to buy 20 stocks in approximately 7 to 10

days’ time period for our class assignment. This as the stocks I bought see, Figure 16.

Figure 16: Stocks – Buy and Hold 1

(Source:www.Stocktrak.com)

My strategies of buying stocks in ‘Buy and Hold Account’: 1. As I didn’t really had time to do in depth corporate valuation I used www.Finviz.com

screener to see what kind of stocks are available and used some filter on it P/E lower than 15% , forward P/E lover than 15% , EPS growth this year positive, EPS qtr over qtr positive and gross margin over 30%. As I could not trade in all the markets I tried to see if those


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stocks from around the world were being traded in the New York Stock Exchange market or NASDAQ.

2. The second strategy was I looked the Forbes Billionaires (Forbes, 2014) top ten people and explored what kind of companies they possess and buy those stocks as they had invested in some prosperous long term positive revenue companies as you need those for the buy-and-hold stock positions.

3. As the world economy is shifting from west to east with big indication of sanctions against

west to Russia the energy distribution of Russia moved to brick countries especially India and China. Therefore I bought some stocks of energy and logistic companies from that region especially Chinese as they invested a lot of money in energy networks in Europe.

At the start of almost one million invested capital in buying stocks at the end the value of portfolio return was -14,10 % . My opinion is that some of the stocks will bring expected return in longer position. Some other indicators of portfolio value compared to S&P 500EFT see Figure 17 and Europe EFT see Figure 18:

Figure 17: S&P 500EFT

Figure 18: Europe EFT

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Trading Account

Day to day trading was meant to be open for trading on daily basis on stocks, futures and

options and try to use the strategies that we had cover over the course of a class. There was an option of 300 trades made at the end I made around 115 trades in mostly options and futures and some in future-options at the beginning as they were not working. At the end I made a remarkable return but as I didn’t pay attention to the Stock track those retunes could not be executed see Figure 19. As future-options stopped working and the price of oil was going down I could not cash in the profits that were made in regards to movement of the oil, as seen in Figure 19: Portfolio returns. But eventually I managed to gain most profit in the last 14 before the closure of three months trading period that was given to do trades.

Figure 19: Portfolio returns

1. Day to day trading I used mostly news and blog posts of financial experts and sites as Forbes, Business insider, Reuters, Financial times and I used 3D map of the www.finviz.com to track the movement of certain stocks over a few days and if the movements were big I went to see the news reports and blogs to see what is happening and then I bought the options of that stock if the forecast was suitable. In reports you usually see annual or quarterly reports being uploaded or some patens being or legislations standards being achieved that they bring interest of trading by selling or buying and if there is a movement there is an arbitrage chance. All this data I compared to charts and also made analytical view of the prediction of the history movements of the stock using previously described tools.

2. In futures I included the happening of the Christmas preseason, winter season and political happening of the markets especially in the Future-options see Figure 20 and future account see Figure 21 .


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Figure 20: Future options

The biggest loss I made was the CAD/USD as oil prices fell down strength of the dollar was going up and as Canada I one of oil producers with highest cost of production the price of CAD/USD was declining as it is a time of Christmas and shopping’s my indication was that this ratio will be positive it even vent back to -20.000,00 $ and I hesitated.

Figure 21: Futures

As global market at this time is really volatile this graph made me think that there could be another black scenario being ahead of us, see Figure 22.

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Figure 22: S&P 500 Index

My overall ‘ratio shape’ see Figure 23 and ‘alpha and beta’ see Figure 24 were quite in good condition over the time.

Figure 23 : Ratio Shape

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Figure 24: Alpha/Beta

The overall condition of day-to-day trading of the portfolio did performed well and it did meet even my exaptation to hit the highest value at the end of trading position time see Figure 25 and Figure 26. Figure 25: S&P 500 EFT 3 months

Figure 26: Europe ETF 3 months

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Tumbler blog

In time of the trading I had Tumbler blog account posting different news on world markets of the

financial derivatives and trading. With weekly review of the changes in sectors of industries traded. Link: Tumblr URL: bortrade.tumblr.com

Conclusion

The trading is a big task to achieve and there is a lot of work include in it to achieve positive goal

with a lot of research and sometimes even some luck. But if you work luck is mere factor of results of your work. I would really like this trading assignment to last 1 year to experience whole cycle of the year.

http://bortrade.tumblr.com/

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Bibliography

Caplan, D. . L., 2005. Profiting with Future Options. 1st ed. Grove city: Center for Futures Education.

CME, 2014. Strategy future & option guide. 1st ed. Chicago: CME. Cohen, G., 2005. The Bibile of Option Strategies. 14th ed. New Jersey: FT Press. Forbes, 2014. The World's Billionaires. [Online]

Available at: http://www.forbes.com/billionaires/ [Accessed 15 12 2014].

Guide, C. G. W., 2012. http://latrobe.libguides.com. [Online] Available at: http://latrobe.libguides.com/content.php?pid=54132&sid=398044 [Accessed 20 Oct 2014].

Heritage Foundation, 2014. 2014 Index of Economic Freedom. [Online] Available at: http://www.heritage.org/index/visualize?countries=ireland|slovenia&src=ranking [Accessed 20 Oct 2014].

NAPF, 2013. Derivatives and Risk Management Made Simple. [Online] Available at: https://www.jpmorgan.com/cm/BlobServer/is_napfms2013.pdf_for_pensions_page?blobkey=id&blobwhere=1320629079768&blobheader=application/pdf&blobheadername1=Cache-Control&blobheadervalue1=private&blobcol=urldata&blobtable=MungoBlobs [Accessed 15 12 2014].

UDLAND, M., 2014. Finance. [Online] Available at: http://uk.businessinsider.com/oil-cash-costs-2014-12?utm_content=buffer97f42&utm_medium=social&utm_source=facebook.com&utm_campaign=buffer?r=US [Accessed 15 12 2014].

Wilmott, P., Howison, S. & Dewynne, J., 1995. The Mathematics of Finacial Derivatives. 1st ed. Cambridge: Cambridge University Press .

Appendix

Appendix 1: Option strategies 1 ..................................................................................................... 21 Appendix 2: Option strategies 2 ..................................................................................................... 22 Appendix 3: Option strategies 3 ..................................................................................................... 23

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Appendix 1: Option strategies 1

(Source: Profiting with futures options, (Caplan, 2005) )

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(Source: Profiting with futures options, (Caplan, 2005)

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(Source: Profiting with futures options, (Caplan, 2005)

Stock track Report on Trading

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