OPEN CONTEST 03 - NIFTY Opens @Circuit (+10% or -10%)

A situation is being placed, before the whole trading industry, which always has non-zero probability, i.e., NIFTY opens at circuit price tomorrow. These are the out of control situations when we lose most of the value on our long term investments as well as our trading accounts are damaged badly. This situation is being discussed by Jack D. Schwager and William Eckhardt, The Mathematician, in Market Wizards in the following question.

“JDS - “What are the practical implications of the (price change distributions) variance not being finite?

William Eckhardt- If the variance is not finite, it means that lurking somewhere out there are more extreme scenarios than you might imagine, certainly more extreme than would be implied by the assumption that prices conform to a normal distribution-an assumption that underlies most statistical applications. We witnessed one example in the one-day, 8,000-point drop in the S&P on October 19, 1987. Normal estimation theory would tell you that a one-day price move this large might happen a few times in a millennium. Here we saw it happen within a decade of the inauguration of the S&P contract. This example provides a perfect illustration of the fact that if market prices don't have a finite variance, any classically derived estimate of risk will be significantly understated.”

 1. What can be the possible reasons?
     (a)  For 10% Upside circuit. 
     (b) For 10% Downside circuit.

      2. What to do at market open if we are in the trade?
          (a)  If we are on the Profiting side.
              (i) If liquidity is there in your contracts?
              (ii) If liquidity is low in your contracts?
          (b)  If we are on the Losing side.
              (i) If liquidity is there in your contracts?
              (ii) If liquidity is low in your contracts?

     3. Any evergreen trading Strategy/System you can elaborate which will only profit from such a volatile event and can also make money in normal times?

Please Note:

1. Only the best attempt will win the prize of INR 1100/-. Mail your analysis to uttamsmethodofselling@gmail.com.

2. Prize money would be transferred through online NEFT transfer to winner's account.

3. Anybody (except my mentees) will be eligible for prize money, i.e., GIC subscribers or any other visitor/subscriber to the blog.

4. I will wait for the best attempt till 15^th Feb. 2013.

5. Winner’s name would be published on or before 28^th Feb. 2013. Your strategy will be published only after your consent for publication.

Best Wishes!

Kamlesh Uttam