Article posted on: Sat, 28-Sep-2024

Look at this Nifty 50 returns of the last 5 years as of 28-Sep-2024:

Source: Google Finance

Almost all stock market pundits are saying that the stock markets will now fall. The valuations look stretched and may not be sustained.

Usually, I do not follow these pundits because most of the time what they say is for the very short term which no one should be bothered about.

You may have noted that 50% of them say markets will go up in the short term, and the rest say they will go down.

It is better to ignore them and plan your trades as per your research or knowledge.

But this time things are different – almost all of them are saying that the valuations are stretched and do not reflect the actual returns from the companies listed.

Especially the midcap and small-cap stocks have generated returns that are over-stretched and should correct within the next few months. Here are the returns:

Nifty Midcap 150 Index:
As of September 20, 2024, this is the absolute returns:
30.01% for the year to date
47.75% for the last one year
84.99% for the last two years
105.04% for the last three years

Nifty Smallcap 250 Index:
As of September 20, 2024, the returns are 34.56% for six months, and 51.77% for one year.

Nifty 50 Index:
This index had the following returns over the last 15 years:
15 years: 11.8% CAGR

Over the long term, Nifty 50 and other indexes have generated almost the same returns.
So they will converge soon if not very soon.

What you should do?

If you have invested in mid and small-cap stocks then book all or 50% of the profits.

Large-cap stock investors need not worry.

Here are a few tips for option buyers especially if they are beginners:

1. Do not buy deep Out of The Money (OTM) options. They almost always expire worthless.

2. Do not buy deep In The Money (ITM) options. They behave like futures. Losses will be more than the profits. If you are a deep In The Money (ITM) option buyer – trade futures instead.

3. Keep the target and stop loss in the system as soon as you buy the option. With a system target and stop loss, you need not monitor the trade once it’s live – the system will take care of that. If the target is hit, the stop loss order will automatically get cancelled. If the stop loss order is hit, the target order will automatically get cancelled. This type of order is called the GTT (OCO) order.

The full form of the GTT (OCO) order is Good Till Triggered (One Cancels the Other). If your broker doesn’t allow this feature, you can open an account here. This broker allows this kind of order for free. Plus, the account opening is online and free. Stock buying and selling are also free. Click here to open an account with them.

4. If you are not experienced do not start trading with multiple lots. Practise with one lot initially then if you are getting profits increase the lots one by one – slowly. Increase one lot every month but do it up to five lots max.

5. Make an Excel sheet and record all the trades.

6. If you are making losses for more than 3 months consecutively then stop buying options. Then practise selling options with hedge. If you want to learn option strategies with hedge you can do my course.

Date of Posting: Monday, 08-July-2024

Note: This is a copy of the newsletter I send to my subscribers almost daily. If you also want to read please subscribe above.

I am sure by now you must have read or heard that the founder of India’s first discount broker Mr. Nithin Kamath (Nithin Kamath is the Co-founder and Chief Executive Officer (CEO) of Zerodha, the largest stock brokerage firm in India, headquartered in Bangalore, Karnataka) saying in social media platform X post, that they may need to reconsider their zero brokerage model or potentially raise brokerage fees for F&O (futures and options).

This after SEBI issued a circular mandating that all market infrastructure institutions, including stock exchanges, adhere strictly to their fee-charging practices.

I will explain what that circular is later but as of now if you trade derivatives should you worry?

NO.

Right now it’s a wait-and-watch situation. Don’t unnecessarily panic. Even if there is an increase in brokerages buying stocks, I think most will start with a Rs.10 increase, which is almost as good no increase.

Suppose you make a profit of Rs.1000/-. Right now you get 1000 – STT – Current Brokerage. After the increase in brokerage, you will get 1000 – STT – Current Brokerage-10-10. Just think what difference will it make to your life. Not much.

What exactly was the SEBI circular that may have led to an increase in brokerages across all brokers?

In its bid to create parity among market participants, concerning turnover charges, the Securities and Exchange Board of India (Sebi) on Monday, July 01, 2024, issued a directive to market infrastructure institutions (MIIs or the brokers) to levy a uniform fee, irrespective of the size of the market participants, essentially stock brokers.

Here is the circular:

https://www.sebi.gov.in/legal/circulars/jul-2024/charges-levied-by-market-infrastructure-institutions-true-to-label_84506.html

Stock exchanges charge a transaction fee based on the overall turnover contributed by a broker in a month. The more turnover, the lesser the transaction fee. You can see the latest slab-wise transaction charge charged by NSE here. The difference between what the brokers charge the customer and what the exchange charges the broker at the end of the month is a rebate. Such rebates are common across the major markets in the world.

Zerodha earns about 10% of its revenue from these rebates. This could range between 10% and 50% of the revenue for other brokers. With the new circular brokers will no longer earn these rebates.

So they have no option but to increase the brokerages.

But please do not worry especially if you are not an Intraday trader. For Intraday traders, this can be a problem.

You can do my course and become a non-directional positional trader and save on brokerages and taxes.

Many times I have written about why you should not take a loan to trade. But it’s been very long since I have written a post on personal finance. This post was written on JULY 18, 2017.

https://www.theoptioncourse.com/do-not-take-a-loan-to-trade/

Do read especially if you have taken a loan to trade or wish to take one.

One of the most important rules of personal finance management is never to take a loan to trade or invest in stock markets.

Even if you are a good trader, most of the profits will be taken away by the loan interest and you will be left with almost 8-10% a year or less which is equivalent to investing in good stocks or mutual funds.

And if you lose that money then you will be in deep trouble.

Another important personal finance management try to avoid personal loans. They come at a very high rate – at almost 12% a year.  If you cannot survive without a personal loan then take at most up to 1 lakh not more and try to repay it as soon as possible.

Today access to credit is easy. Do not fall for the trap. Some loan apps are fraud. Try to avail loan from a well-known bank. If possible walk to your nearest bank and talk about loans. Many look-alike apps can fool you, take your personal data and sell to third parties.

I have not installed any banking app on my mobile to avoid online fraud. If required I access them online from my laptop. The chances of my mobile getting lost are bigger than my laptop getting lost. You don’t know who will get your mobile when lost and what they will do. So to avoid the stress I do not install banking apps at all.

This rule I leave to you, but it is better to uninstall any banking apps from your mobile to be safe.

Of course, we need to buy items/services online and offline so keeping payment apps is ok as long as you have kept them secured with a phone screen lock pattern, PIN, password or fingerprint.

Even if a hacker gets access to your mobile phone they may not be able to open the app. The same goes for banking apps but still, it is better not to have them on your mobile phone at all as checking your bank account periodically can be done easily on your laptop.

As far as home loans is concerned do not hurry to buy a home. Take your time, research well and buy a good home so that you do not need to buy another home after a few years. By taking more time you will have saved enough to buy a good home and take a home loan as little as possible. There is no penalty to prepay your home loan so try to prepay as soon as possible.

The same is the case with a car loan. You should not take a car loan if possible. To avoid taking a car loan downgrade your choice to what you can afford. But if your love for a particular car is very high then take a car loan and pre-pay it as soon as possible.

Car in any case is a liability plus if you take a car loan, the liability will increase.

Have one term insurance equivalent to ten years of your take-home salary and one family health insurance of at least 10 lakh.

Your savings should be invested well in stocks, bonds and mutual funds and do not break them to let the compounding do their job. Of course, you will need money from time to time in that case just redeem whatever is required at that moment but do not stop your investments.

If you follow the above personal finance management tips then you will live a stress-free life as far as your finances are concerned.

NSE – National Stock Exchange of India Ltd –  Has gone from 8,083.80 on 03-Apr-2020 (Covid Era) to 23,851.35 today (26-Jun-24):

What’s the increase?

It is an increase of 195.05%. All this in just four years.

In the last year from June 23 to Jun 24, it has given a return of 27.63%.

An experienced investor will understand that this will NOT sustain.

In the future two things may happen to the Indian Stock Markets.

• It may fall by a minimum 5% to max 10%, or
• It will be range-bound for another 12 months.

From where the money is coming?

It is the Mutual Funds.

The assets managed by domestic mutual funds (MFs) rose by 34 per cent during 2023-24 (FY24) — the most since 2016-17 — propelled by a sharp rally in the equity market and robust inflows.

For the three months ended March 2024 (Q4FY24), the average assets under management (AUM) stood at Rs 54.1 trillion compared to Rs 40.5 trillion in Q4 of 2022-23 (FY23), according to data from the Association of Mutual Funds in India.

Source: https://www.business-standard.com/markets/news/domestic-mutual-fund-assets-jump-34-in-fy24-the-most-in-seven-years-124040400938_1.html

So nothing looks suspicious now, but these kinds of returns cannot be sustained for long.

Why the stock markets can get stagnate or fall?

Most of this influx is from short-term investors. Once they start booking profits the markets will fall.

Or they will stop their SIP investments, and then the markets will get stagnant.

You see for the markets to keep rising money has to keep coming. But we need money to live a life right? One day or the other in the near term that day will come when we will see a fall or an elongated and very boring stagnancy in the markets.

When the markets start falling the non-directional options traders have nothing to lose. But most of the directional trades especially those who will be long in the markets will suffer.

You can do my conservative option course and learn non-directional option strategies and make approx 3% a month.

When a trader thinks that a stock will go up they can:

1. Buy the stock, or
2. Buy its Call Option, or
3. Buy its future. Or
4. Sell its Put Option

Similarly, when a trader thinks that a stock will go down they can:

1. Short the stock (shorting the stock is possible intraday only), or
2. Buy its Put Option, or
3. Sell its future. Or
4. Sell its Call Option

In this article, I will discuss when you should buy a call or a put option. I have explained in my blog that buying an option means you are racing against time. It doesn’t matter if you are buying a call or a put option. Once you buy an option, you are racing against time.

Read below to know when you should buy a call option.

The expiry should be at least 30 days away.

This is very important. If the expiry is very near, then the option’s premiums will start decreasing very fast. The premium decay will be so fast that you will not be able to exit the trade quickly or exit the trade with a profit unless, during that last period, the stock moves rapidly up. Usually, it will not happen because during the last couple of days before expiry all the buyers and sellers create liquidity. The liquidity is so much that the demand and supply remain the same, leading the stock to move down or remain in the same position.

When the expiry is 30 days away, at least for the next 10 days, the time premium value, a.k.a. theta, does not erode too much. So try to exit at least 20 days before expiry if you bought an option.

If the INDIA VIX is below 15 the option premium will be less than average, if it is between 15-20 then the option premiums will be average and if the INDIA VIX is above 20 then the option premiums will be above average and will keep increasing with the increase of INDIA VIX. So decide accordingly.

The benefit of a low VIX is that you will get options at a low cost so the risk will be less, but if the VIX is high you have to pay a high premium to buy an option on the other hand, it will lower the risk as a high VIX will indicate huge movement which may lead to a profit.

However, in most cases, you will know why INDIA VIX has increased. It will be mainly due to an upcoming political event like elections an economic event like budget or geo-political events like a likely war or an attack by another country.

Once the event is over there will be a sudden drop of the INDIA VIX within 2-3 working days. You must exit the bought options before the event ends, or else you may suffer a huge loss as the option premium will erode quickly. In such cases even if you are right in direction the premium erosion will eventually negate the delta increase so you may not get the desired profit or suffer a loss.

Do not buy ITM options, ATM options or Very Far OTM options:

In The Money (ITM) options are very costly. They behave like Futures. If right in direction they will make a good profit for you, but if wrong in direction the loss will be huge.

At The Money (ATM) Options have the most time value and therefore face the fastest premium decay.
Very Far Out of The Money options are cheap but most of them expire worthless as the stock never reaches there. In ten times you will make a profit one time. They are very tempting to buy for their low price – but rarely do they give profit. So better avoid them.

Therefore buy slightly Out Of The Money (OTM) options – 2-3% far. They are not costly and they give good profits when right in direction, and less loss when wrong in direction.

Find intrinsic value to know if the option is overpriced or underpriced – then do this:

Earlier it was difficult to find the intrinsic value of an option as a lot of calculations are involved in the Black & Scholes model formula to know its intrinsic value, but nowadays your broker will display an option’s intrinsic value.

If the price of the option is above the intrinsic value then it is overpriced and needs to be sold. If the price is below the intrinsic value it is underpriced and needs to be bought. This is an important factor when deciding whether to buy or sell options.

However, depending on just the intrinsic value is not an ideal way to buy or sell options.