Citing Tobin to Bury Him

Prof. Jayant  R. Verma’s recent posting makes a provocative case in support of day traders, noise traders, speculators, hoarders, flashers, scalpers and  what have you. 

It has been accepted wisdom for some time now that speculators are beneficial to markets in providing liquidity and facilitating price discovery.   For Prof. Varma the benefits don’t stop there.  He claims that by generating volatility, speculators actually reduce the “tail risk,” big and totally unexpected movements in prices that have come to precede (and possibly cause) financial crises of various kinds.  By keeping investors on their toes, this speculation-generated volatility helps guard against the sort of unthinking complacency that characterized the real estate boom.

The Indian experience, at least so far as stock markets are concerned, seems to bear this out.  Most small cap stocks that find themselves in the 5% circuit limit category actually exhibit more volatility over the medium term when compared to their brethren in the 10% circuit limit category.   The argument that the volatility in these stocks would actually be higher were it not for the tighter circuit limits is, unfortunately,  un-falsifiable and likely to persist despite reasons and indications to the contrary.

If we were to accept the thesis that active speculation is necessary not just for liquidity, but also for market stability then one could argue that, other things being equal, public policy should support speculative activity instead of hindering, much less inhibiting, it.  Prof. Varma’s suggestion of a “Tobin Subsidy” is not really one; He proposes merely that real-estate speculators be allowed to get a refund on stamp duties paid when “flipping” property making it more of a “Tobin Tab-break.”  Nevertheless, I’m sure all this talk has old man Tobin spinning in his grave.

Survivorship Bias in Action

The Times of India has a story today that is a textbook illustration of the deceptive marketing carried out by the mutual fund houses.  Apparently, “nearly one out of every two funds has bettered the sensex returns of 9% (emphasis added).”  What, say that again?   So, if I had invested my money uniformly across all these funds, I might have nearly beaten the Sensex? Of course, after taking off the entry and exit loads, the Sensex would have certainly beaten me.  The  “CEO of a top mutual fund” (whose PR flack almost certainly provided the entire copy of the story) is quoted as saying “We (the industry) have delivered always alpha.”  Wait a minute, negative or positive alpha, Mr. CEO of a Top Mutual Fund Company.  This is hilarious, except there are probably plenty of statistically challenged people out there that would swallow it whole and continue to repose faith in this morally bankrupt “industry.”  Notice how that  there isn’t even a passing reference to funds that might have lost money over the year. Blech!

NIFTY and IndiaVIX

NIFTY™ Close since IndiaVIX™ reporting began.

Changes to 5DMA of NIFTY close.

Day-on-day changes to IndiaVIX

If we were to hypothesize that the VIX trails changes to the NIFTY while changes to the VIX leads big changes to the NIFTY… Wait a minute, that doesn’t event begin to make sense.  But maybe you should stare at the pictures some more.

Top 10 Meals Hotels in Bangalore

One  cannot say with any degree of certainty when the confusing practice of using "hotel" to mean "restaurant" started in India, but it has been around long enough for "Meals Hotel" to have stopped sounding odd to our ears.  In fact, most restaurants in Bangalore turn into "Meals Hotels" at around noon serving little else besides, well, “meals”, also known as thalis (literally, dinner plate).  The ones that have "North Indian/South Indian/Continental/Chinese" under their names usually have a "North Indian thali" in addition to (an often cheaper) “South Indian thali,” although we’re yet to hear of Chinese or Continental thalis.  If you've been in Bangalore even a  few weeks, you'll likely have had a chance to try "meals" at least a few times.  These are quite good in even the most mediocre of places -- we put this down to scale and commoditization -- and are consequently a safe, inexpensive bet if you happen to find yourself in an unfamiliar part of town come feeding time. But you wouldn't normally expect to do "meals" when you go out to treat yourself or your family, would you?  Well, you should! 

Hidden among these many thousands of meals hotels are a few exceptional gems; places that lay out a treat at unbeatable prices, serving  "meals" that subsequently come to define what a good meal ought to be.   Here, then, is our selection of the Top 10 best places to go out to have "meals" in Bangalore.

10. Annapoorna (Cambridge Layout, Ulsoor)

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Annapoorna, a solidly middle class TamBrahm  joint, models its meal after the typical South Indian wedding feast.  The owners of the place, Mouli's Catering, are in fact primarily wedding caterers. (Insert favourite leftovers joke here.) But seriously, the food is top-notch, the service prompt and the bill, very manageable.  The meal is organised around the usual three courses (steamed rice with sambar, rasam and curds) with accompaniments like chithranna, thair vadai and vadam apart from the usual poriyal/podimas/palya (pan fried vegetables prepared in different styles),  Go on a weekend afternoon to catch their special meals.  They serve lunch on all other days as well, except Mondays when they are closed.  They only serve tiffin items for dinner.  These are pretty good too: we recommend the Adai Avial. The average bill works out to no more than around Rs. 150 per person.

9. Bheemas (Church Street)

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Andhra-style is the second most common cuisine in Bangalore, right behind Darshini-style.  There are only two things worth ordering in any Andhra-style restaurant: meals and biriyani.  Do not bother with the rubbery naans, brittle-as-a-biscuit rotis, oily chowmeins and what not.  Just stick to the meals.  Order a biriyani if you’re feeling particularly hungry.   With few exceptions, both these will be good at any Andhra-style place you happen to walk into: tasty, substantial, inexpensive, unpretentious, unapologetically spicy, completely authentic and invariably quick to appear at your table following your order.  Supplement with a “dry” side-dish if needed (chilli chicken is popular).   We also recommend a scoop of plain vanilla ice cream post-biriyani to wash down the spice and grease from your oesophagus.

Of the two Andhra-style restaurants that made it to our list, Bheema’s is the more difficult pick.  The M.G. Road/Brigade Road area is littered with restaurants and there’s one other Andhra-style restaurant close by, the Nagarjuna, that is older and arguably more popular.  But our vote goes to Bheema for its spread (the pepper-garlic rasam is particularly addictive, the Andhra-style dal  is exceptionally good), the “gun powder” accompaniments (dry ground lentils and spices suitable for mixing with steamed rice) and better service.  The full meal, without any accompaniments comes for around Rs. 100.

8. Brindavan (MG Road)

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Part of a very old hotel (an actual rooms-for-rent type hotel) of the same name right in the middle of M.G. Road (near Cauvery junction), the inside of this restaurant transports you right back to the old pre-IT Bangalore  of High Ideals and strong coffee and smoother traffic and cooler climate and … What this means in practice is large rectangular granite topped tables arranged in a very socialist grid (each one can seat around 10, so expect to share yours with total strangers), plastic chairs to sit on and waiters wearing colour coordinated Gandhi caps who look they’ve known three generations of owners. But the food they serve is the reason they are on this list.

The Brindavan meal is superficially the same as what one might see in any other South Indian thali -- chapati-kurma, rice, dal, palya, sambar, rasam, curd -- but  this stuff is unique.  Heck, let’s make that a capital Unique.  This food belongs to a culinary tradition that is almost lostThey also usually serve a very tasty and very tangy menasu-kai (pineapple, mango or pumpkin cooked in a sweet and sour gravy).  

The meal costs only around Rs. 60, so the place gets very crowded around 1:00 PM.  Go early to get your place. They also serve a ginger-lemon juice for around Rs. 15 – somewhat too sweet, but definitely worth a try. 

 

7. Pai Refreshments (Anandrao Circle)

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Pai is yet another of those old-school business hotels with an attached restaurant.  Pai actually has two (three if you count the bar out in front).  Avoid the one on the ground floor/basement: that is your usual run-of-the-mill Darshini.  No doubt they serve adequate fare at reasonable prices, but we can’t be sure because we’ve never been there.  It is the restaurant on the first floor that gets Pai an entry into this list.

This restaurant serves jolada roti oota – literally, sorghum bread meal.  Rotis made of sorghum (sometimes called jowar), a staple of the arid north Karnataka region,  is harder to prepare, but softer on the teeth and in our opinion tastier compared to those made from wheat or refined flour.  The curries that go with it are also very different compared to standard North Indian stuff.     The meal is finished off with rice, but you want to consider skipping that and making a meal of the rotis alone.  The standard meal costs around Rs. 60.  There’s a special one available as well, with an extra dessert, that goes for Rs. 75.

6. Eden Garden (Infantry Road)

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Perhaps its only us, but we think the idea of naming an Andhra-style restaurant after a Biblical place somewhat incongruous.  Neverthless, in the opinion of many, Eden Garden serves the best Andhra meal in town.  In addition to gun powders, they provide a couple of well-made pickles and a jar of ghee (clarified butter) at your table as well.  The meal is expensive (at around Rs. 110) compared to other Andhra-style places, but well worth the extra buck. Despite being in a posh part of town, there’s a lot of space inside the campus with some set aside for a kids play area as well.  Usually parking is not a problem either. They have liquor license too.

5. Sukh Sagar (Majestic)

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The Sukh Sagar “food complex” on the way to the Railway Station from Kempe Gowda Road is part of a larger restaurant chain of the same name.  But unlike the others in the chain that mostly serve Darshini-style stuff (albeit very good Darshini-style stuff), this one carries many Gujarathi specialities on its menu, including two Gujarathi meal choices.  Both are excellent, although the pricier one (the executive meal) is overdone in our opinion.

Go on an empty stomach and plan on coming out a little overfull.  The spread is extensive and most dishes are very rich.  The regular meal is priced at around Rs. 150. 

4. Woodlands (Richmond Circle)

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Despite the size of their property, it is surprisingly easy to miss Woodlands Hotel on Richmond Road near Kanteerava Stadium.  It is at the end of a longish drive way,  right around the bend, looking the wrong way on a busy one-way road.  Go up the long driveway leading to the cul-de-sac in front of their auditorium and you will find yourself in an other world -  a quieter, calmer, and somehow s-l-o-w-e-r world.  The restaurant on the ground floor (we haven’t really checked if there are any others reallys), serves vegetarian meals that can be thought of as a pricier (and somewhat less healthier) alternative to Brindavan.  Replaces the rotis with pooris (deep fried flour bread), add another palya, throw in the kusumri (cucumber and soaked lentils salad dressed with coriander leaves and mustard seasoning), top it off with a desert or two and there you have it.  This is first class stuff: take your time to savour the delicate flavours and take a walk around the property afterwards to settle your stomach.  Very family friendly place.  The restaurant is quite large and we’ve never known there to be a rush.  The meal costs around Rs.150.

3. Rajdhani, UB City, Rs. 250

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We suspect that the Rajdhani on the food court at the recently opened UB City Mall brings in more revenue than all other stores in the mall put together.  The serve a Rajashthani feast (we are quite tempted to call it a Rajputani feast) fit for kings and we’re yet to find the place sport a single free table during lunchtime.  The meal is multi-dimensional, starting off with a snack or three, followed by three different kinds of rotis (one of which is sweet, so watch out in case you take exception to that sort of thing) surrounded by half-a-dozen curries, dal and kadi (chickpea flour gravy), kichdi (rice cooked with lentils), steamed rice and  two different and very rich desserts. Be sure to sample everything in small quantities.  The meal costs around Rs.275.    While the service if quite good once you manage to get yourself seated, the restaurant does not take reservations, so be sure to go early to get a place without too much waiting.

2. MTR (Lalbagh Road)

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To call the Mavalli Tiffin Room (MTR) a Bangalore institution would be a gross understatement.  It is the only Bangalore restaurant that we know with its own Wikipedia entry, so you can read all about it there.  This is the Meals Hotel, serving the definite Bangalore meal and we are not going to anger fans by attempting to critique the food.   We will mention only two things: firstly, that we deplore all attempts to bucket the cuisine as belonging to a particular community. We believe that their meal has evolved long enough to be identified exclusively with Bangalore alone.  Secondly, while we think they make a complete mess of their desserts through the indiscriminate addition of sugar, we hold this as a  touching remained of the sugar rationing of yesteryears and eat them all nevertheless.  We could also point out that  they continue to charge only a paltry Rs.75 a head, and  that most of  the waiters look underfed, and that the red oxide flooring seems to have held up rather well and so on, but we won’t.

1. This place Left Intentionally Blank

We didn’t like the sound of “Top 9 Meals Hotels” and hence this little subterfuge.  But do leave us a comment if you think we missed one that should take this place.

Qipit?

The biggest convenience of having a phone with a camera is in using it as a quick note taker of sorts. Say you're at a book store and see a book title that looks interesting. You're not ready to buy it yet. You want to go back and think about it a bit. Maybe run a few searches at your favorite online bookseller's. Catchup first with your existing reading stack. Or maybe wait for it to appear at your friendly neighbourhood road-side pirated bookseller.

You could whip out your pocketbook and pen and write down the details, except you don't carry either since getting out of school. Perhaps you could commit the title and author to memory, except your memory is not what it used to be and author names and especially book titles are getting stranger by the day. Why not just take a picture of the book cover on you phone and then look at it later?

Same thing goes when you see a notice at a local grocer offering some used furniture for sale. Or you happen on a hoarding for a new apartment block coming up down your road that you think someone you know might be interested in. The easiest thing to do is to take a snap on your phone rightaway.

Used to be, back in the day when a VGA camera on a phone pushed the price up some 300%, that the picture quality rarely allowed this to be any more than a supplement to, or perhaps encouragement for, one's memory. No longer. Most camera phones today offer resolutions close to what you can get with a budget desktop scannner. Mine does, at any rate.

So when I happened upon Qipit, a promising new camera-phone based document scan service, on a list of sites supported by ShoZu, I was instantly interested.  I went over to the site and got me an accoutn pronto.  I wish I could say the sign up was simple:  it was the most protracted and agonising sign-up process I've been thru (save for some Indian sites) in ages.  It wanted my phone number, and then it made me pick my phone model (which wasn't listed anyways), and as I was doing all this the form changed all over the place (pick a country and the carrier changes automatically; pick a phone and the country changes; go back and pick a country and everything gets reset to default).  

The site seemsed to suggest that I'm allowed only 100 photos to upload.  So there must be a premium account.  Must be, but I couldn't for the life of me figure out what it was and how much it cost.  It is also still not clear to me how the "Publish" feature works.  The site talks about it, but the instructions were not clear to me. I had to use a rather round about way to publish the results of my experiment.

I ran the experiment this Sunday morning. I took a couple of pictures of the day's paper (Hindu's Sunday supplement) and uploaded them to Qipit. Here are the pictures and right below them the PDFs that Qipit generated from them.

Tubingen		Connection
PDF		PDF

First, the bad news: there's no OCR! Maybe it's me, but surely OCR would've been the first thing to have put in?  Surely a lot many more people would wish for that over, say, the ability to fax their docs?

The PDFs do look a lot clearer than the originals, I have to admit, and are a lot smaller to boot.  In the second case ("Connection"), where I took the picture somewhat more carefully than the first ("Tubingen"), Qipit did a much better job in terms of cropping and centering the text.  

I'm disappointed and a little confused (will I have to pay $$ if I really get used to this? do I have to download/email the PDF manually everytime I need to share it?), but I like the idea of this service and am certainly not ready to write it off just yet.

Pricing Long-term Options on the NIFTY (Part II)

In my last post,   I ended up looking at long-term call options on the NIFTY mainly in terms of liquidity.  This one looks at their prices in greater detail.   my motivation is to come up with a decent, intuitively grasp-able, model for pricing these instruments.  That Black-Scholes fails badly here is quite appearent from the base priecs that one sees set by the NSE when these contracts are listed.  These computed base prices show up as the closing price on the F&O Bhav sheets until the first trade takes place.  In all cases that I've looked at the first actual trade happened at anywhere between 20-70% of NSE's base price.  Here's the evidence from the 6 contracts that we're tracking from the previous post:

Contract	Last base Price	First Trade	Ratio
24-Jun-10 5000	2001.95	880	44%
30-Jun-11 4000	2353.9	1585	67%
30-Jun-11 4500	2489.55	1470	59%
30-Jun-11 5000	2407.7	950	39%
30-Jun-11 5500	2236.75	600	27%
30-Jun-11 5700	2172.7	519	24%

As a first exercise, I made scatter plots of "Price" vs. "Underlying"  (no time order).  My feeling was that, since the expiries are way out in time, it really donesn't matter when the trade took place over the last 6 months.  All that really counts is that a trade took place on that day.  So I used close price as a proxy for "Price" and NIFTY's closing as a proxy for "Underlying" on all days when any trades took place.  The results appear below.

The biggest suprise for me was the fact that the data seems to fit a nice linear regression like some textbook physics experiment.   And the more trades a contract had (see JUN-2011 call @ 5000, for example), the better the fit appeared to be.

I used excel to do the fit and here are the equations it threw up (Price = A*NIFTY + B):

Contract	A	B
24-Jun-10 5000	0.4074	-1190
30-Jun-11 4000	0.6523	-1768.6
30-Jun-11 4500	0.652	-1965.3
30-Jun-11 5000	0.5677	-1788
30-Jun-11 5500	0.3034	-788.47
30-Jun-11 5700	0.3857	-1196.6

We're now closer we were than at the end of the last post to answer my original question: what is the delta on these things?  But we're nowehere near done yet.

(To be continued...)

Pricing Long-term Options on the NIFTY (Part I)

NSE notified long term contracts on the NIFTY on Feb 27, 2008. In addition to the near, next and far month expiries, we now had 3 quaterly expiries and 5 half-yearly expiries. In effect, these contracts allow one to take a view on the NIFTY upto 3 years into the future. Trading started on Mar 3, 2008.

When these contracts were introduced, there was much doubt raised to their viability. It was pointed out that the volumes on far (and even next) month options were quite thin for the most part. In a ominous sign a month or two following its launch, ICICIdirect, India's largest brokerage by some measures, suddenly and inexplicably dropped support for these contracts from their trading platform. Press coverage was muted (see here). That NSE's most recent attempt at broadening the derivatives market, the so-called Mini-NIFTY contracts, had been an utter failure didn't help either.

Today, 6 months later, we may safely conclude that these contracts are here to stay. The volumes, while not spectacular, are very respectable. There is a good mix of trading and investment activity from the looks of the order books. Most importantly, investment companies such a KMIL are introducing hedge-fund style products that are built on top of these contracts. The table below gives the open interest position as on Sep 5, 2008 across all expiries.

Series	Expiry	Open calls (Rs. Cr.)	Open puts (Rs. Cr.)	Total O.I. (Rs. Cr.)
Near, next and far month	25-Sep-2008	8650.31	9688.93	18339.25
	29-Oct-2008	441.89	1121.86	1563.75
	27-Nov-2008	96.02	139.05	235.07
3 quarterly expiries	25-Dec-2008	2037.88	3200.97	5238.85
	26-Mar-2009	62.30	226.47	288.77
	25-Jun-2009	494.62	340.37	834.98
5 half-yearly expiries	31-Dec-2009	326.64	289.38	616.01
	24-Jun-2010	98.73	66.62	165.35
	30-Dec-2010	318.56	320.85	639.41
	30-Jun-2011	1272.46	893.19	2165.65
	29-Dec-2011	3.05	0.63	3.68

I am interested in these contracts as a means of taking leveraged bets on the NIFTY. As a firm believer in the NIFTY's long term growth potential, my options before Mar 2008 were between buying an index linked exchange traded fund, such as the NIFTY BeES, or buying and constantly rolling over NIFTY futures contracts. The former offers no leverage at all, the latter is quite painful to do without a large corpus and full-time staff. Long-term options provide leverage (high-delta) and require no maintenance. But what is the delta on these things? This is the question that I shall attempt to answer in subsequent articles.

For my study, I needed to pick a sub-set of contracts whose pricing could be meaningfully studied. As a long-only investor, I'm naturally only interested in calls. As a long term investor, only the half-yearly expiries interest me. But even after filterting for those two, I'm left with a total of 114 contracts across the 5 expiries. Of these only 44 have ever been traded. A glance down this list of 44, revealed that the action seems to be bunched up around a few contracts. I set the somewhat atrbitrary criteria that I'll picks only those contracts that have seen trades on at least a fourth of the days on which they have been listed and ended up with just six. The table below lists the 44. The ones I picked are in red.

Expiry	Strike	Listed Since	Days Listed	Days Traded	Max O.I	O.I
24-Jun-2010	4300	10-Mar-2008	121	3	100	50
24-Jun-2010	4400	05-Mar-2008	123	1	50	50
24-Jun-2010	4500	04-Mar-2008	124	1	50	50
24-Jun-2010	4900	03-Mar-2008	125	7	7800	7800
24-Jun-2010	5000	03-Mar-2008	125	42	185750	185700
24-Jun-2010	5100	03-Mar-2008	125	5	3750	3750
24-Jun-2010	5200	03-Mar-2008	125	2	100	100
24-Jun-2010	5400	03-Mar-2008	125	1	50	50
30-Jun-2011	3500	01-Jul-2008	47	2	1150	1150
30-Jun-2011	4000	18-Mar-2008	115	50	342200	342200
30-Jun-2011	4100	14-Mar-2008	117	1	40750	40750
30-Jun-2011	4200	14-Mar-2008	117	2	9350	9350
30-Jun-2011	4300	10-Mar-2008	121	2	115050	115050
30-Jun-2011	4500	04-Mar-2008	124	56	561550	561150
30-Jun-2011	4600	04-Mar-2008	124	1	58750	58750
30-Jun-2011	4700	03-Mar-2008	125	1	50	50
30-Jun-2011	4900	03-Mar-2008	125	1	5250	5250
30-Jun-2011	5000	03-Mar-2008	125	102	773400	773400
30-Jun-2011	5100	03-Mar-2008	125	2	25050	25050
30-Jun-2011	5200	03-Mar-2008	125	1	9250	9250
30-Jun-2011	5300	03-Mar-2008	125	1	100000	100000
30-Jun-2011	5500	03-Mar-2008	125	62	112000	105150
30-Jun-2011	5700	03-Mar-2008	125	58	487750	469850
31-Dec-2009	4000	18-Mar-2008	115	3	50000	50000
31-Dec-2009	4100	14-Mar-2008	117	2	50	0
31-Dec-2009	4300	10-Mar-2008	121	3	50	50
31-Dec-2009	4400	05-Mar-2008	123	1	50	50
31-Dec-2009	4500	04-Mar-2008	124	10	200150	200150
31-Dec-2009	4600	04-Mar-2008	124	4	50	50
31-Dec-2009	4700	03-Mar-2008	125	1	125000	125000
31-Dec-2009	4800	03-Mar-2008	125	3	250050	250050
31-Dec-2009	4900	03-Mar-2008	125	2	75000	50000
31-Dec-2009	5000	03-Mar-2008	125	8	400	400
31-Dec-2009	5200	03-Mar-2008	125	1	25000	25000
31-Dec-2009	5500	03-Mar-2008	125	1	50	50
30-Dec-2010	4300	10-Mar-2008	121	3	401500	401500
30-Dec-2010	4500	04-Mar-2008	124	1	50000	50000
30-Dec-2010	4600	04-Mar-2008	124	2	50200	50200
30-Dec-2010	4800	03-Mar-2008	125	2	250	250
30-Dec-2010	5000	03-Mar-2008	125	15	200400	200400
29-Dec-2011	3600	30-Jun-2008	48	1	50	50
29-Dec-2011	4000	27-Jun-2008	49	1	150	150
29-Dec-2011	4500	27-Jun-2008	49	3	600	600
29-Dec-2011	5000	24-Jul-2008	30	6	5400	5400

My arbitrary critera does leave out some contracts with very large open interest on account their not having been traded on many days. I've indicated some of these (those with O.I. greater than 1,00,000) in green. My problem with these is that since Iwont have price discovery on most days, any attempt to back calculate delta from these is likely to badly misfire. Much better to use my short-list and come back to these to see if the theory fits.

(To be continued...)