Monday, July 5, 2010

Power of Trading Stock Futures : Bajaj Hindustan

While trading Stock Futures, one has to constantly keep in mind the power it generates in terms of leverage. Its return on investment is five times that of trading in cash segment. And with this power you can rotate your money faster for further leveraging effect. When the markets are moving sideways trading in stock futures can be very rewarding. Case in point is that of Bajaj Hindustan. The recommendation to buy Bajaj Hindustan Futures was posted by me at

Bajaj Hindustan June Futures was bought on 16 June 2010 at 116 for a target of 121, as per my recommendation posted. The scrip was chosen for Futures trade because all Technical parameters were giving strong buy signal. However Fundamental reasons for entering into sugar sector in general and Bajaj  Hindustan in particular were as follows:-
  1.  On 14 June 2010 Indian Government had approved rise in levy sugar prices paid to mills by Rs 4/-. This would help market sentiments to improve as it signals that the prices could be higher than what they were.
  2. Global sugar prices were rising.
  3. Bajaj Hindustan was to merge it subsidiary - Bajaj Hindustan Sugar. This move would strengthen Bajaj Hindustan's position in Indian Sugar Sector through rationalization of operations, resulting in enhanced production, better profitability and stronger competitive edge.
The position was rolled over to July series as the target was not met. On the first day of July series Bajaj Hindustan surged past 121. I had then recommended to hold the stock for enhanced target of  127 which was later revised to 130. In this position I had recommended a trailing stop loss of 118. However the stock reached a high of 121.7 but met with trailing stop loss of 118 on 29June 2010. In this manner we could protect our profit in a very volatile market. Profit made was Rs2/- per share and since the lot size is 2000, the total profit was Rs 4000/- against an investment of Rs 46000/-.

Again on 30June2010, one lot of Bajaj Hindustan July Futures was bought at 116.75. Next day this position was squared off at 119. This provided a profit of Rs 2.75/- per share  and total profit from one lot of 2000 shares worked out to be Rs 5500/-.

Further on 01 July2010 one lot of Bajaj Hindustan was again bought at 116.8 and covered on 02July2010 at 118.5. This gave a profit of Rs 1.7/- per share and total profit of Rs 3400/- from one lot.

Thus by rotating our capital we could make a total profit of Rs 4000+5500+3400 = Rs 12900/- against capital investment of Rs 46000/-. That is equivalent to a return of 28% in two weeks.

Comparison With Cash Segment
Now for some comparison of Futures trading with Cash market trading. If we had bought Bajaj Hindustan in cash segment with capital investment of Rs 46000/- and at buy price of 116, we would have bought 396 shares. With a profit of Rs 2/- per share we would have made a profit of Rs 2x396= Rs 792/-. Instead ,by trading in Futures, we made a profit of Rs 4000/- with the same capital and at same buy and sell prices. This is the power of leverage acting on Futures trading which gave us a profit multiplication of five times over cash trading.

Now if you make a profit of Rs 792/- in delivery based trading , you will not like to exit your position because most of this profit will evaporate in giving brokerage. But with brokerage being one tenth in Futures trading in comparison to cash trading, you will not mind exiting your position with a profit of Rs 4000/-. And that is why we could rotate our capital of Rs 46000/- to make a total profit of Rs 12900/- with a return of  28% in two weeks. This quick money rotation would not have been possible in cash segment trading.

Thus we have seen the power of Futures trading in terms of leverage and capital rotation.