3% Nifty Option Strategies Trade Limited Profit & Loss – TheOptionCourse.com — Get limited profit and loss nifty options trading strategies free to make monthly income.

Everything About Earnings Per Share EPS

by Dilip Shaw Date: December 19, 2024

in Stock Markets

What is EPS?

EPS is a financial metric that indicates how much profit a company makes for each share of its stock.

To calculate EPS, we must divide the company’s net income by the total number of outstanding shares.

For example, let us assume that company XYZ’s net income is 100,000 and its outstanding shares are 100. Then its EPS is 100,000 / 100 = 1000 per share.

This does not in any way mean that everyone holding its share is making Rs. 1000/- profit per share but it means that the company is earning 1000 per share.

EPS gives a good indication of the financial health of the company but it still does not indicate the future growth of the company.

EPS indicates how much profitable a company is and how much each shareholder would receive if all the net income were distributed as profits. However net income is never distributed as profits but dividends are given on income made.

It is out of the scope of this post to discuss how dividends are calculated. I will post some other day.

Other than the options course I also have a course where I teach how to select stocks to invest for the short term 5-6 months for good returns. Let me know if you are interested.

{ 0 comments }

Double Calendar Spreads Explained

by Dilip Shaw Date: December 2, 2024

in Strategies

In this article, I will explain how to set up, and when to use a Double Calendar Spread.

What are Double Calander Spreads?

It is an option strategy where current month options are sold and far / next month options are bought to protect the losses from huge movements. Selling the current month options is the original trade and buying far month options is the hedge trade. The hedged trades act as a protector.

What strikes are used in Double Calander Spreads?

The same strikes for calls and the same strikes for puts are used.

For example, if you have sold a call option of a stock’s 1000 strike of this month, you must buy a call option of its 1000 strike for the next month. And if you have sold a put option of the same stock’s 950 strike of this month, you must buy a put option of its 950 strike for the next month.

When a Double Calander Spread be traded?

When the VIX (volatility index) is low. You can check INDIA VIX here. Trade a Double Calander Spread when INDIA VIX is below 14. Trade it preferably near the expiry of the current month.

When does a Double Calander Spread make a profit?

A double calendar spread will profit when the stock/index expires near the sold call or put option or it can profit if the stock expires anywhere between the sold strikes but the VIX increases.

When the stock expires near the call or the put option sold, this is what happens:

The sold options expire worthless, and the bought option’s total premium would not have lost too much value because one of the strikes would be in profit due to the direction being on its side. The other bought option would not have lost much value since 30 days are still left for the expiry.

As written above, it will also profit if the VIX increases and the stock/index is anywhere between the sold call and put strikes.

When this happens, both the sold options expire worthless. This pair makes good money for the trader. Due to the increase in VIX, the bought options do not lose much due to theta decay. The premium loss is compensated by the increase in volatility. So the profit from selling the options is more than the losses made by buying the options. Overall the trader is in good profit.

When does a Double Calander Spread make a loss?

If on the expiry day, the stock is above either the call or the put sold strikes. However, since there is a hedge (the bought options), the losses are reduced to a large extent.

If the stock moves too early just after the trade, the trader may get panicked and get out of the trade at a loss. Therefore the trade should be planned well in advance. The trader should know the risks involved in the trade before taking the trade.

There is a platform Sensibull – India’s Largest Options Trading Platform which makes a max profit and loss graph of a trade in advance that a trader plans to trade. This is possible only in the paid version of the platform. The paid version costs Rs.800/- per month. However, if you open an account with this broker you get all the paid services of Sensibull for free.

Conclusion:

Trade Double Calander Spreads when you feel that at least till the expiry the stock you wish to trade on is not going to move much. Do not trade Double Calander Spreads near the result season. During the result season, too many speculative trades take place and almost all stocks witness volatility. Also, avoid trading in stocks going through any kind of news either good or bad. Good news will push the stock north and a piece of bad news will pull the stock towards the south direction which is bad for a Double Calander Spread.

Recommended article:

How to trade neutral calendar spreads

P.S.: I have a paid course on conservative option trading strategies. You can see the details here and check the testimonials here. If interested you can WhatsApp me or email me.

{ 0 comments }

The Right Approach to Investment

by Dilip Shaw Date: November 30, 2024

in Investments

For many years country’s strong inclination towards fixed-income investments like FDs and PPFs has not changed much. This is good, however, slowly things are changing which is not good. The new generation even the generation born in the late 90s and thereafter shifted their inclination from fixed and guaranteed returns to very risky investments like cryptocurrencies and short-term investments like equity intraday / few days holdings or derivative trading.

Nothing wrong with this but the problem comes when the investors put all their eggs in one basket.

You will find people who invest everything in guaranteed return investments and then some who have invested everything into equities and/or derivative trading.

Either of the above is not good.

The right approach is a balance of equity, derivative and debt. 50% of your savings should be in debt, 30% in equities long term and the rest can be used for derivatives/crypto/commodities whatever you want to try.

As you can see if you follow the above approach, 80% of your savings will be safe and generate good returns. In such a situation even if that 20% generate or do not generate any returns you will still be safe.

I hope you will follow this approach. Let me know what approach to investing you follow.

If you want to do safe trading you can do my Conservative Option Course. It will make your derivative section of investments safe due to hedge.

{ 0 comments }

The Greed that NEVER Goes Away

by Dilip Shaw Date: November 3, 2024

in Newsletters

Yesterday, I received an email from a senior and highly educated executive. I noticed that even experienced people do not understand the financial markets and dream of things with no historical proof.

Everyone is greedy, including myself, but there must be some logical sense to that greed. Imagination beyond a limit can be self-destructive. Read the email to understand what I mean:

Here is my reply:

Thanks for your feedback, Mr. Gautam.

You have not mentioned making 1 to 6k daily on how much money?

Assuming it’s 20k and the mean profit is 3k then the ROI comes to 15% in a day. In 22 trading days, this equals anywhere between 250 to 350% in a month.

I have nothing more to say – the figure above is unsustainable in the long run.

No one in the history of options trading has achieved even close to this for the long term and no one will be able to do this ever.

Now coming to your question.

>>In your strategies, the profit is 3-5% only in a month. How can this discrepancy in profit be overcome with your strategies?

3-5% is NOT ONLY a month it’s quite big. It comes to 36% a year. Compare this to equity mutual funds which generate a 12% return a year.

So please think logically instead of letting your imagination go wild and start dreaming something unattainable. If you try – instead of making 6k a day you will start losing 3-4k a day.

If you still want to try take out 25k from your savings and start doing the intraday options trade as you have mentioned in your email. Do it unless you lose half then stop, or continue till you make above 100% a year. The latter will not happen.

>> My objective for writing this is to know whether any hedging or positional trade is in existence to earn an equivalent income or more compared to intraday option buying & that also with minimum investment & higher return.

No, there is no such strategy.

======================

What you can learn from this:

If you are still thinking making 5k per day is possible from 25-30k please stop dreaming. You will lose your hard-earned money. If you still feel you can just try with 25k and stop when you lose 50% of it.

{ 0 comments }

Index Options Contract Size Increased to 15-20 Lakh From 5-7 Lakh What To Do?

by Dilip Shaw Date: October 7, 2024

in Investments

The Securities and Exchange Board of India (Sebi) announced on Tuesday, 01-Oct-24 measures aimed at reducing undue speculation in FnO trading (mainly options) particularly from retail investors. They will be introduced in a phased manner beginning Wednesday, November 20, 2024.

Why did SEBI take these measures?

SEBI from time to time does research on various topics to find out what traders and investors are doing in the stock markets. You can find the list of all the research here. There are two research, results which prompted SEBI to take these measures. The links to the research are below:

Jan 25, 2023 – Study – Analysis of Profit and Loss of Individual Traders Dealing in Equity F&O Segment

Sep 23, 2024 – Study – Analysis of Profits & Losses in the Equity Derivatives Segment (FY22-FY24)

SEBI found out that over 91% of Futures & Option trades lost money trading in all the years in which the research was done. The data was taken from the top 10 brokers in India. Retail traders collectively made net losses amounting to a staggering Rs 1.81 trillion in F&O from March 2021 to March 2024.

SEBI wants to keep the retail traders away from Future and Options trading as much as possible so six measures were taken. These six measures aim to reduce undue speculation in FnO trading (mainly options) particularly from retail investors. The report is available here.

These six measures are:

1. Upfront collection of options premium:

Some brokers (not all as of Sep 2024) still do not collect the full premium for buying options for intraday trading only as of writing (Thursday, 03-Oct-2024). The margin they block is decided by the stop loss taken by the trader. Note that if there is no stop loss, then the full margin is blocked.

For example, today is the expiry day of weekly Nifty options. At 1.46 pm 3^rdOct 25300 CE (Call Option) has a premium of 19.5 and the lot size is 25.

Now assuming Amit trader thinks that Nifty will shoot up in the next 30-40 minutes and wants to buy this option to make quick money. He decides to buy 10 lots.

So the margin blocked should be 19.5 * 25 * 10 = 4,875.00

All brokers who block the full margin will block 4875.00. However, the brokers who give leverage on buying options in intraday trading will block only the maximum loss possible.

If the final trade is:

Buy 10 lots of 3^rd Oct 25300 CE and the stop loss is set at 15.5. then the max loss possible is

(19.50 – 15.50) * 25 * 10 = 1,000.00

Since options are highly liquid on the expiry day there is a 99% chance that if the price of the option drops – the stop loss will be executed.

Therefore the brokers who do not block the full margin will block only 1,000.00 for this trade. However, this will change if the stop loss is placed somewhere else.

Why do they do this?

To encourage their clients to trade more often. And this will help even a poor trader to trade options.

Well, the fact is they say this to advertise their product but in turn, it harms the trader but makes more money for the brokers.

However good thing is it will stop on Saturday, February 01, 2025.

How does it affect you?

Not much if your broker already blocks full margin to buy options intraday. However, if your broker blocked margin equal to the max loss, you have to trade less number of lots from Feb 25.

This is good news as 91% of option traders lose money trading options. Due to the leverage given they lose more, now if they still want to trade they will lose less.

Other measures are:

2. Contract size has now been increased to ₹15-20 lakh from 5-7 lakh currently for Index derivatives. The report does not mention anything about stock options. This is very confusing. Will write a detailed post if they only increase the contract size for Index options. The new contract size will take effect for all new contracts starting November 20, 2024.

3. No calendar spread benefit will be given on the expiry day starting February 1, 2025. I think they are talking about the margin benefit given on a spread.

A calendar spread is a strategy that involves simultaneously entering long and short positions on the same underlying asset, but with different delivery dates. This allows traders to offset risk between contracts and reduce margin requirements. However, on expiry days, the value of a contract expiring on the day can move very differently from the value of similar contracts expiring in future.

I feel this is done because, on the expiry day, the option premiums are just too volatile to offset the risk by buying an option expiring on a later date. Traders sell the options expiring the same day and to reduce the risk buy an option expiring in the next week or month. But the reality is the movement of the option expiring in a few hours is unpredictable and so volatile that a huge move will cause too much loss for the retail trader, which may not be compensated by the long option expiring next week/month. SEBI may have taken notice of this and have taken out the margin benefit given on calendar spreads.

This rule will reduce aggressive trading strategies, especially selling of options on the expiry days as full 15 lakh + 2% margin will be required to sell just one contact. The risk-reward ratio will be so pathetic that retail traders (especially those who used to short options on the expiry days) will now either become option buyers or will try some other strategy or may just stop trading (highly unlikely).

4. Intraday monitoring – 4 snapshots will be taken randomly and sent to the exchanges to monitor exchange set limits.

Purpose:
To prevent traders from exceeding permissible limits during volatile intraday sessions.
How it works:
The margin requirement for each snapshot is calculated, and the highest margin requirement is the peak margin.
When it will be effective:
The measure will be effective for equity index derivatives contracts from April 01, 2025.

This SEBI has done to ensure that even the small brokers who take benefit of no-monitoring to make money, follow the guidelines set by SEBI or lose their broking license. Now no broker can break the rule set by SEBI.

5. An additional 2% Extreme Loss Margin (ELM) on all open short options on expiry days will be required. This is done to reduce speculative trading on the expiry days.

This rule will apply to options held at the start of the day and new positions created throughout the trading session.
The rule is intended to protect against the high volatility that often occurs on expiry days.
The rule will take effect on November 20, 2024.

6. Each exchange can have ONLY ONE weekly expiry contract from Nov 20, 2024. I think Nifty will keep The Nifty weekly expiry as it is the most popular weekly expiry. Bank Nifty, Nifty Finance and others will have only a monthly expiry.

Update on 18-Oct-24:

NSE is discontinuing weekly option contracts in the following indices:

Nifty Bank BANKNIFTY on November 13, 2024
Nifty Midcap Select MIDCPNIFTY on November 18, 2024
Nifty Financial Services FINNIFTY on November 19, 2024

No new weekly index option contracts will be generated with an expiry date beyond the last expiry date for the respective index as mentioned above.

NSE will continue to make weekly index options available only on the Nifty 50 Index (NIFTY).

Here is the NSE circular.

Nifty expiry will be Thursdays
Sensex expiry will be on Fridays.

Here is the Index options expiry schedule after November 20, 2024:

{ 0 comments }

New Investment Asset Class ‘Investment Strategies’ Coming

by Dilip Shaw Date: October 4, 2024

in Newsletters

This new investment class is for HNIs only – i.e. people with a minimum of 10 lakh to invest.

I read a lot of websites but the whole picture is not clear.

I have understood that there will be certain rules for investing in derivatives, and it will fall between mutual funds and portfolio management services.

I fail to understand why this was necessary when there are thousands of mutual funds and many portfolio management services already available.

When the whole picture becomes clear I will write a detailed post. Till then if you have 10 lakh to invest I would request you not to invest in this new asset class now. It takes time to understand a new investment opportunity, how it works, what are the risks and rewards etc.

Invest only when you fully understand this or any other new asset class.

Here are a few features of this new investment class:

A. The minimum investment limit for these schemes will be ₹10 lakh per investor across all strategies.

B. This asset class will fall somewhere between mutual funds and PMS (Portfolio Management Services).

C. These will have adequate safeguards such as no leverage, and no investment in unlisted and unrated instruments beyond what is permissible for mutual funds. Exposure to derivatives is limited to 25% of AUM for purposes other than hedging and rebalancing.

D. These offerings will be referred to as ‘investment strategies’ to keep them separate from the traditional instruments of mutual funds.

Let us wait for the advertisements from the mutual funds, then we will understand this new investment scheme better.

I suggest just keep investing in good stocks, and mutual funds and trade derivatives with hedge to be safe. You can do my paid course to learn some good options and futures hedging strategies.

{ 0 comments }

Midcap and Small-Cap Stocks May Fall Reasons Given

by Dilip Shaw Date: September 28, 2024

in Stock Markets

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.

{ 0 comments }

What You Should Do If You Are An Option Buyer

by Dilip Shaw Date: September 3, 2024

in Newsletters

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.

{ 0 comments }

Tax-Loss Harvesting Explained

by Dilip Shaw Date: July 27, 2024

in Investments

First: Budget 2024 in short for investors and traders:

Here are the key takeaways:

1) Higher Capital Gains Taxes

Long-term gains tax: 10% to 12.5%

Short-term gains tax: 15% to 20%

2) No Indexation Benefit – No indexation on investments, disappointing for investors.

What is indexation? Indexation adjusts the purchase price of an asset for inflation, reducing taxable profits and tax liabilities.

For example, you made a 30% profit in 3 years but the inflation for the last three years was at 5% every year. Then you pay taxes on 30 – (5+5+5) = 15% profit only, not 30%. But since this indexation benefit has been taken away, you will have to pay taxes of 30% even if you made this profit in 10 years.

3) Increased Tax Exemption

Capital gains tax exemption limit: ₹1 lakh to ₹1.25 lakh/year

4) Higher Securities Transaction Tax (STT)

Futures STT: Increased from 0.0125% to 0.02%

Options STT: Increased from 0.0625% to 0.1%

5) NPS Vatsalya for Minors

A new pension scheme allows contributions for minors, which become theirs upon adulthood.

How to Save Money From These Taxes?

Tax-Loss Harvesting. I did some research but could not find a correct solution. Then I used my expertise and found out an idea – here it is:

If you do not know tax-loss harvesting is a legal trick to save taxes on the short-term & long-term gains.

Let me explain with an example.

Step 1) Let us assume you bought two company shares – XYZ & ABC company shares both for 1 lakh. After six months XYZ company is giving at 30% profit and ABC company is giving a 40% loss.

Step 2) Now sell both. On paper, you have taken a 30,000 – 40,000 = -10,000/- short-term loss.

Step 3) The next day buy the ABC company shares (the one in which you took a 40k loss) for 60,000. Note that after selling ABC company shares you received 60,000 after taking a loss of 40,000. Use the same amount i.e. 60,000 to buy ABC company shares.

Step 4) DO NOT sell the ABC company shares for one year.

Thats it. Instead of paying Short-Term Capital Gains (STCG) Tax on 30,000, you can carry forward the 10,000 short-term loss for the next 8 years and adjust against any short-term gains in future to save taxes.

So you not only saved taxes but carried forward a 10k loss to be adjusted in future against any short-term gains.

You can carry forward your losses – both short and long-term for 8 assessment years immediately following the assessment year in which the loss was first computed.

Make sure to file these losses on your IT return so that when you book profits you can adjust these profits against the losses and either pay no tax or pay less tax on STCG & LTCG.

You can do the same to save money on Long-Term Capital Gains tax. Here is an example:

Let us assume you have shares of two companies – ABC and XYZ company of 1 lakh each. After 1 year ABC is running at a loss of 20k and XYZ at a profit of 15k. You can sell both. Currently, you have an overall 5k loss. Now do not buy the shares of the company you booked profit in. Next day buy shares of ABC company in which you took the loss. Hold it till the next financial year. That’s it – instead of paying taxes on the profit you made you can file a carry forward loss of 5k and adjust against any gains made in the long term in ABC company or any other company shares for the next 8 years.

Is Tax Loss Harvesting possible in derivative trading?

No. Unfortunately, you cannot do this in derivative trading.

Actually, you can but closing a Future / Option and buying / selling it again will cost you huge Securities Transaction Tax (STT). See above. The cost of STT will be so high that it will offset the profits and increase the losses.

So tax loss harvesting is not recommended in derivatives trading unless you are an exceptional trader.

Securities Transaction Tax (STT) has almost been doubled and it just cannot be saved. It is charged on every trade you take. Unlike GST it doesn’t even have a credit input. It is a tax that you have to pay even if you have taken a Short Term or Long Term Capital Loss.

The only way out is to be a profitable trader. Losers in derivative trading will now lose more due to an increase in STT.

You can do my conservative options and futures course and learn hedged and stress-less strategies that will make small but consistent profits.

What traders say about this course

{ 0 comments }

All Brokers In India May Increase Their Fee

by Dilip Shaw Date: July 8, 2024

in Newsletters, Stock Markets

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.

{ 0 comments }

Open FREE Share Trading Demat Account