Today I received an email from one of my subscribers that I believe most of the traders think most of the traders think the same way. So I have shared his email here.

What he believes?

That the stock operators and brokers control the stock market price action. Since they want traders to lose money – most of them play against them and operate the stock in such a way that it almost always hits the stop loss – thus making them money.

However, let me tell you that this is simply not true. Assuming that even if its true, stock price manipulation by any mean other than demand and supply is illegal in India. One day or the other they will get caught and their license will be cancelled. No broker can take a risk with their business license for a few thousands rupees a month. But the main reason is that stock brokers are just that stock brokers, they can help us to get a trade go through, they do not have access to main sources/resources where final transaction between a seller and a buyer is done. Therefore there is no way they can manipulate the prices.

Having said that, stock price can be manipulated by illegal means, but right now this post talks about brokers only – so I leave that for another day.

Here is his email:

Hi Dilip Sab, many thanks for all your emails, I am gathering some confidence in your Tutorials, I have some questions. I have been Trading in Equities for the last 4 years and have finally lost huge money, not because of my wrong market analysis, but SYSTEM itself is corrupted. I was using STOP LOSS wisely. Say at placing order after market stabilizes at entry price and gradually keep raising as the price move up. Always the operator at the Board reverse back and cancels and climbs up fast, even if I think of re-enter the stock, it will be at much higher price thereby reducing my profits. Then I thought of putting STOP LOSS at the purchase price itself. Here believe me, the operator starts coming down slowly even 20/30 rupees and cancels and climb up very fast where re-entry is at very much at very high price, so net result is loss. This is when the market is in Ist & 2nd hour.

The next experience is, if the market falls, operator cross the STOP LOSS mark duly cancelling the TRIGGER PRICE and go down very fast, wherein you have to use SQUARE OFF option which is always at a very low price.

Next experience is say you have to sell of the stock when the movement is not there, by putting SELL option say for example Price of 100, the operator will never cross that 100 mark, on the contrary he keep playing between 90-99 and to induce excitement, even he will touch 99.95, even 100 and stage back. Unless it crosses 100 sell off option will not be executed. It invariably forces one to use the SQUARE OFF option leading to considerable loss.

Next experience, say. if I think I am very wise, NO, and if I modify my sell price to say 99.50 and confirm, price falls very rapidly and quickly to say to 99, (This may be programmed in the Computer in advance) somehow you are forced to use SQUARE OFF option which is always say 3 or 4 Rupees less.

This is how I have lost my wealth. I consider this is purely a GAME of Stock operator and Broker AND not all it is Shares Buying/Selling most of the time, of course there may be one or two exceptions.

Having Stopped Trading in Equities, I want to try FUTURE/OPTIONS in ONLY NIFTY to recover some of my losses. Please advise me, will same thing happens in F&O also, when you say talking of HEDGING, is the same trick exits there also and how effective is Hedging and Rules connected with if it fails to protect my money which will be the very huge loss and end of my Trading career.

Now I shall await for your Expert Opinion to think further in the matter.

With regards,
H Ramachandra

Since you have read the email, think hard. Is what he is saying possible? No.

I have already given the reason above that brokers cannot at will manipulate any option or strike price. Its a global pricing. Someone in Africa will also see the same LTP (last trading price), as someone in India. Billions of trades are going on when the markets open for trading – it is virtually impossible to manipulate all these trades in a particular stock or indices. Just to make a few bucks from one single trader a broker will not try to do anything illegal.

Moreover systems are in place to control price manipulation.

Still one cannot completely deny that some powerful brokers have taken unethical paths to make profit from their clients money or stock holdings. Please note that when they do all or majority of their clients suffer. When they decide to do something illegal they want to make it big not small so that if they do not get caught they end up making millions.

In November 2019 SEBI banned Karvy Stock Broking Ltd (https://mfs.kfintech.com/mfs/) for pledging clients’ shares and transferring Rs 1,096 crore worth of clients’ securities to its group company Karvy Realty Pvt Ltd WITHOUT their consent.

Once this was known investors with Karvy demat accounts had to transfer their securities and close their Karvy demat accounts. It will be considered as off-market transfer and investors need not pay any capital gains tax. Transferring select securities attracts charges, transferring all securities does not.

As you can see investors did suffer for some time but later were able to exit from Karvy. So yes stock brokers can manipulate the portfolios of their investors but not pricing of stocks.

Please do not worry after reading the above as SEBI has put in place stricter rules and regulations for stock pledging for all brokers after this fiasco.

However, investors still need to be vigilant, as dishonest brokers may find ways to subvert the system. Today discount brokers have given a though competition to small traditional brokers. But even a big broker may try something that may get you in a problem. Struggling with cost of survival, many big brokers are known to indulge in such practices. I gave one recent example above.

Which broker is likely to do such malpractices?

Brokers who over-leverage themselves resort to such doings.

That should not stop investors to invest in stock markets. You can safeguard against fraud. Here are some tips:

1. Make sure your mobile number and email ID records are updated with the depository.
2. Check SMS or email statements sent by depository after every transaction in Demat account.
3. Ask the broker to furnish ledger balance and stock statements at least once in 90 days.
4. In case of fraud or inaction by broker, make timely complaint to the depository.
5. Avoid keeping excess money in broking account; transfer money from savings account only at time of purchase.
6. Avoid keeping signed delivery instruction slip with broker for offline trades.
7. Open your Demat account with banking brokers for better safety.
8. Study the financial health of the broker

Some other safety tips to keep investments safe:

You can register on the portals of either NSDL or CDSL and get all details related to your holdings from these depositories online or using their mobile applications. For example, CDSL offers an ‘Easy’ facility to view the Demat holdings and transactions and an ‘Easiest’ option to view and transact in your Demat account.

Users need to reconcile their holdings regularly with depository statements — specifically number of shares and not value of shares — sent every month. NSDL sends an email every month of all holdings in stocks and mutual funds which you must check.

Is there any solution to any fraud if it happens?

The only practical solution to any such frauds in the financial sector is complaining to SEBI immediately after noticing any discrepancy or malpractice. Before posting your problems on social media, you should promptly bring the issue to the notice of the concerned authorities.

Hope the information helps.

This is INDIA VIX on 31-Aug-20 at 1.19 pm (Source: https://www.google.com/search?q=india+vix):

INDIA VIX 31-Aug-20
INDIA VIX 31-Aug-20

This is NSE on 31-Aug-20 at 1.24 pm Source: https://money.rediff.com/index.html:

NSE 31-AUG-20

Can you see that both are inversely proportional?

Check out this post where I had also given a caution of India VIX surging and NSE falling.

What can you make out from a surging India VIX?

That when India VIX surges NSE will fall and vice versa.

How can this help the directional traders?

Well, this will not help 100% of the times, but if from 11 to 11.45 am you see that India VIX is surging then you can short Nifty futures and if from 11 to 11.45 am you see that India VIX is filling then you can buy Nifty futures. However, this trading must be done Intraday only. Next day the situation can change and you may see the position reversing.

Why India VIX Surges?

India VIX (Volatility Index) is a measure of PANIC in Indian markets or the environment. This could be due to some business news like good results/bad results/RBI policy/Budget etc and political news like it happened today (31-Aug-20).

Here is what happened today that spoofed the markets and India VIX surged:

Intrusion by Chinese troops in Eastern Ladakh gave enough ammunition to stock market bears to push domestic indices sharply lower on Monday, wiping off all morning gains. A general profit booking also weighed on the indices, analysts said.

Source: https://economictimes.indiatimes.com/markets/stocks/news/sensex-plunges-900-points-from-days-high-what-triggered-this-sudden-crash/articleshow/77847411.cms?

As I am writing this article at 1.47 pm Sensex is down by almost 700 points. This is the reason why India VIX is a very important factor to look at before taking a trade especially if its a directional trade.

Full-time traders like me, have time to read news and then take a decision to go long or short for the day if they decide to do Intraday trade, however people who have a job or are busy may not find the time to read the news. So for them, India VIX gives a good indication to take a trading decision.

However, for non-directional trades India VIX is not that important measure as either way they make money in 75% of the trades. My course strategies are mainly non-directional trading only. A non-directional trader may not look at India VIX if he/she decides to take a trade, however its a very important indicator for a directional trader.

People all over the world do absolutely no planning on how much to invest in stock markets. They just keep investing on gut feelings, as much as possible, to recover losses. This is a poor money management skill. In this article I will help you learn how to properly plan investing in stock markets. This post will help you a lot to plan your investments in future in stock markets, especially if you are young.

Contrary to traditional belief, you do not need too much money to start investing in stock markets but you must know where to invest. In fact it is very important for a beginner not to invest too much money at the very beginning. It is important that you separate the cash that you want to invest in stock markets from what is needed to live a life. Never take a risk with the money you cannot afford to lose.

As a thumb rule, not more than 10-15% of your salary should be invested in stock markets. Which means if your take-home salary is Rs. 50,000/-, then at max invest 5000 – 7500 per month in stock markets.

This can be done for 24 months. Which means once your investment in the stock market equals two years of your salary – you should stop investing in stock markets unless you start making profits.

In other words, if you invested for 2 years in stock markets, 10-15% of your salary then at the end of 2 years if:

a) You are making losses – stop investing any more money in stock markets – educate yourself – start paper trading.
b) You are making profits – you can keep investing up to 20% of your salary in stock markets – but up to the next 10 years only.

Here is some calculation. Ram’s salary is 50,000 pm. He starts investing 10% of it in stock markets for 2 years.

5000*2*12 = Rs. 1,20,000 invested. He is making profits. How much here is not important – what is important is that he is making profits.

He now decides to invest 15% of his salary in stock markets for the next 3 years. His salary now is 60,000.

9000*3*12 = Rs. 3,24,000 invested.

Since he is still making profits he decides to invest 20% of his take-home salary which is 75,000 per month now, for the remaining 5 years.

15000*5*12 = Rs. 9,00,000 invested.

Total invested till now in 10 years: 1,20,000+3,24,000+9,00,000 = Rs. 13,44,000/-

That’s it, he decided to control his greed and stop investing in stock markets. He will from now on invest in fixed deposit schemes in banks, liquid funds and post office schemes.

What you read above is proper money management.

Assuming that Ram got the job at 25, by this time his age is 35. He is still young and has a growing portfolio of more than 13 lakhs in stock markets, plus he is now free to invest in guaranteed return schemes by the government. By now his salary is 1 lakh pm and he invests 25% of it in FDs giving a return of 6% a year.

Assuming that his salary increases, but he still is able to save only Rs. 25,000/- per month as his expenses have also increased.

Suppose his stock market returns are just 25% a year – here is the calculation of what he will get when he retires at 60 (calculated as Rs. 13,44,000/- giving an ROI of 25% a year for 35 years):

Well, it’s coming too much therefore I am not showing you the calculations. You can see for yourself here.

Ok, here is what he will get at retirement (age 60): Rs. 108,56,74,553.98 (One Hundred Eight Crores+)

Well that looks like too much, so let’s reduce it to 20% return a year (calculated as Rs. 13,44,000/- giving an ROI of 20% a year for 35 years):

Future Value: Rs. 31,90,33,765.75 (Rs. 31 Crores 90 Lakh+)

Did you notice even 20% a year will fetch you amazing returns – then what is the need to try 10% a month which is equal to 120% a year? Making 10% a month for a long time in stock markets is simply impossible.

Now here is what he will get from his fixed deposits:

Here is the calculation for Rs. 25,000/- deposit every month for 25 years giving an ROI of 6% a year:
Final investment value: Rs. 1,70,96,817.59 (Rs. One Crore 70 Lakh+)
Total interest earned: Rs. 95,71,817.59 (Rs. 95 Lakh+)
Total monthly deposits: Rs. 75,00,000.00 (Rs. 75 Lakh+)
Effective Annual Rate: 6%
Even 6% is a good return.

Total at retirement Ram will get:
31,90,33,765.75 + 1,70,96,817.59 = Rs. 33,61,30,583.34 (Rs. 33 Crores +)

Isn’t that enough money to fulfill all financial goals and live a great retired life even in 2050?

Do not forget that Ram was still living a good life when he had an average paying job. By the time he was 40, he had a good income spread over many investment vehicles that he can withdraw to buy a car, home, and other expensive items without too much financial burden on him.

Can you see proper money management can help you live a good life? Assuming that his stock market returns turned negative or gave some loss when he was 60 and withdraw all the leftover money – still, he has over one crore 70 lakh rupees to live a comfortable retired life.

Hope this article will help you to plan your investments in stock markets wisely. Be very conservative with your trading and your story may be same as Ram in this article. I will be very happy if that happens. 🙂

This article will help you to know how to start investing in stock markets. However there is a very high chance that you already have done mistakes and lost some money. In that case I suggest for now stop trading, learn and then trade.

I have got calls from traders who have lost Rs. 40 lakhs to up to 2 crores. So please do not lose so much money that it becomes hard to recover. Anything above 5 lakh loss is a red sign – you should stop trading here and start learning. I lost a bit more – approx 7 lakhs, but do not want you to lose that much.

The problem with stock markets is that beginners start with too much hope, so much so that they think they will make one core in 4-5 years. Some ask me, if they can make 5-10k a day with just 50k investment. Just think if this was possible then who will go to college?

Treat yourself as a beginner in stock trading if you are trading since years and yet not able to make a single rupee profit.

You do not need too much money to start investing in stock markets but you must know where to invest and how to plan your stock market investments.

Now let me discuss the steps you should take to start investing in stock markets.

First Step: Open a Demat account

You cannot buy or sell a stock if you do not have a Demat account. A Demat account acts like a bank locker where all your bought shares are kept and your money also safely. A trading account is required to trade the shares to buy or sell. There are many stockbrokers today, so it may be hard for you to choose one.

I highly recommend ZERODHA – India’s No. 1 Discount broker. They do not change anything to buy or sell stocks & allow free direct mutual fund investments. No other stockbroker in India offers these facilities. If you open an account in ZERODHA mapped to me then I will help you to learn how to choose stocks to invest for Swing Trading. Which means you will buy the stocks and when they rise in a few days you can sell. To open an account mapped to me just click here and register immediately and start the process to open the account. Contact me when your account is opened.

Once your account is opened do not start dreaming big just because you are now allowed to trade. It takes time to become good at something – give yourself that time.

If you do not want to open an account in ZERODHA, or already have one and want to get the free training in Swing Trading then click here register immediately and open an account in second best discount broker in India – UPSTOX!!! If your account is mapped to me in either ZERODHA or UPSTOX I will teach you Swing Trading stocks.

Anyways, if you prefer any other broker, please do your research before opening the Demat and trading account. The most important should be how much they charge for buying and selling stocks and for trading options and futures. Plus do they charge anything for keeping stocks as collateral etc.

=== to be continued =========

The new margin rules for hedged future and options trades coming into effect from 01-June-20 reduced the margin required. It is very good for retail traders, as it reduces the unlimited risk of naked trading.

Here is a detailed very technical explanation by NSE – National Stock Exchange of India Ltd., on the reduced margin framework from 01-June-20:
https://www.theoptioncourse.com/NSE-New-Margin-Framework-01-June-20.pdf

Well, the above file will be a bit complicated to understand. I will try to explain in simple language.

Before I explain here is a fact. Up to 31-May-20, India was the only country in the world where a hedged trade margin was at least 500% more than any other stock market in the world.

This was highlighted by many stockbrokers in various meetings to The Securities and Exchange Board of India (SEBI), NSE (National Stock Exchange) and BSE (formerly known as the Bombay Stock Exchange Ltd), since many years but it all fell on deaf ears.

Finally, Mr Ajay Tyagi (appointed chairman on 10 February 2017, replacing U K Sinha), who took charge of the chairman office on 1 March 2017, finally approved to allow the new margin rules as it is followed in the western countries.

So finally to the relief of retail traders and brokers the new margin framework rules, went live on Monday, June 1st, 2020, for future and options trades.

Please note that there is one more margin rule change that went into effect from Monday, June 1st, 2020. From this day margin block will increase for un-hedged or naked option selling and future trades. The rules on reduction on the margin swayed away from this news as brokers want more safety for their clients and in-turn for themselves. Every broker advertised the reduced margin rules.

This is what happened on margin rules for naked derivative trading:

Price Scan Range is used to determine the future and options margin. The price scan range is the probable price change over a one-day period and is referred to as standard deviation sigma. The standard deviation (volatility estimate) shall be computed using the Exponentially Weighted Moving Average Method (EWMA). Since the Price Scan Range is directly related to the volatility estimate, it will change as per the volatility index (India VIX).

What amount of margin will increase for un-hedged/naked derivative trading:

From Monday, June 1st, 2020 Price Scan Range will be changed to 6 sigma from 3.5 sigma. Thus when the markets are volatile and if India VIX increases – which it does – then the Price Scan Range will also increase leading to higher margin for naked trades (option short/future buy/sell). This can go up to 20% increase in margin compared to what it used to be till 31-May-20, in volatile market conditions and up to 5% increase on normal market conditions. Which means margin will reduce significantly as the volatility in the market drops. Higher Price Scan Range also means that there will not be a sudden spike in increase or decrease of margin going forward, it will be gradual, still, it will be higher than compared to what it was before June 1st, 2020.

Why Price Scan Range was increased to 6 sigma from 3.5 sigma when brokers up to May-20, were able to manage naked trades?

This was done deliberately to discourage naked option sellers and naked future traders. I support this move. I was and am and will be in future, totally against naked option selling and naked future trading as this can bankrupt a trader in a single trade. 99% of derivative traders lose a lot of money in a single trade, is for this reason alone – naked trading.

Right from the start of this website since 2014, I have been telling via my newsletters and posts to always hedge your trades for either small profits or small loss. Hedging the trades keeps you comfortable, stress-free and mentally fit. Naked trading keeps you stressed – and a stressed trader cannot take correct decision when a trade is live in the market. 80% of the times they will make the wrong decision.

I Will Now Discuss The Reduced Margin For Hedged Trades

Note: The given below margins are for my research account held in ZERODHA. If you also want to open an account in ZERODHA, you can click here are start the process to register online.

I waited for a few days for INDIA VIX to come to the normal band, but I could not wait any longer to complete my research on reduced margins for hedged trades. I was waiting since 2011-12 for this. This was the year I studied somewhere, that in the US they block only the max loss possible, plus some more for brokerages and taxes for a hedged trade. In India, they treated a hedged trade and shorted option as two different trades and therefore blocked the entire margin to sell an option. I had no idea why, but since beggars can’t be choosers, I had to trade what was offered to me. Thankfully even with higher-margin, things went well. 🙂

Since I couldn’t wait any longer, on 08-Jun-20 I took a Bear Call Credit Spread trade on one lot. Please note that volatility on this day was higher than normal. INDIA VIX (India’s Volatility Index) was 29.28. As per my experience if India VIX is above 25 – its high. 15-20 is considered normal, 20-25 is considered above average, 25-30 is considered high and above 30 is considered very high.

What is Bear Call Credit Spread?

A Bear Call Spread, or Bear Call Credit Spread, is a type of option hedged strategy used when an options trader expects a decline in the price of the underlying asset. The maximum profit to be gained using this strategy is equal to the credit received when initiating the trade. However, the bought option will reduce the profit but will keep the naked option unlimited losses capped – thus its called a hedge.

Here is INDIA VIX on 08-Jun-20 – see that it’s high:

India VIX on 08-Jun-20

Here is the bear call credit spread trade:

Bear Call Credit Spread Trade 08-Jun-20

This is the trade:

BUY Nifty JUL 11200 CE One Lot
SELL Nifty JUL 10900 CE One Lot

On 08-Jun-20 Nifty was hovering around 10230, and I took this trade with a view that Nifty may not be able to break 10900 levels in the next 50 days. Well, I may be right or wrong – I do not know – but here my risk management is allowing me to trade as the risk is very low. So I went ahead with the trade.

Good news 🙂 after I took the trade Nifty started to fall:

NSE 08-Jun-20

Important Note:

I knew that if I shorted the option first the broker’s software may ask the full margin of 80k for the trade as there was no hedge existing. So what I did was, I bought the call option first then went on to sell the sold option. To my happiness and as I guessed – the trade went through with the new margin rules of hedged trades.

Here is the margin blocked in the bear call credit spread trade – Rs. 27,182.63:

Margin used on bear call credit spread 08-Jun-20

What used to be margin used before June 20?

Its the same, actually more now (please read above) for a sold option if you do not hedge the trade. So what you can do is just sell an option and see how much margin your broker is blocking. For Nifty option sold it will be nearly 1 lakh. Before June 20 it used to be 80,000.

Another Important Note on New Margin Rules

80% of the times, historically, India VIX is in the normal range of below 20. But what you are seeing above is the margin blocked when India VIX is in the higher zone. So I cannot give you an exact figure of what margin will be needed for a bear call credit spread when markets will go back to the normal zone after this COVID-19 pandemic (also known as the coronavirus pandemic). But I can give you an idea.

29 is approx 30% higher than 20. Of course, margin block may not reduce by 30% as it depends on other factors as well, but it may fall by 10% more when India VIX will be below 20. This comes to around 24,500.

Now let’s do some calculation. Earlier, to sell one lot nifty option, 80k used to be blocked. So in the same money, a trade can now sell 80000/25000 = 3.2 or approx three lots.

Isn’t the reduced margin blocked a piece of good news for trades as low-income traders will also be able to trade?

Well, the news is good and bad too. Why? When I take a trade I look at both sides of the coin.

Here is the calculation of max profit of the trade taken with premiums:

BUY Nifty JUL 11200 CE One Lot at 76.75
SELL Nifty JUL 10900 CE One Lot at 134.80

Max profit:

134.80 – 76.75 = 58.05 * 75 (lot size) = 4353.75

ROI (Return on Investment) = (4353.75/27,182.63)*100 = 16.01% – That’s an amazing return isn’t it?

Here is the calculation of max loss of the trade taken:

134.80-76.75 (I sold an option and bought so the final credit needs to be calculated) = 58.05

300 (distance between sold and buy strikes) – 58.05 = 241.95 points is my max loss in this trade.

241.95 * 75 = 18,146.25 is my max loss

ROI (Return on Investment) is negative if there is a loss:

(18,146.25/27,182.63)*100 = 66.75%

Now let me go back and calculate the negative ROI on one lot of the old margin blocked prior to June 20 for the same trade I have taken.

(18,146.25/80,000)*100 = 22.68%

Did you notice if there was a loss in percentage terms loss is more? In one lot frankly, it does not matter because either way, the trader will lose 18,146.25. But what if I trade 3 lots, as it’s possible in the reduced margin in 80,000. If I have the money I can right? In fact, greed will come into effect and most traders will do this. Instead of going for proper risk management, they will fall for greed and start trading more lots as they already have the money in their trading account.

Here is the max loss if a trader trades with 3 lots: 18,146.25*3 = 54,438.75

That’s a huge loss in a single trade. Now compare this with the loss when the reduced margin did not come into effect. It will be limited to 18,146.25.

So due to reduced margin, the profit potential of the option sellers have increased (for those who hedge), but on the other side, the risk to lose more money has also increased.

Update on 09-Jun-20 (Tuesday), Day 2 of the trade:

Remember the trade I took yesterday? If not you can see here:

Bear Call Credit Spread 09-June-20

And here was the margin blocked yesterday:

Margin used on bear call credit spread 08-Jun-20

I was surprised to see an INCREASE in margin blocked the next day 09-Jun-20:

Bear Call Credit Spread Margin as on 09-Jun-20

Calculation of increase in margin:

34,391 (on 9th Jun, 20) – 27,182 (on 8th Jun, 20) = 7209

While writing this I am scratching my head. Like you, I also do not understand why they increased the margin in just one day. What is the reason behind it?

So I looked at India VIX on 9th Jun, 20 – the day margin increased:

India VIX 09-Jun-20

As you can see there is not much increase. So what I can conclude is you need to have at least 10,000 extra cash in buffer zone if you have done hedged trades and are taking the benefit of reduced margin. I really do not know what would have happened if I did not had that extra cash they blocked on the next day. Had the risk management team closed my trades? I do not have an answer to this.

There is another question in my mind. What if I exit the Call Buy option? That I am using to get the margin benefit – what will my broker do if I close the buy option and leave the sold option naked?

I feel the risk management team will automatically close the remaining naked sold option at 3.15 pm for lack of margin required. I will try to experiment that as well but when I get a good profit in the bought option, I will exit that – take a risk and leave the sold option naked by not closing it. I will then check what they do and update here.

Update on 11-June-20

I got an answer to what will my broker do if I close the buy option and leave the sold option naked?

After I sent the email to my subscribers about this, one of my subscribers DEBADYUTI did that to find out what happens when the bought option is closed and sold option is kept naked, and emailed me. Here is the reply:

Sir, I have tested.

When I exit position of the Bought option, immediately I got an SMS in my registered mobile no, “xxxxxx – your EQ margin utilization has reached 275.01% of your available balance. Add funds on kite.zerodha.com/funds immediately to avoid square off.”
(xxxxxx is my trading id)

So my guess was right. He squared off the sold option immediately to restrict the loses, however, I am sure if he did not do so, the broker would have closed the sold option automatically at 3.30 pm.

Thank you DEBADYUTI.

Update on 10-Jun-20 (Wednesday), Day 3 of the trade:

Margin blocked on Day 3 (T+3) reduced by approx 3000 (please note that in between the day it was swinging so I took the screenshot at End of Day EOD)

Bear Call Credit Spread Margin Blocked on 10-Jun-20

INDIA VIX on 10-Jun-20 did not change much:

INDIA VIX on 10-Jun-20

Update on 11-Jun-20 (Thursday), Day 4 of the trade:

Margin blocked on Day 4 (T+4) reduced again by approx 2000:

Bear Call Credit Spread Margin Blocked on 11-Jun-20

INDIA VIX on 11-Jun-20 also did not change much:

INDIA VIX on 11-Jun-20

But I noticed something which I want to share:

NSE on 08-Jun-20 (the day of the trade when the least margin was blocked – 27,182 – as per the new guidelines issued by SEBI):

NSE 8-Jun-20

NSE on 09-Jun-20 increased (the day of the trade when the margin increased by 7209 – in tune with NSE increase):

NSE 09-Jun-20

NSE on 11-Jun-20 decreased (this day the margin also decreased):

NSE 11-Jun-20

The trade as on 11-Jun-20 is in profit going with the tune as the margin decreases:

Trade as on 11-Jun-20

I hope you have guessed by now why the margin is increasing and decreasing. Since the broker’s risk is selling of the call option – they have managed the software such that if Nifty increases they will increase the margin and if Nifty decreases they will decrease the margin because their risk is also reducing.

Here is a graph that explains with 10% accuracy the difference in margin blocked before and after Jun-20 is FnO hedged strategies:

Future and Options change in margin from June 20

Conclusion

So to conclude I can say that my research is over. I can say with confidence that the margin on hedged sold options and futures have reduced from June 20, but please keep at least 10,000 extra cash in your trading account for each lot traded. Because in case the trade goes against you, your broker will increase the margin and if they do not find the margin you may get a margin call or they will close the trade.

Hope this article has helped you in understanding margin requirements on hedged trades from June 20.

If you do not know on Monday, 20-Apr-20, in the US, Crude Oil FUTURES fell below $0 a barrel to -$40. Yes MINUS $40. So basically the sellers of Crude Oil futures had to become buyers (closing the trades), to get delivery of Crude Oil. So the buyers were actually paying the sellers, to get their hands off the stock they have to keep in their stores, in the US. 

What do ‘negative prices’ mean?

You see, oil is produced and kept in stores. This involves cost. Oil producers and sellers make a profit only when it is sold at a higher level than all costs, including such as producing, transporting, storing and labour. Unfortunately, there are no buyers in such a market when the US went on a complete lock-down. So even storing was getting difficult and costly.

If they were making a profit, even very small, the price would have not gone below ZERO, but even storing oil is a loss – so the price of futures went below zero. In other words – negative returns for future traders and HUGE LOSS for buyers (both futures and crude oil buyers).

Oil producers in the US were paying buyers to take the barrels of oil off their hands because storage facilities were full. They could not keep the oil anymore.

At the market’s lowest point on Monday, 20-Apr-20, an oil company might have paid about $40 for every barrel of oil someone was willing to take.

Understanding the Last Trading Day in the US

The last trading day is the day before a derivative expires. On the expiry date, the derivative is no longer trade-able (in cash) and the settlement process begins.

What is the Settlement Process

A future seller will have to take physical delivery of the stock/commodity equal to the lot size traded. If he sold a future for 100 and bought it at 60, then he gets the physical delivery of the stock/commodity at 60 which he will have to pay to the seller to close the contract. But he sold for 100, so once the prices rise he can always sell that at a higher price and not close the contract – he then profits if the settlement price is more than the buy price.

90% of the future contacts are speculative trades and so are settled in cash one day before the expiry. 

Assume the expiration date on an options contract is Friday, March 22. The last trading is Thursday, March 21.

Unlike in India, in the US Futures can be cash-settled only one day prior to the expiry day. If the contract is taken to the expiry day, then are NO cash-settlements in the US. A seller of the future, to close the trade, will have to buy the product equal to the lot size traded. Similarly, a buyer of the Future will have to give away the stock from their Demat account to the buyer of the future to close the trade.

What is the Solution to Overcome This Issue?

To overcome this issue, traders in the US cancel out their trades by purchasing a covering position. This is what they will do. They will buy next month contract to cancel out an earlier sale (covering current month future short), or selling a next month future contract to liquidate an earlier purchase (covering long future).

The last trading day is the final day that a futures contract can be traded or closed out. Any contracts outstanding at the end of the last day trading day must be settled by delivery of the underlying physical asset, exchange of financial instruments, or by agreeing to a monetary settlement. The specific agreements covering these potential outcomes are contained in the futures contract specifications and vary between securities.

When the Sellers of Crude Oil were in Huge Profit so What is the Problem?

Remember that on expiry day a seller becomes a buyer. As a buyer, he/she would need to factor in the cost of transporting oil from the well to a shipping port, or a storage facility, where it may need to be held for up to six months, at significant cost. Or, if they are delivered oil already lying in a storage facility then they will have to pay the rent for the storage facility to the owners until the market for crude oil picks up so that they can sell and make a profit.

On top of that, they would also need to bet that oil prices will rise later this year to make a return on the “investment”. No oil company wants to “sell” their crude at a loss, so many producers are likely to shut their wells until the market recovers.

If the crude oil owner did not enter a future trade his loss is the production and storage of the oil until the demand for crude oil picks up. Add to this the interest rate loss equivalent to liquid funds in the US. When they finally start selling crude oil, to make a profit they will have to keep all these expenses in mind before finalizing the price.

More information on Crude Oil Future Trading in US

Before reading let me tell you, do not look stock markets for minute to minute or hour to hour for any analysis. This article has a view for the short term – which means anywhere from 2 to 6 months.

I hope you must have heard the news of Rs. 20 Lakh Crore Special Economic Package in Indian economy by our PM Mr.Modi on 12-May-20.

If you do not know read this:
https://economictimes.indiatimes.com/news/politics-and-nation/pm-narendra-modi-address-live-centre-announces-an-economic-package-of-rs-20-lakh-crore/articleshow/75699154.cms

This is not a small amount. This is almost 10% of our current GDP.

What is Gross Domestic Product (GDP)?

Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. As a broad measure of overall domestic production, it functions as a scorecard of the country’s economic health. Though GDP is usually calculated on an annual basis, it can be calculated on a quarterly basis as well.

What is India’s GDP?

India Nominal GDP in 2020 (as in Apr 2020) )is USD $3.202 trillion which in terms of Rupees is 24,13,42,74,50,00,000.00 (approx).
Source: https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)

Well, that is Rs. 241 Lakh crores. Which is 5th rank in the world as per the International Monetary Fund (2019 estimates).

India is the fastest-growing trillion-dollar economy in the world. India has become the fifth-largest economy in 2019, overtaking the United Kingdom and France. The country ranks third when GDP is compared in terms of purchasing power parity at $11.33 trillion.

What is Purchasing Power Parity (PPP)?

Purchasing power parity is an economic term for measuring prices at different locations. It is based on the law of one price, which says that, if there are no transaction costs and no trade barriers for a particular good, then the price for that good should be the same at every location. So a computer in New York and in Hong Kong should have the same price. If its price is 500 US Dollars in New York and the same computer costs 2000 HK Dollars in Hong Kong, PPP theory says the exchange rate should be 4 HK Dollars for every 1 US Dollar.

Though in the real world that does not happen, still, PPP is a very important data to know the purchasing power of people in that country.

PPP gives and an indication of real money movement inside a country compared to other countries (for same price of goods) for a given time period. PPP also gives a real indication of the economic health of the country. For an economist, PPP is more important data than GDP itself.

Due to this 20 Lakh Crore Special Economic Package Investment, Stock Markets will go up in the near future. We can see that today itself:

NSE on 13-May-20 – After 20 Lakh Crore Special Economic Package

So be happy if you are an investor – your stocks may give good profits in some months especially if you bought them during this lock-down.

If you are equity mutual fund investor – do not stop investing – continue the Systematic Investment Plan (SIP). Just keep investing, these SIPs will give great return over the long term just like the economic recession of 2008-09.

Today May 04, 2020 India VIX has surged 26.42% with a huge fall in NSE.

And here is graph of NSE today (May 04, 2020 at 11.06 am):

Why have I written this article? Just to tell time and again that India VIX is inversely proportional to Indian Stock Markets.

I have written a detailed post here that Nifty and India VIX are inversely proportional.

Why you should see India VIX before taking a trade?

You can gauge the fear factor in the markets. If India VIX has risen anything over 10% then that day is a dangerous day to trade. You have to trade with caution.

In such times trade with reduced lot size and always keep an eye on the trades. Need I say again that you must hedge your trades even if it’s just a single lot?

I have said this time and again in my site that trades who do not hedge are the biggest losers in the markets.

They are the ones who are overconfident and destroy their wealth.

I will also repeat again now that I have been telling since years – that it is impossible to make 10% a month consistently for even one year, which most traders in the world are trying to make. But its unfortunate that trades just cannot control their greed and are destroying wealth since ages and will keep doing so in future as well.

However 2-3% a month is possible, but for trades, this is way too small.

Just imagine if a bank gives a guaranteed return of 36% a year? Now the same return looks extraordinary big. I fail to understand why the same return does not look big when you trade options and futures.

You just need to change your psychology of thinking, then even 24% return a year from stock trading will look big.

If you want to learn to trade stock markets and are happy with a 36% return a year – you can do my conservative option course.

Date of post: 06-Apr-20

Since last few days, India VIX is dropping. See this image:

India VIX 03-Apr-20

From a high of 86.63 to 55.30 in less than 30 days.

What does it mean?

It means that traders are assuming that the worst has happened and some kind of normalcy may resume in a few days so fear factor is decreasing.

Does this guarantee that normal trading will resume soon and that Nifty will now start to go up?

Well, nothing is guaranteed in stock markets else everyone would put 100% of what they earn in stock markets. But this gives some indication that in the near future (30 to 60 days) normalcy will resume.

So what can you do?

Right now you still have to trade with caution and if possible intraday only with a single lot. Positional trading is a big no.

Just trade with strict stop loss and target. Do not change the target or stop loss whatever happens.

Hope this helps.

Other articles on India VIX by me:

India VIX over 17 What It Means

How India VIX Is Calculated and What to Expect After Seeing High or Low India VIX

India VIX Futures – Trading The Volatility

What Is INDIA VIX And Why It Changes

Volatility is Average But India VIX Still High

Nifty And India VIX Are Inversely Proportional

Why INDIA VIX Is Increasing and Markets Falling

india vix

7.86% Increase in India VIX

Impact on Nifty Bank Nifty India VIX due to General Elections 2019

India VIX is Not Increasing Despite Budget On 05-Jul-2019

EOD End of Day 22-Jan-2018 India VIX up by 10.09%

How To Trade When Volatility VIX is High

When VIX Drops Nifty Rises