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.

2019 Indian General Elections are due to be held in India between April and May 2019 to constitute the 17th Lok Sabha. Its obvious that a lot of speculative trading will happen from now until the results are declared. In fact for one month after the results are declared there will be volatility.

See this movement of Nifty last six months from October 2018 to February 2019:

Nifty Oct to Feb 2019

Nearly 1500 points drop from Sep to Nov 18 and then 1000 points surge in next 2 months. This is volatility. A 500 points up and down in a few months is considered stable stock markets – but 1500 move points is above average volatility. Be prepared for this for next few months.

So if you are a directional future trader life is going to be very difficult. You will never know when stocks or index will take a turn – I can only say be very careful with your traders.

India VIX will also be not stable so any guess work based on India VIX will also be futile.

Therefore you must learn to hedge any trade you take. Learn to limit your loss first – Profit is secondary in trading. Not making a huge loss ever is Primary.

Here are a few things you can do before the General Elections:

• Some stocks that were at their peak in August 2018 are now available at a discount. You can buy 3 or 4 companies’ stocks from different business sectors for short time of 3-4 months. If there is a run up to elections these stocks may perform.
• India VIX will keep increasing 30 days before the election start date and will drop after the results are announced. So if you are an option buyer you should take a long view not trade intraday.
• If you are an option seller be ready for slow premium decay due to increasing VIX at least until results are declared.
• If you are a future trader its going to be very though to find direction – even if you are right the stock may change direction at the drop of hat. Reason is pretty simple. Politicians will speak something in media and you will see its effect on the stock markets. The effect will be on a sector not on individual stocks. So its better you exit on small profits.
• Commodity trading also will be very volatile. Most political talks are on commodities so its price may get affected. You will see this volatility in commodity markets too.

Conclusion:

Its better to be safe for next few months. So exit at small profits – do not leave money on the table. Do not regret even if you could have made more. These are the times when keep your losses in check is more important than trying to make good profits.

The major reason why traders lose money is they make the same mistake over and over again. They do not realize that if you do the same mistake again you may get the same result again.

Here are two biggest mistake traders do:

1) Hoping of a reversal and not taking stop loss when it comes, and
2) Taking profits early in the fear of making a loss if you do not take out the profit.

Other Mistakes:

3) Averaging a losing trade : This is again a blunder. You should just take a stop loss that is all. Averaging a losing trade means you will lose more.

4) Adjusting a losing position : Well this does not only cost money but cost brokerages as well. Adjusting a losing trade is nothing but taking a loss in one trade and making another trade.

5) Taking Tips from unknown sources : In India unlike the developed nations advisory services are given by unknown people. It does not end here. They claim of making 3000 to 5000 a day (some claim 1.5 Lakh in a single trade) on investment of mere 50k is unfortunately believed by even the educated people. What happens next is a pitfall of losses. I have written a lot in my blog not to take tips. You can read this one as why taking tips will not make you rich.

6) Freely available YouTube strategies : Today no one wants to read. Everyone is interested in YouTube. XYZ makes a video – uploads it – you see it and take a trade based on that next day. Do you even think twice before taking the trade?

7) Reading a tip on a website and trading based on that. This one is silly.

If you can stop doing such mistakes you will become a better trader in 2019.

A trader has to take some important decisions when a trade is going on like to hold or not, buy or sell, exit with profit or with stop loss etc.

You cannot get emotional when you take such decisions. If you do not have good skills to take correct decisions you will almost always take bad decisions.

Make this year your goal to keep creating winning habits and keep away the losing ones.

Here is some more reality on why traders lose money when they start trading.

99 out of 100 traders do not know even the basics of stock markets. They just think that since they have invested money, they will make money. It does not end here – they start dreaming big like if they start with 10k investment they will end up with over one lakh in one year. This is 10 times the invested money – all that they dream of making in just one year. All this without even knowing the basics of stock markets.

After few losses they realize they are inherently bad at trading. Then a long journey taking tips and advisory service starts. Media and social media also plays a very bad role in the minds of traders. It is very common to see Telegram channels filled with thousands of subscribers where huge profits are shown on a stock. The traders who join these channels start believing the same.

Here is a trick to show great profits in stock future trading in Telegram channels:

Open two accounts. In one account short any stock. In other account at the same time buy the same stock future. Wait for a couple of hours. In one there will be huge profit – in other account same loss. So the Telegram channel operator loses only the brokerage but is able to take a great profit making screenshot and show to his channel members/subscribers. So easy. The subscribers get spell-bound by seeing the profits and readily pay upward of 30k for a course in some hotel with breakfast, tea and lunch. After they come out from attending the course they practice the same – but its obvious what happens next. They lose money trading the same strategy they were thought in the seminar.

Well I get calls from traders who have done many courses but yet are failing – so what I have said above is pure experience.

You can check testimonials in my site – this my customers are saying not me. Its obvious my customers will not take one strategy in one account and another strategy in another account and send me the profitable screen-shot. They will tell me what exactly they are making.

Despite what you may see on the internet, no one became a consistently profitable trader overnight. It takes a lot of time and effort to become a good trader.

In order to become a successful trader, you must have basic knowledge of how stock markets work, how options and futures behave, what are the risks involved, trade plan and lot of other things like risk management that a normal trader does not know. And of course you must have the psychology to conquer greed, speculative and over trading.

Here are some belief systems that you must change to become a good trader:

• The market owes me money today because I am a good trader I work very hard I know everything (ego)
• Everyone else is buying, so I will also buy (speculation)
• It’s not a loss until I decide to take loss (bad trade management)
• The market is manipulated by HIIs (blaming others for their own problems)
• I need to make back the money I just lost (revenge trading)
• I’m a terrible trader because I lost on on trade (decision based on just one trade not statistical analysis)
• I’m a successful trader because I put on a winning trade (decision based on just one trade not statistical analysis)

Here are some belief systems that you must have to become a good trader:

• The market owes me nothing, I need to prepare and learn to trade and earn (willingness to learn and no ego)
• The crowd is usually wrong, I will trade what my research says is correct (willingness to research and trade not copy)
• Taking small losses (when stop loss is hit) is necessary for profitable trading (trade management)
• The loss was my fault, not anyone else’s and I will not repeat this mistake ever again (taking the blame and learning from it)
• Wins and losses are randomly distributed, one win or loss doesn’t define a trader is good or bad (decision based on statistical analysis)
• No worthwhile result in life comes in one or two months – it takes years for real results to show (understanding that it takes time to make money in stock markets)

What you learn from the above is to accept responsibility for every trade. You have sacrifice short term pleasure for long term success. Remember that in trading (and in life), the more responsibility you take for your outcomes, the more you can control and improve them.

Please note that it takes some time to get our habits change. It takes on average 66 days before a new habit becomes integrated in our brains.

So if you have read the above article just now and start formatting these habits from today – you will not see any significant change in one day. It will take approx 2-3 months for the change to be seen.

Here is what you can do right from today – keep a stop loss of 5% on the margin blocked on all your next 10 trades.

Whats the max risk? 5*10 = 50% of your money gone if all the time your trades hits a stop loss. But this will have a major impact. You will always take a stop loss on 5% on every trade. Can you see how habits works like magic?

So if you decide the above you may have to pay a small price in the short term to eliminate a habit that could make it impossible for you to become a profitable trader in the long run.

Changing habits is a very difficult and long process, which most of us fail at. If it was easy, everyone would be rich and successful – if not rich at least happy in life. Do you know to be happy in life you do not need millions of rupees? If you can shed your ego you will become 50% more happy than what you are now.

Well I can write a book on how to be happy in life that will include a lot of things but lets leave it for another day.

Most of the people who set New Year’s resolutions give up by February. If you are reading this just tell yourself that nothing worthwhile is an overnight process – and help yourself to change your habits especially trading habits and see how you will change in next two months.

I am ending this post with the hope that you live a better life as a trader after reading this post.

Budget is tomorrow 1-Feb-2019 please trade carefully.

Read this article to know what you should trade on a budget day.

Important for option traders:

Do not sell options especially if you do not know how to hedge. And if you buy options please keep in mind that India VIX will keep falling thought the day as the budget progresses so option prices will not increase the way they normally do. In fact if the move is slow then option buyers may suffer a loss even if the direction is correct.

Suggestion for Derivative Traders:

I would suggest directional traders wait for the markets to take a direction then trade. No one is forcing you to trade, it’s better to wait for the correct opportunity to trade.

But if you still want to trade then try the long strangle. Please keep your stop loss and profit target in the system not in mind.

Those who have done my bank nifty course may do the future and option strategy in financial stocks except HDFC bank or any other stock that may move due to effect of budget. Do not jump into a trade – wait for the budget to get over – try to know its effect on different sectors – then choose a stock and trade.

Suggestion for Stock Investors:

For people who only buy stocks I suggest wait for your favorite stocks to react to the budget news. Some will fall and some will gain. Buy the one that you feel comfortable with – but only after the budget is over.

If you already hold any stock make sure to buy ATM put to hedge against a huge fall. Buy a married put only if you hold more than 3 lakhs of the stock.

Hope it helps you trade well on the budget day.

Have you ever done a course and got so much confidence that you are ask your mentor on how to deploy a capital of 8 lakhs with the strategies learned?

Here is one such customer of mine who is willing to do that:

How do you feel when you do a course worth a 5 or 6k and think about deploying 8 lakhs after see that these strategies work and can be compounded to make money month after month for your entire life?

Here was my reply to him:

This is his email in text if you found it hard to read on image:
==================
Hope you are doing well. Attached file contains the strategies I bought from you so far. I’ve used these strategies for some time and found them good (particularly Conservative Non-Directional Strategies on NIFTY options). Later I was not regular in applying these strategies month on month as I had to move my funds to another asset class. Now, I got 8 lacs capital to trade on these strategies and I would like to use this capital only for options strategies month on month. So, based on your views, feedback from your customers and based on the returns they have provided can you please suggest me which strategy I can deploy month on month. Also, are there any New or Modified or fine tuned strategies for above strategies I can consider?

I would like to use 3 lacs for aggressive strategies and 5 lacs for moderate or conservative strategies. Appreciate your help and guidance in this regard.
==================

My reply to his email:
==================

Nice to know you have made good profits from my strategies and taking the second step to success – trading with more lots.

3 Lakhs for Nifty Conservative

3 Lakhs for Bank Nifty Conservative

2 Lakhs for Bank Nifty Aggressive

Expected return a month from 8 Lakhs is 24k to 30k a month.
==================

Please see above how I have deployed the capital, giving more importance to the conservative strategies and less to the aggressive.

Note that aggressive strategies in the bank nifty course has high reward to risk ratio. Conservative ones have low risk and low reward.

So why I gave more importance to the conservative strategies? Because when more capital is at stake its better to first look at safety than the returns.

There is another point you should note that I have divided the money into three strategies and not asked him to trade only one strategy. The reason is financial management – Don’t Put All your Eggs in One Basket. I am sure you must have heard this phrase many times in your life or read it many times – but the question is DO YOU FOLLOW it?

If no you just got another reason why you are losing money in stock markets.

This is what happens – you win in one trade and double your stake in next. If you win again you triple your capital. But this time you lose. Now to take revenge you take another trade with four times the capital. Even if you succeed one one revenge trading it will not bring back all the money you lost. This can bring in mental issues. This is the reason I emphasis on hedging all your trades so that even if you lose money it will be small amount that will not bother you much.

Its really frustrating to bounce back from bad trading but its not impossible.

Here is another trader looking to trade 15-20 lots in Nifty using my rare loss strategy:

Here is my reply:

Now some words on risk management and why its important. Well financial risk management is not only limited to trading but to whatever you earn in life from your job or business. I follow the 25-25-25-25 rule that you may check here – now to follow it or not is your choice but at least make a rule that is comfortable for your lifestyle and earnings vis-a-vis your expenditure and savings.

Here is an important advice for HNI traders (High Net Worth Traders)

By high net worth I mean at least 7 Lakh and above. Yes some people trade with 10 Lakhs or more but I feel anything above 7 lakh comes under above average trading account.

Here are some rules that a high net worth trader must follow:

1. Never enter a trade without any plan. You have high risk at stake – you should not trade just to trade because you have a lot of money. You should know why you are taking a trade.

2. Do not trade with all the money in any one trade. Limit it to 25% of your entire money. Now even if you lose 10% of this money you lose just 2.5% of your trading account. This is manageable and you will be able to stay in the game for long. I have nothing more to say on this – its explained well above. One loss in a single trade will bring your account back by a big percentage.

3. Depending on the trade set up you may increase or decrease the risk. Here is some explanation. For example if its an Intraday trade you may increase the risk if you see that you are good at it after some practice. But if you are taking an entirely new Intraday trade with different set ups – then reduce the risk unless you get comfortable in the new set up. Do not forget to put the target and stop loss in the system.

4. Depending on the trade set up you may increase or decrease the risk. Hedge your positional trades. Naked trading without hedge that too positional derivative trading is equal to financial destruction. No matter how good trader you are – you cannot do anything with the gap up and down the next day. Its only the hedging – a proper hedging that will save you from huge losses.

5. Never do revenge trading – its a pitfall from where you will never recover. Trader with a lot of money have a lot of ego too. Once they make a loss they bring more money to the table to take revenge on markets and make more. Well they lose more. Revenge trading a never ending loophole of losses. Its better to take small profits consistently on small capital rather than try to make a big home run of profits.

Conclusion:

HNI traders or traders with large capital have more responsibility than traders with small accounts. One mistake can cost them a life time of pain. So if you are a trader with huge capital you must ensure you are trading with your brains not your heart. Speculative trading, trading without hedge, trading on tips, and trading without planning is a big no no.

Part of my newsletter to my subscribers dated 29-Nov-18

I have written this before that Nifty and India VIX are inversely proportional. Today I want to just write again because it has again proved that they both are inversely proportional.

See last 3 months graph of India VIX and Nifty – Source: MoneyControl.com:

Can you see from Sep to Nov 18 India VIX kept on rising and Nifty in the same period kept on falling?

If you read my emails thank you. Hope you remember what I said on 27-Nov-18 that Nifty at 10600 is looking very strong and at the time of writing this email on 29-Nov-18 Nifty is at 10824.25.

Nifty 29-11-18

Here is the image of my email on 27-Nov-18:

Email dated 27-11-18

This is good – but what next?

Now Nifty has reached a point where it gets difficult to guess where it will go. So the best way out is hedge your directional trades too.

See this testimonial of the Nifty course directional strategy – where a trader learns to hedge a directional trade:

Results may vary for users

Rs.12,500.00 profit is a single trade on just 2 days on 1 Lakh margin block. 12.5% ROI.

Hedging is a beauty – it saves you when you are wrong and it keeps you strong when right. And of course if you want stay away from trading direction you will also learn the non-directional strategies in my course.

Naked trading is dangerous, it can ruin your wealth. You cannot win every-time – when you lose it takes away whatever you made in last few trades. For overnight protection hedging is very important.

Good news is India VIX is falling down after being near 19 in last two months.

You can see India VIX here. Please note that India VIX will change when you see. When I was writing this post it was near 17 falling from 19 a few days back.

This means that Nifty will become more stable now if India VIX does not increase.

Let us hope for the best.

Do you see India VIX and trade or you just trade on hope? Do write in the comments section below.

Traders who short options profusely have a misconception that over 80% of options that are traded expire worthless. Let us see option chain for Banknifty expiring on 22-Nov-18.

Option Chain Banknifty 22-Nov-18

Source: https://www1.nseindia.com/live_market/dynaContent/live_watch/option_chain/optionKeys.jsp?symbolCode=-9999&symbol=BANKNIFTY&symbol=BANKNIFTY&instrument=OPTIDX&date=-&segmentLink=17&segmentLink=17

Please note that the options colored in yellow are all In The Money (ITM) when this screen-shot was taken at 1.02 pm on 19-Nov-18.

So lets use some logic. Suppose even if 80% of the call options that were traded for this expiry, expire worthless – in that case 80% of the put options will not expire worthless and will be In The Money (ITM) on the expiry day.

Therefore its a misconception that over 80% of the options expire worthless.

Another interesting note – can you see that at the bottom its written – Note : 10% interest rate is applied while computing implied volatility. So it looks like to keep the calculations simple to arrive at the price of options. Implied volatility is one of six inputs used in an options pricing model. The inputs used in an options pricing are known as Option Greeks which you can find in this pdf file. Download and read.

Yes it is a fact that most professionals, high net-worth individuals mostly sell options to take benefit of time value and the thinking that 75-80% of options expire worthless, but that does not mean all of them expire worthless. It depends on what options you have sold.

There is another reason high net-worth individuals sell options – can you buy any option worth a crore knowing very well that one crore may become ZERO within few days/hours? Putting that much money at stake to make money is very foolish – so they mostly sell options.

Fact is naked selling or buying options, both come with risk. A trader must learn to manage risk.

For example selling options as a measure of covered calls is also ok, still the number of stocks must match the lot size of the option otherwise the trade becomes a bit risky. Covered calls is selling naked options against stock holding in your demat account. Please note have not said trading account. Well a trading account is used to place buy or sell orders in the stock market. The demat account is similar to a bank where shares bought are deposited in, and where shares sold are taken from out of your demat account.

And buying options are better used as married puts to save losses from stock crashing. But its very important to know the loss that may arise if the stock doesn’t crash. Married puts are put buying to save losses due to a crash in your share holdings.

At least in the above examples it makes sense to sell or buy an option but just selling naked options or buying naked options is very risky.

Sellers sell option thinking 75% options expire worthless and buyers buy options thinking option buy is unlimited profits. Both of these are wrong.

Writing covered calls is a good strategy for high net worth individuals who have a lot of stocks in their portfolio, but risky for traders with less stocks.

In India not much research is done on how many options that are traded expire worthless but research has been done by OCC – The Office of the Comptroller of the Currency (OCC) is a division of the U.S. Treasury. A research done in the year 2015 by OCC found that options held and allowed to expire worthless till expiry was 21.7% only. Plese note that in US the volume is very high in options trading. And moreover US traders are more educated than average Indian trader. So I am sure the data must be same in India too.

I hope you understand an accurate data suggest that only 21.7% options expire worthless. Please note this data is combined data of Calls, Puts, Index and Stocks.

Even If 75% of Options Expire Worthless – The Data is Not Correct

Let me start with open interest (OI). A lot of traders look at open interest (OI) to decide the options to buy/sell, but what they do not know is that open interest (OI) keeps changing every minute. So let us take an example.

On 29-Nov-18 the November 18 series options will expire. Assuming that on 28-Nov-18 (one day prior to expiration day) open interest (OI) was 150 and on 29-Nov-18 the open interest (OI) was reduced to 50 and with time as the expiration time comes closer it gets reduced further. This means that a lot of options DID NOT expire worthless but were CLOSED. Note that on the expiry day only those options expire worthless or remain in the money (ITM) which were left to trade on the last day of expiry. This means we are measuring only a portion of the options that expire worthless of the total options traded. This clearly means that whatever percentage of options expire worthless is a flawed data.

So people who claim that over 75% of options expire worthless either do not know that they are only talking about a portion of options traded or just want to hide this fact.

Fact is that a high percentage of the open interest (OI) that remains to be traded or were not closed until expiration day expires worthless. This is a very different number than the total open interest right from the day the trading began in that expiry.

After I sent this post as an email to my subscribers someone wrote me back that only 50.02% option expire worthless:

I can understand his thinking. Call options – any option strike above the current strike on expiry day expire worthless and any strikes below the current strike expire in the money, and vice versa for put options. Well this is the common belief. Fact is something else.

Note that only those options are counted that were not closed on the expiry day. It is not just the strikes but open positions that did not get closed and expire worthless are counted.

Say for example someone closed their position at 0.50 and that was the last option trade on that strike – then it will not be counted.

Lets assume an impossible but a technically correct thing. Lets assume in Nifty on any expiry day if everyone closed their option trades anytime before the markets close, then 100% of options will be considered NOT expiring worthless neither expiring In The Money. Its just that all options that were traded were closed.