For beginners rule based trading is better for risk management. Experienced traders may change the rules depending on their experience and situation as per the market condition. But it’s better for all to stock to the rules.

In this post you will learn how you should trade options with rules. These rules will keep you safe.

1. Position Size Should be Small:

It has been told quite often and written many times in financial blogs that when you trade derivatives keep the position size small, but for some strange reason after a few profitable trades, traders start trading with 5-10 lots thinking they will make a lot of money in no time.

This is when they start losing it.

Post Date: 26-Sep-2019

One decision to lower corporate tax by Finance Minister Nirmala Sitharaman by a few percentage resulted in huge jump in stock markets.

The News: On Friday, September 20, 2019, Finance Minister Nirmala Sitharaman announced a reduction in the country’s effective corporate tax rate from around 35% to 25%. For companies that do not avail of any other incentive or commission, the effective tax rate would be just 22%.

This will save a lot of money of the companies doing business in India and of course will result in better profits, which in turn will result in business expansion and creation of jobs. Its a very good news for Indian economy.

Of course a news such as this results in a jump in stock markets. From Friday to Thursday, 26-Sep-19 NSE went up from 10700 levels to 11600. This is an increase of 8.5% approx.

Bank Nifty went from 26757 to 30400 levels. This is an increase of more than 13%.

See this one month graph of Bank Nifty:

Bank Nifty 25-Aug-19 to 25-Sep-19

In such a swing and volatile markets such profits are possible in 1 or 2 days in my Bank Nifty Course Strategy:

Sijo Testimonial – Results may vary for users

During these volatile times traders must be very careful. Especially if you are a future traders or an option seller you must maintain your stop loss levels.

There is no better adjustment than taking a STOP LOSS.

Traders keep asking me one question that what is the best adjustment strategy for a future or an option short trade gone wrong. They think that there is an adjustment strategy that can work wonders and bring a losing position to winning position after the adjustment is done.

Let me tell very clearly. The more you try to adjust a losing trade, the more you will go deep in losses.

After seeing an option shorting gone wrong, traders adjust the position by shorting another either the same option or a deep OTM option.

This is a very wrong way to adjust a trade.

The best adjustment in a losing trade is to get out of the trade.

There is nothing better than this.

So be careful when a major news has come out. This is the time to reduce your lot size, take a less risk and trade.

This site is educating traders and investors since 2014. You can read about me here.

I am sure you must have subscribed for my 5-Day Free course by signing up the form at the top of this page. If not please do so now. Thanks if you subscribed, please do read my 5 days course. It will tell you a lot about options and after signup you can download a PDF file explaining Option Greeks in simple language.

Here are a few important things about Stock Markets, Investments and Finances which you Must Read:

1. If you are looking for tips/advisory service or already taking one – I am sorry to say you will lose a lot of money. I have been there lost that. So advising you against taking tips from anyone including your broker. Its better to learn and trade yourself. There are many tips providing companies in Indore – stay away from them. I suggest install Truecaller App on your phone and never pick a phone call with color red. They are 100% accurate in identifying SPAM calls.

2. If you are planning to automate your trades be very cautious as there are many software out there to take your money every month but if they do one single mistake you may lose more than you made. Software do have bugs please remember that.

3. If you want to invest in a stock then keep a time frame of at least six months. Please note that investing is NOT trading. Keep them separate. If profit comes before 6 months you can exit, but do not take a stop loss before that time frame. But you may also keep a stop loss based on the money you are wiling to lose in an investment. So a stop loss in investment is different than stop loss in derivative trading. In investment it should be based on money and in trading it should be percentage of the margin blocked as you are taking a leverage.

4. If you found a strategy in a website or YouTube, paper trade first before trading with your hard earned money. Now days there are so many videos that you may have to spend a lifetime seeing each one and then researching them on paper. For this reason I have stopped seeing YouTube videos on stock trading. It’s hard to figure which is good and which one is uploaded by my neighbor (maybe) or an unknown person randomly on stock markets.

5. If not today, tomorrow you will understand that Technical Analysis is not worth the hype. Stocks are a non-living thing – they are not bound to move as per the charts order them. Warren Buffet by the way the biggest investor and profit maker from stock markets of our times does not know even A of Technical Analysis. So if you are trading based on Technical Analysis, please keep your stop loss in your system always. 50% of the times your stop loss will be hit.

6. If you are married please ensure that you share 100% of your investments with your spouse. Your spouse will make sure you are not blowing your account for greed or for whatever reason.

CCD founder VG Siddhartha did not inform his wife about the loans he started taking from his friends and other sources for reasons only known to him. Had he informed his wife about his plans she would have surly stopped him from doing anything wrong financially. Consequences of bad financial investments can be ugly. Siddhartha case is known to all.

So it’s very important to inform your wife of all the investments you have done in stocks markets and other places and also the profit and loss you are doing. Do this every month to ensure your finances are in place.

In most cases it’s the husband who does not inform his wife about the investments made. Wives on the other hand inform every investment they do to their husbands. As for as investments are concerned it’s your moral right and for safety of future of your family please do inform all your investments to your wife/husband.

7. At the end of every quarter write down in a dairy or in an excel sheet all the investments you have done in all the places including their current values and add them to know your financial condition. This way you will be able to control your greed in taking risky trades in derivative trading. Also your investments will be scattered across multiple sources which is good for your finances.

You can download an excel sheet here to keep a tab on your investments. I use the same excel sheet to manage my finances and keep them under control. Of course after every calculation I make sure to show the sheet to my wife to get any suggestion if any.

Since 4-Jul-19 both BSE (Bombay Stock Exchange) and NSE (National Stock Exchange) are falling.

Two main reasons are:

1. Business sectors such as Automobiles (Maruti Suzuki, Tata Motors), Banking (PNB, Yes Bank), Non-Banking Financial Companies (NBFC) (Indiabulls Housing Finance Ltd), and even FMCG (Parle) are seeing a heavy slowdown in business. More than 1 lakh people have lost their jobs in these sectors in just the last two months and more will lose in the coming days.

2. FPIs and FIIs are selling, in fact, the rich investors in India also not happy.

Read this article to know what exactly is the problem.

Most important read from the article:

If FPIs earn an income of over Rs 2 crore entirely from listed equities, they will now need to pay 25 per cent surcharge on their capital gains, short or long. In the case of income of Rs 5 crore and above, the same will go up to 37 per cent.

In case of gains from unlisted securities and derivatives trade, STCG for the Rs 2-5 crore group will be 39 per cent, while it will be as high as 42.74 per cent for the Rs 5 crore-plus group.

Almost half of their profits will go away in taxes. Then why should they invest in India?

95% of FPIs and FIIs fall in the above category. Just imagine their anger.

Now coming to when things will get normal?

Well, business sectors written above can see growth only if government give them loans on low interest to expand the business. Which I do not see happening in the near future.

FPIs and FIIs are awaiting clearance on the exact nature of taxes they have to pay. In India, the tax system is very complex. You need an expert to understand the exact meaning of the new tax rules. So this may take time.

They want to rollback – but I do not think this government will do this. This government is known to keep increasing taxes.

It’s unfortunate but we have no control over what the government does.

So I suggest trade with strict stop loss and if you are an investor invest in a few good companies as most stocks are at a very attractive price. However, you may have to wait long to make a reasonable profit.

This is the reason I keep advocating non-directional strategies which are the most popular strategies in my Nifty and Bank Nifty courses.

There is no money in trying to trade direction. This path is full of losses only.

This post discusses how Nifty Options settlement is done.

First thing you must know is that in India Nifty options are cash-settled. These are European-style settlements. A cash-settled option is a type of option for which actual physical delivery of the underlying asset or security is not required. The settlement results in a cash payment + brokerage and taxes, instead of settling in stocks, bonds, commodities or any other asset. In India, options are allowed for trading before expiration (European style). You cannot exercise Options in India before the expiry date (you can only sell them off to other buyers), which means a trader can buy/sell an option and finish the trade before expiry any time they want. However, in American style, the option contract owner is required to hold until expiration.

Though stock options settlements in India is moving towards cash settlement before expiry, however, if held until expiry then physical delivery of the stock is required. Here is the news report that you can read:
https://www.livemint.com/Money/RfzIRyoFkf1lI6Ar7GpURO/Sebi-takes-aim-at-extremist-speculators-with-new-derivativ.html

Here is list of stocks in which physical delivery is required if options are taken to expiry:
https://www1.nseindia.com/content/circulars/FAOP40257.pdf

And here is SEBI circular which explains that by October 2019 expiry ALL stocks where options are traded will be moved towards physical delivery of stocks:
https://www.sebi.gov.in/legal/circulars/dec-2018/physical-settlement-of-stock-derivatives_41482.html

American style settlement where the owner of the option has the right to exercise the option.

Thought introduced in a phased manner in April 2019, it is still not popular in India as Indian option trader rolls over the position but does not want to take delivery of shares.

But what happens in India if you fail to close the option trade and take it to expiry?

If the option you sold or bought expires worthless then there is nothing to be done. But if you bought an option and it ends in the money you will have to take the delivery of shares.

Here is small explanation of the meaning of exercising of options (not cash settlement):

Basically exercising means the right to buy or sell the stock at a certain price as defined in the options contract.

If the holder of a put option exercises the contract, then he will sell the underlying security at a stated price within a specific timeframe.

If the holder of a call option exercises the contract, then she will buy the underlying security at a stated price within a specific timeframe.

Before exercising an option, it is important to consider what type of option you have and whether you can exercise it. You should know the terms and conditions of trading options before you are trading them. If there is a confusion you can ask your broker.

Due to the above reason its HIGHLY RECOMMENDED that do not trade stock options. If you want to trade options then trade either Nifty or Banknifty options as neither Nifty nor Banknifty shares are traded in the market, so the question of settlement does not arise – they can be settled in cash only.

Here is what happens when an option is exercised:

A Put Option is a contract that gives its holder (the buyer) the right to sell a set number of equity shares at a set price, called the strike price, before a certain expiration date. However in India a stock option is exercised only on the expiry day

If the option is exercised, the writer of the option contract is obligated to purchase the shares from the option holder. “Exercising the option” means the buyer is opting to take advantage of the right to sell the shares at the strike price.

The opposite of a put option is a call option, which gives the contract holder the right to purchase a set amount of shares at the strike price prior to its expiration.

There are a number of ways to close out, or complete, the option trade depending on the circumstances.

If the option expires in the money, the option will be exercised. If the option expires out of the money, nothing happens, and the money paid for the option is lost.

Conclusion:

In India Index Options are cash-settled, which means you can buy/sell Nifty/Banknifty options anytime and close the trade anytime before expiry. Net result will be cash-settled. If you make a profit, your account will be credited with the profit money minus the brokerages. If you make a loss, the broker will deduct the loss plus brokerage from the money blocked from the margin to trade and release the rest of the money back to your account.

Here is an example.

Assuming Trader A buys a Nifty call option strike 11500 at 55. And margin blocked was 75 (lot size) * 55 = 4125.

He sells it at 70. So 75 (lot size) * 70 = 5250.

Profit made: 5250-4125 = 1125.

Assuming brokerage + taxes was 50 in this full transaction.

So the broker will release 4125 (initial margin blocked) + 1125 (profit) – 50 (brokerage + tax) = 5200 back to Trader A’s account.

This is cash-settlement. You can see that no change of stocks took place in this transaction, only cash exchanged hands.

Now suppose Trader A had sold that option at 40 then what would have happened?

75*40 = 3000

Loss made:

3000-4125 = -1125.

So the broker will release 4125 (initial margin blocked) – 1125 (loss) – 50 (brokerage + tax) = 2950 back to Trader A’s account.

As you can see whether profit or loss the option trade was cash-settled – there was no exchange of stocks.

However when you do stock option trade in India, after October 2019 there is almost a certainty that 100% of stock options will be exercised if in the money and you may have to either buy the stock in cash equal to number of lots traded or have to produce that many stocks from your account.

So if you trade stock options make sure to close the trade before expiry and NEVER let the stock option get in the money and be exercised.

Hope the above articles helped.

This is a very common question befalling option buyers since ages. After paying the huge premium and the stock moving in the direction of the option bought if the option buyer sees a loss in options bought they get stressed and start thinking what wrong they did.

This is especially worrisome for novice options traders who just came into the options business. They get worried about seeing a huge decline in option premium if the stock stays in the same place or move slowly in the direction of the option bought. So they ask themselves or their mentors/brokers or keep searching online – why my option declined in price when the stock moved in my option buy direction?

Well, they did nothing wrong except they paid for time value and other things that I will discuss here.

Here is an explanation:

Assuming the stock is at 100 and at the money call option at 100 is bought for 5, then the option buyer will make money only if the stock crosses 105 before expiry. Even if the stock finishes at 104 the option buyer of strike 100 will lose money because he bought the option at strike 100 and paid 5 as premium. So the break-even point is 100+5 = 105. Anything above 105 is profit for the option buyer.

Now coming to the real world live trading. When you buy an option you are racing against time. In Option Greeks its known as Theta. Decay of theta is a big concern for option buyers.

Assuming your view is positive for a stock and your buy an ATM call option paying a hefty premium. The premium you paid for is your maximum risk. Everything is fine and the stock moves up slowly. You will be happy that the stock is going in your direction.

You login to your account happily and to your shock to see your option contracts losing value, means its premium is lower than what you paid for.

This can be frustrating.

Three reasons for this:

One, the stock did not move far enough for you to make a profit yet.
Two, change in implied volatility. If it has gone from a high level of volatility to a lower level the option will lose value.
Three, too much time taken for the move to come.

Please note that option contracts are multidimensional. This is not a simple trade as stock buying and holding. When you buy an option, you buy a lot of stocks by paying a small premium but you also pay for a few things that are not in your control. These are option Greeks. If you do not understand option geeks you can download an Option Greek file from here.

So remember in an option contract, you have this multidimensional issue. You have to not only predict the directional move of where the stock is going, but also how implied volatility and how time decay may impact the position in future. So sometimes even if you get the direction right you may lose money in buying option.

So whats the way out?

Way out is to keep a target to exit. Target should be both for taking loss as well as taking the profits. If you take out the profit and then option moves to make a very high premium you should not repent your decision to exit early. You traded with a plan and you exited.

Trading without a plan is sure-shot way to losing millions in stock markets. You can do my conservative option course and learn ways to set up trades for monthly income.

Selling a put option is a slightly bullish strategy wherein the stock has to move up else the put seller may face a loss. Its better to sell a put option slightly OTM – Out of The Money. You must have read in lots of places that its better to sell an ATM (At The Money) put option, but my experience has been good with selling put options slightly out of the money. Out of the money put option gives you time to decide to book profit or take a stop loss.

Suppose you are very bullish on a stock then there are four things you can do:

1. Buy the stock in cash
2. Buy its Future
3. Buy an ATM Call option
4. Sell an ATM or OTM Put option

No. 1 is the best if you have enough cash to buy the stock and hold. There is no tension or worry about the trade finishing on expiry day. You can hold the stock till you retire.

No. 2 Future is the most dangerous trade of all four. In this month Jul, 2019 Yes Bank is going up 10% one day and falling 10% the next day – imagine the situation of a future buyer or seller caught on the wrong direction. But if it was a call or a put buy the trader would have managed to escape with a limited loss.

No. 3 is ok but you must have strong view on the stock. Plus the IV of the stock must be low to buy an option whether its call or put. But the biggest enemy is time value or theta decay. Sometimes even when the option buyer is right in direction, he loses the trade. Read this post to know issues with buying options.

No. 4 is good option if the trader wants to eat the time value premium of the option. However a stock crash might be dangerous so the trader must have a strong bullish view in the stock.

You must read news about the company before selling its put option. A company having financial, management or any other issue do not qualify for this strategy. In fact no trades must be done on such a stock.

After reading such news will you trade in Yes Bank?

One man alone lost Rs 7,000 crore in YES Bank rout since August 2018

Yes Bank Shares Fall 13% After Earnings Miss

Yes Bank drops 20% as bad loans mount, provisions surge

Yes Bank’s investors are desperate for a buyer amid fears of a massive quarterly loss

Obviously, the answer is NO. Still, look at option chain and volume in Yes Bank as on 18-07-19 – there is heavy volume in options trading:

Source:
https://www.moneycontrol.com/stocks/fno/view_option_chain.php?sc_id=YB&sel_exp_date=2019-07-25

This is speculative trading at its best.

If you are reading this – make sure not to trade such stocks going in a bad new phase. It does not matter how bad the news is. Avoid trading in such a stock. You may suffer even if you short the stock because you do not know when the stock will rebound.

So selling a put option in such a stock is a Big NO.

What you can do if you have a very bullish long-term outlook in a stock? You can consistently sell its OTM put option month after month. Of course you must keep a limit to the loss you want to take in the trade. If that is reached you have to stop the trade. Same with profit booking. The stock will not keep rising forever so put a stop to your profits too if you are selling a put option of the stock consistently.

If you compare the results between a stock buyer and a put option seller you will see that the put option seller wins more times when the stock falls to the limit of the strike price of the option sold, stays at the same place at expiry, or goes a very small percentage.

What should you do when you sell a put option?

Keep limit to the money that you are willing to lose in the trade. Its not required for you to take this trade till expiry if the stock has fallen down. You are free to exit the trade if you see that the stock is falling and reached the level of the put option sold.

Note that selling put option strategy is a neutral to bullish strategy. You can sell a put option if the result of the stock has come better than expected, or the stock is not moving much or is witnessing huge spike up everyday.

Important points to note:

1. Do not use all money in your account to sell a put option.
2. Always hedge your put option sold.
3. Keep extra cash for adjusting the position in case you want to close the losing sold option and move to a lower strike.
4. Standard deviation volatility of the stock will give you an idea of how far you can sell a put option. However this does not guarantee that the stock will not hit the strike – but it does give you a general idea.

When you lose money trading in stock markets – its just not the loss you must add the interest lost had you kept that money in a Bank Fixed Deposit.

Read this email I got:

Hi Dilip Bhai,

I was a regular trader in the stock market but form 2005 to 2007 after that I had lost my all money in the crash, which is around Rs.15 lakh. If I invested that money in FD that would be more than 40 lakhs. Just think what I lost in this market. Then I stopped trading for 10 years and I thought I need more education to trade in stock market and I found a teacher who taught me trading in option with hedging option and hedging option with future, pair trading in options, arbitraging with current and next month future, time decay technics with current month and next month option selling, 22 ways of option hedge trading like butterfly, collar, condor, straddle, strangle but ultimately none of them can make money for me. Now my experience is this that somehow market will fetch money from the trader, no trader can earn from this market for a long run, may be 5% of trader are exceptional or lucky or punter what ever. Honestly do you think I need to learn much more or to quite for ever.

Here is the screenshot of that email:

And here is another trader losing 15 Lakh:

Adding FD interest loss to the loss makes sense. Current Bank FD rates as of July 2019 is 7% per year. So whatever your loss you can use this calculator with 7% per year interest rate to know your exact loss till date:

https://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php

Coming to the question, if you have lost too much money trading the stock markets (too much money is more than 5 lakhs with interest) – well even I am in that club, then should you learn and start trading again?

Ans – Well this is your personal opinion. If you have the urge to trade and invest even after the loss then yes you must learn to trade but you have to change your mindset to become a very conservative trader. You just cannot trade for revenge.

You have to change your mindset that 10% a month is simply not possible in the long run from stock trading. You must learn to first protect your capital by hedging your trades and be happy with 2-3% a month.

Use this calculator to know how much you can make at 2-3% a month if you start now and trade for next 10 years:
https://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php

You have to be patient to recover your money – there is no other alternative.

My Nifty Conservative Course and Bank Nifty courses will help you to achieve 2-3% a month – but you must have the will to learn and trade.

If interested you can pay the course fee online here.

Date of posting: 04-Jul-2019

Its strange that tomorrow is Budget 2019 and INDIA VIX has actually dropped:

INDIA VIX 04-JUL-2019

Usually, INDIA VIX increases prior to budget or an event day and then drops after the event is over. But this time it’s different.

I think the reason is that India already knows what’s there in the budget because the interim budget has already been presented on 1 February 2019. Due to the General Elections to be held in Apr-May 2019, The Interim Union Budget of India for the year 2019 was presented by acting Finance Minister Piyush Goyal on 1 February 2019.

It looks like traders have an impression that there will not be a major change in the budget to be presented, therefore, India VIX is not showing a rise.

So what can you do tomorrow?

1. Reduce lot size.
2. Keep your profits and stop losses smaller than what you take on average trading days.
3. If you are a positional trader do not change your plan, but you can bring your stop loss closer.
4. If conservative trader then better do not trade, stay away from markets. Here are 7 reasons why you should not trade on budget day.

Note: If you are fed up with stock market losses you can do my courses.

Basically, my course will teach you how to combine buying and selling and create a hedge. They give you an edge over naked trading and keep you at peace – so you can wait for profits. On top of that if planned well your success rate will be over 80%.

Even after an increase in selling margin block, you will make an average of 3% per month. And there will not be any stress as these are direction independent strategies.

Nifty course has 5 such strategies. Min required is 1.5 Lakh.
Bank nifty has 2 strategies. Min required is 1.2 Lakh. For intraday in BN, only 70k required.

What you will learn:

– Conservative Options hedging
– Futures hedging
– Equities hedging
– Aggressive Options hedging
– Bonus strategy for reversal benefit

Here is the complete process of my course:

Once you pay I will send you the course materials for studying to your email. They are well explained in step by step manner with examples in PDF files. There is a total of 6 pdf files in Nifty and bank nifty courses.

Whenever free you read these files strategy by strategy and ask me questions via phone/WhatsApp/email to clear doubts.
This will take about 2 days. Then you start paper trading and still can ask me questions. This will take about 10 days. After this, you can start trading. You can still ask me doubts in live real trading for one year from the date of payment.

Then you can start trading on your own. No need to depend on anyone once you are on your own.

Course fees can be paid online here.

You can contact me after payment.