In short: Selling of options on paper is unlimited risk so brokers block a huge margin as regulated by market makers. 100% margin is given against Nifty BeES holding to trade derivatives. Read to know more in details.

I get too many questions on selling of options. Some traders are sacred selling options and some do not sell options because they think a lot of margin is blocked.

If a lot of margin is blocked then there is a reason. Selling of options on paper is unlimited risk. So brokers have no other option but to block a huge margin as regulated by market makers.

Do not worry brokers will not run away with you money. Margin blocked is done for their own safety, else if there is a huge loss they will have to pay from their pockets. Which obviously they do not want.

Once the sold option is closed then your blocked margin is released.

Remember that other than option buy all derivatives trades must be hedged if you are taking an overnight position else a breakdown of 4-5% can cause unbearable loss to your trades.

Here is another confusion.

I got an email asking this question:

Dear Dilip,

Thanks and regards,
Name Withheld

My reply:

A) Suppose I have sold say Put at 10400 Nifty. Imagine during the month (before expiry of the contract in that month), Nifty moved below 10400, meaning the sold call became In The Money (ITM). Can I wait till expiry & imagine at expiry date, Nifty rebounded at say 10500. So, in that case, I will have little profit/less loss?

It will be profit as the Put you sold will expire worthless – but when it goes ITM you are sitting on FIRE. Better exit.

Am I right in my understanding? During the month, even if ITM, contract will not be expired – right? Please correct my understanding.

On expiry time 3.30 pm only option final prices are decided. If ITM then even if for entire period it was OTM still it will be declared ITM and vice versa which means if after you sold it went ITM (In the Money), but on expiry day it went OTM then that option will expire worthless.

So if you sold an option and it has gone In the Money (ITM) you should exit immediately – means you should close the position and take a stop loss.

B) Can I buy Nifty BeES (or any Nifty ETF) & trade against that money? How much leverage I would get if I want to intraday? Suppose, I have Rs. 5 Lakhs Nifty Bees in my trading account. How much margin broker would give me for intraday trading approx?

If you bought Nifty BeES for 5 Lakhs then as far as I know most brokers in India give 100% collateral margin against Nifty BeES without charging any interest. Note that for stocks brokers give up to 80% collateral margin and do not charge any interest on 50% of that. However for Nifty BeES 100% collateral margin is given without charging any interest on the full margin.

Nifty BeES is treated as cash holding. If you lose in option sold or future trading traded in that collateral margin – some holdings of the Nifty BeES will be sold to recover loss.

If you are an option buyer/seller and you are making huge losses its because you have no planning and not hedging your trader. If you want to learn proper trading strategies you can do my course and learn conservative ways to trade Nifty & Bank Nifty options.

There are a lot of traders who want to trade intraday or in other word indulge in day trading involving options.
There is nothing wrong with this except the problem is they want to do this while having a day job.

Do you know I was caught red-handed doing day trading in my office and was sacked immediately the day I was caught in the office doing day trading.

So if you want to day trade its fine but make sure you are doing it in your mobile and safely from the eyes of your boss – else the results can be bad.

With limited loss capability option buying intraday trading looks like a great idea, but even if direction is right sometimes the option may not increase as much as possible. Option does not increase as per the stock’s direction is because of the time value component. You can read about time value in options here. The time value has so much power that it can dampen any price movement – and if wrong the trader suffers more.

Near-the-money options are mostly traded for intraday purposes. Near the money options have the benefit of intrinsic value going up with the underlying stock price, but to some extend this gain is offset by the loss of time value. So the trader never sees a one point rise in option with a one point gain in the stock. Some traders therefore shift trading to futures. This is again a mistake.

In some options strikes especially the Out of The Money (OTM) options due to liquidity issues there is a big difference between ask and bid prices thus affecting the option premiums. In India the bid-ask spreads are usually wider in stocks, sometimes up to 2-3 points. This reduces the profit potential of the Intraday trader.

So if you are planning to do intraday trade options, you must overcome these two problems.

How to overcome these problems?

1. Index options like Nifty and Bank Nifty are very liquid – so its advisable to trade them rather than stocks.

2. If you still want to trade stocks look for liquidity first in the option strike then decide the trade. If a particular option is not traded much, its better to ignore that option. in that case you may have to stock to the strike that’s being traded more for that day.

3. Trade near the money options – they have a balance time value and intrinsic value if In the Money. Of course risk is more which can be tackled by a stop loss but profit potential will also be more.

4. Set up a target and stop loss in the system so that you do not have to manually take a stop loss or profit.

I have been receiving emails from my free as well as paid members on What To Trade In General Elections in India to be held in April-May 2019?

Before reading this article I suggest you also read impact on Nifty and Bank Nifty on India VIX due to General Elections 2019.

Since this two months are going to be very volatile – I would suggest going for the debit spread strategy.

A debit spread is a strategy where a trader buys an option near to the money and sell an option slightly Out of the Money (OTM).

For example at the time of writing this article NSE is at 11,621.95

NSE on 2019-Apr-05 at 11.52 am

Supposing a trader has a bullish view.

This is the debit spread he/she can initiate: He can always buy a Call Option at 11700 and sell one Call Option at 11800 or 11900 depending on his/her view.

This will keep the trader at peace since at least one of the option will surly make money. This is guaranteed.

Here is more on Debit Spread strategy:

The word starts with “Debit”. In economics debit is money taken out from an account. So it is evident a Debit Spread needs money to be taken out from your account. And spread signifies that the trade is spread up to a certain point – means profits are limited not unlimited as in naked option buy.

So depending on the premiums of the option you buy, you have to pay a premium and for selling one option you get back some premium paid.

Debit spreads are great during volatile times.

Since premium paid is more than premium received there will be a deduction in your trading account. Please note that whatever money is debited is the maximum loss for the trade debit spread option strategy.

You can read more about debit spreads here – Nifty Bull Call Debit Spread.

Date of Post: 04-Apr-2019
============================

The general election will start from 11th April and end on 19th May 2019. The result day is 23rd May 2019.

This will happen to India VIX – a major factor that decides option premiums.

Here you can see India VIX here:
http://www.moneycontrol.com/indian-indices/india-vix-36.html

India VIX as on 04-Apr-2019, 2.07 pm:

From 11th April 2019 it will start rising and will be in range of 16-18 to 20-22 until 19th May 2019. Then from 20 to 23rd May 2019 it will keep rising and may cross 22-25. After 23rd May 2019 it will start to drop.

What will happen to Nifty?

It will get volatile especially from 19th May 19 until result is declared.

If BJP wins again it may surpass 12300-12500. If BJP loses then Nifty may fall to 10500.

Please trade with keeping the above in mind.

Update: Apr 8, 2019
===================

I had written that India VIX will keep increasing until General Elections are over, then drop. However it’s getting faster than what I wrote.

Today itself it crossed 20. Here is a screen shot:

So my advice to all directional traders is to trade very cautiously. Nifty will get very volatile and may change direction at drop of a hat which may hit your stop loss much often.

For non-directional traders these things are not a concern. They are not bothered by which direction Nifty goes yet they make money. So the volatility increase may not affect your trades much. But make sure to hedge your trades.

If you are a conservative trader happy with small profits you can do my Nifty conservative options trading course. It does not require too much of monitoring. You need not keep looking at it all the time. While you do your job these strategies will make money in the background.

Basically positional and plug and play strategies.

Easy to understand and trade. And these events which impact the markets will not bother you much as they make money irrespective of where the market goes – up or down.

I also have more advanced Bank Nifty weekly options course for experienced traders.

If you are serious and want to learn conservative way to trade options with hedge to stay away from speculations (biggest enemy of a trader) and huge losses ever you can pay the fees here and do my courses.

Learn strategies to make money week after week and month after month for your entire life until stock markets exists.

Option traders must be very smart before they put their money on risk trading options.
In this post I will discuss some things what an option trader must look at before trading.

No 1 question should be – “Does This Fit My Portfolio?”

Before trading you must know your max risk in the trade. If your max risk is more than what you can afford its better to avoid trading. Do not trade against your portfolio size.

No 2 is – “What Plan I Have If My Trade Goes Wrong?”

Do not hesitate to take a stop loss if the position goes against you. However on the contrary traders seems to average out a bad position.

Here is an example. Nifty option bought at 50 goes down to 30. The trader buys another option to average out at 40. However this is a mistake. If you have 5 long trades its foolish to add more bullish trades if the strategy is losing money. Its better to keep some money to go short if the long trade is going wrong. If you do not have money to go against the losing trade no one is stopping you to exit the trade and take a stop loss.

No 3 – Check Liquidity Before Trading

You cannot do business in a marketplace where there are no buyers/sellers. So you must check liquidity of that strike before trading. If there is less liquidity change the strike to trade in a liquid strike. You cannot scale a trade that doesn’t have enough liquidity. If you become a good trader and want to become a full time trader you cannot do that with one or two lots. You may have to increase the lot size to make a substantial income.

If checking liquidity becomes a habit then it will be good for your future. A strike with good liquidity can be easily traded with “Market Orders”. However in strikes where there is less liquidity you may find difficulty getting out of positions even if you are in good profit.

How To Improve Consistency In Your Trading

If you are failing to consistently book profits then there is something wrong in your trading style. Consistent return is very important in stock trading. The problem is change in plan of trading every time they trade. And this is one of the main reasons why most fail.

Misconception of Trading

Traders think consistent profits means making money every day and winning every trade. This is a huge misconception. Consistent profits means successful in at least 70-80% of the trades and losses if any are limited.
This ensures they make profit in one financial year.

How Much Profit is a Good Profit?

Well as an experienced trader let me tell you an honest answer. If anyone makes more than 24% a year which is equivalent to 2% a month. So basically to achieve that you have to approximately make 3% a month so that the losses and brokerages if taken out you end up with more than 24% a year.

Now here is some calculation – 5 lakhs in 10 years will become approx. 54 Lakhs (5,382,581.00) compounded at 24% a year. Which means 10 times the money in 10 years. Compare this to fixed deposit of 6% a year. The money will barely get doubled.

So why traders fail to make even profit while trading? Because they target 10% per trade – that’s like climbing a mountain every time you walk out of the home. So what happens? They fail most of the times.

To make 10% per trade they make rash decisions, take spontaneous trades, take stop loss as soon as they see a negative MTM, or just go and trade anything out of frustration.

If they do the above how on Earth that 10% per trade is possible?

Date of post: 25-Feb-2019

Some reasons why there is too much volatility in the markets:

• Indo-Pak Tension – This could have tanked Nifty but luckily it did not break 10600, but created confusion in traders mind. It did go down but not too much.
• Tussle Between Government and RBI. This problem is going on since very long and I do not think this will get over soon.
• General Elections in Apr-May 2019 – This is a major source of volatility and will keep moving the markets till the elections are not over.

My advice is trade with the basics of trading – do not let the stop loss be violated. This means if you have decided to keep stop loss on certain point – it’s better to exit the trade at that point. And when it comes for time to book profit – just do that. Do not wait for more.

If you want to play safe my courses will help you. Please note that option selling is required so you must have at least 75,000 in your account to do my strategies.

Though 150,000 is better you can still trade with 75k – just that your profits will reduce.

There is nothing better than trading options with limited risk and without looking at charts and without giving too much time to stock markets yet make a monthly income – this will help you surpass results of many technical traders who scratch their heads in the morning everyday to find direction of nifty. Technical traders forget that Nifty is not a stock – it is an average of 50 stocks – so essentially they are doing technical analysis on 50 stocks combined not one. Is that possible?

Update: 26-Feb-2019

Is Volatility Killing You?

How long will you keep speculating in this volatile markets?

Today morning at 3.30 am while you were sleeping, several Mirage 2000 aircraft form the IAF dropped 1,000 kg bombs on terrorist camps across the LoC.

Why am I telling you this?

Because if you are positional trader you have no control on what is happening when markets gets closed at 3.30 pm. Yes trading gets closed but the world and its business runs 24*7 – it never stops. You do not have control over what happens when the markets gets closed. Something may happen in US and our markets may suffer. But today morning what happened has definitely given fear in the mind of traders so this happened:

NSE 26-Feb-2019 9.53 am

And have a look at India VIX:

India VIX 26-Feb-2019 10.04 am

I have a question for you – how long you want to suffer such casualty in trading? Yesterday Nifty was up by almost 80 points and today by the time I am writing this it is down by 102.25 points. I am sure many future traders must be long in Nifty futures after seeing a strong bull trend in Nifty yesterday, and today they are down by more than 7000 rupees. In one day 7k gone just because they are trying to chase direction.

But if the position is hedged traders can wait for the tide to turn in their favor.

Look at how hedging helps traders. Both mom and son in profits in future trading one long and at the same time one traded short:

Mom and son both in profit due to hedging

This is why hedging your traders and trading with proper risk management is very important in trading else it’s easy to lose all the money you earn in your entire life in stock markets.

Note: My Nifty Conservative Course and Bank Nifty Weekly Options Course will help you to earn monthly income without giving too much time to stock markets. Please note that they are non-directional strategies which means unlike stocks which can make a profit only if they go up – these strategies does not need a direction. These trades will make money irrespective of Nifty going down or up – month after month.

Look at a good stock like Tata motors – it’s going down since last one year.

Tata Motors From Feb 18 to Feb 19

An investor must be losing a lot in this stock – however unlike this with my strategies even if Nifty after one year will be at 9800 – you will still be in profit – and if it comes back again to 10800 you will still be in profit. This is non-directional trading. This is possible only with hedging.

If interested to learn the strategies (5 in Nifty course and 2 in bank nifty weekly options course) click here to pay the course fees. Please note that support of one year is also included in the fees. The support is also very important because when you chat with me I may tell you things that are good for your knowledge and way beyond the strategies in the course which itself is worth 10k.

Disclaimer: Although most of the time writing or shorting puts often produces better results than buying calls or holding a stock it comes with its own inherent risk. Please know the risk involved before shorting a put. I am not responsible directly or indirectly for any ideas or strategies written in this post or this website.

Selling options whether it is call or put is considered very risky proposition especially by new and novice traders. One reason is everywhere it is written in option trading books as well as in many online websites that selling options is an unlimited risk. This is true on paper but is there any rule that says if you sell and option you cannot close it before expiry?

If selling options, you can always (just like buying options) – buy it back to close the trade. The risk is over when a trader buys back the sold option.

Another reason why new traders do not sell options is that they do not know that you can actually sell the option first. They think that you can only buy the option and then sell. Margin block is also an issue. Recently there was an increase in margin block rule which has also taken away lot of traders from selling options.

Do not forget that buying options also comes with its own risk. Buyer of an option is running against time. Time value of an option gets eroded with time if there is no movement.

How brokers take benefit of increase in margin block rule:

A trader goes to sell a put option and sees that the trade getting rejected due to new margin rule. Earlier he/she use dot sell option easily but now the order gets rejected. So he calls his broker. They say due to less margin rules it is not possible to sell an option. The trader asks so what to do? The broker advises the trader to buy call option. The trader is happy and buys the call option. Well what happens next is not important – but what I am trying to say is that DO NOT go by what your broker says. Trade what you want to trade. Brokers do this for brokerage – but it is you who makes the final decision.

Option trading is dangerous for traders who buy and sell options without any knowledge or as pure greed factor – treating them like a lottery.

The term – Buying options is unlimited profit is misunderstood and used like get rich fast scheme in option trading. Both the terms “Buying Options is Unlimited Profit” & “Selling Options is Unlimited Loss” are only good on paper. Reality is in both the trader is at risk – it all depends on how he manages his risk.

The truth is options were created to hedge (risk reducing investment) the portfolio of fund managers mainly equities – but retail traders use this to speculate and gamble. This is where options are misused.

This is the reason options should be traded with hedge. If you trade them without hedge you may suffer huge loss.

When Should You Sell Put?

When you see a stock trending up since a few days and you want go with the trend then you have three options as a derivative trader:

1) Buy stock future
2) Buy call option
3) Sell put option

Buying stock future is very risky as if the stock moves down 10 points from where you have taken the trade then you may stop out taking a loss.

Almost same with buying a call option – or you may choose to wait as the risk is limited. But it is well known that most options expire worthless.

So the better option is selling a put.

Whatever the case you should keep a stop loss.

Conclusion:

In short even if the stock does not go up and stays there the put seller makes a profit however this is not the case with buyer of stock future or buyer of call option.

Here is the new change in future and option selling margin from 21-January-2019:

Change in F&O margins from January 21, 2019

Here are the official circulars:

SEBI: https://www.sebi.gov.in/legal/circulars/dec-2018/review-of-risk-management-framework-for-equity-derivatives-segment_41314.html

NSE: https://www1.nseindia.com/content/circulars/CMPT39766.pdf

There will not be any change in margin for option buyers. However if you are future trader or option seller – this might effect you. Mainly profits will reduce in terms of percentage on the margin blocked if you trade future or sell options.

Well there are a few things that you can do while trading options as a seller or trading futures:

• Try to scalp your trades: Scalping is an art where an trader calculates every expense in a trade like brokerage, taxes (STT), GST and of course short term tax and knows how much points he needs to make a profit after paying all the taxes. This is where he exits the position. For example let say in a trade 2 points are required for brokerage and taxes, he will try to exit in 5 points. This means he can take multiple trades in a day and come out good. Of course scalping is hard to do in positional trading. But its not that difficult. Its just that we target more profits and come out successful most of the times. My nifty and bank nifty courses teach exactly that. Strike selection, when to enter a trade, when to exit, how to hedge, adjustments if any required or hold without adjusting etc, everything is explained well.
• Trade with less number of lots: of course this is natural, if more money is blocked as margin then you cannot trade with the same number of lots as you traded a before Jan 21, 2019. Do not force yourself to trade with more lots by taking a loan or asking money from your parents or friends.
• Take less trades: Earlier you were able to take 3-4 trades in different stocks or index now you cannot do that. So reduce the number of trades you take at one time. When you have no other choice you have to trade less.
• Practice Intraday Trading: Less margin is required in intraday trading so try to trade intraday if possible. Of course if you have a job it gets difficult to trade Intraday, but whenever you can trade Intraday or just trade positional when you are more confident.
• Learn Hedging: In USA margin is blocked on the maximum loss in a hedged trade not more. India tends to copy US markets rules and regulations, so you never know when the same rules will be applied in India. Knowledge oh hedging will help you when such a rule is applied in India too. To give you an idea less than 25% of the margin blocked as on today (14-Feb-2019) will be done if the “maximum loss in a hedged trade” is blocked as margin. This will increase the volumes and of course you will get the first mover advantage of already knowing hedging the trades. You will learn hedging in my course.

The idea is not to get frustrated and force yourself to trade. Not take a loan or do anything drastic that will destroy your wealth. It is always better to make less in stock markets than lose money in trading.