- Bogle’s formula:
Future Market Returns = Dividend Yield (last 5 years) + Earnings Growth CAGR (last 5 years) +/- Change in P/E Ratio (last 5 years).
- The dividend yield has usually been in the range of 0.93-1.66%. A conservative estimate takes the yield as 1.34%.
- The Nifty’s EPS has grown from Rs316 in December 2012, to Rs391 now. So, five year CAGR is 4%.
- Currently, the Nifty PE is at 26.75 and it was at around PE 18.50 in December 2012. So, it is up by about PE 8.25 in the last 5years.
Using the formula, the expectations for future index returns would be (1.34 + 4 + 8.25), which is about 13.59%. As on December 20, 2017, Nifty is around at 10,450, which means as per future market return formula, Nifty could be 11,800-11,900 levels by December 2018.
- Mean+1 Formula:
The returns from the index over short periods of time can be said to be Normally Distribution (ND) and ND is defined by mean and standard deviation with a bell-shaped curve.
The Formula is:
Spot price + (IV range * Reversal level)
10,450 + (1357*0.786) = 11,517
So, as per Mean+1 formula, Nifty could be 11,500-11,600 levels by December 2018.
For Nifty to achieve the target of 11,500-12,000, the best derivative strategy is ‘Synthetic Call’ with LEAP option. Traders and investors are advised to do these complex options strategy after knowing their risk management through a derivative expert only. Hedging any open positions against adverse market movements is the key aspect of risk management in derivatives.
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