NSE – National Stock Exchange of India Ltd –  Has gone from 8,083.80 on 03-Apr-2020 (Covid Era) to 23,851.35 today (26-Jun-24):

What’s the increase?

It is an increase of 195.05%. All this in just four years.

In the last year from June 23 to Jun 24, it has given a return of 27.63%.

An experienced investor will understand that this will NOT sustain.

In the future two things may happen to the Indian Stock Markets.

• It may fall by a minimum 5% to max 10%, or
• It will be range-bound for another 12 months.

From where the money is coming?

It is the Mutual Funds.

The assets managed by domestic mutual funds (MFs) rose by 34 per cent during 2023-24 (FY24) — the most since 2016-17 — propelled by a sharp rally in the equity market and robust inflows.

For the three months ended March 2024 (Q4FY24), the average assets under management (AUM) stood at Rs 54.1 trillion compared to Rs 40.5 trillion in Q4 of 2022-23 (FY23), according to data from the Association of Mutual Funds in India.

Source: https://www.business-standard.com/markets/news/domestic-mutual-fund-assets-jump-34-in-fy24-the-most-in-seven-years-124040400938_1.html

So nothing looks suspicious now, but these kinds of returns cannot be sustained for long.

Why the stock markets can get stagnate or fall?

Most of this influx is from short-term investors. Once they start booking profits the markets will fall.

Or they will stop their SIP investments, and then the markets will get stagnant.

You see for the markets to keep rising money has to keep coming. But we need money to live a life right? One day or the other in the near term that day will come when we will see a fall or an elongated and very boring stagnancy in the markets.

When the markets start falling the non-directional options traders have nothing to lose. But most of the directional trades especially those who will be long in the markets will suffer.

You can do my conservative option course and learn non-directional option strategies and make approx 3% a month.

When a trader thinks that a stock will go up they can:

1. Buy the stock, or
2. Buy its Call Option, or
3. Buy its future. Or
4. Sell its Put Option

Similarly, when a trader thinks that a stock will go down they can:

1. Short the stock (shorting the stock is possible intraday only), or
2. Buy its Put Option, or
3. Sell its future. Or
4. Sell its Call Option

In this article, I will discuss when you should buy a call or a put option. I have explained in my blog that buying an option means you are racing against time. It doesn’t matter if you are buying a call or a put option. Once you buy an option, you are racing against time.

Read below to know when you should buy a call option.

The expiry should be at least 30 days away.

This is very important. If the expiry is very near, then the option’s premiums will start decreasing very fast. The premium decay will be so fast that you will not be able to exit the trade quickly or exit the trade with a profit unless, during that last period, the stock moves rapidly up. Usually, it will not happen because during the last couple of days before expiry all the buyers and sellers create liquidity. The liquidity is so much that the demand and supply remain the same, leading the stock to move down or remain in the same position.

When the expiry is 30 days away, at least for the next 10 days, the time premium value, a.k.a. theta, does not erode too much. So try to exit at least 20 days before expiry if you bought an option.

If the INDIA VIX is below 15 the option premium will be less than average, if it is between 15-20 then the option premiums will be average and if the INDIA VIX is above 20 then the option premiums will be above average and will keep increasing with the increase of INDIA VIX. So decide accordingly.

The benefit of a low VIX is that you will get options at a low cost so the risk will be less, but if the VIX is high you have to pay a high premium to buy an option on the other hand, it will lower the risk as a high VIX will indicate huge movement which may lead to a profit.

However, in most cases, you will know why INDIA VIX has increased. It will be mainly due to an upcoming political event like elections an economic event like budget or geo-political events like a likely war or an attack by another country.

Once the event is over there will be a sudden drop of the INDIA VIX within 2-3 working days. You must exit the bought options before the event ends, or else you may suffer a huge loss as the option premium will erode quickly. In such cases even if you are right in direction the premium erosion will eventually negate the delta increase so you may not get the desired profit or suffer a loss.

Do not buy ITM options, ATM options or Very Far OTM options:

In The Money (ITM) options are very costly. They behave like Futures. If right in direction they will make a good profit for you, but if wrong in direction the loss will be huge.

At The Money (ATM) Options have the most time value and therefore face the fastest premium decay.
Very Far Out of The Money options are cheap but most of them expire worthless as the stock never reaches there. In ten times you will make a profit one time. They are very tempting to buy for their low price – but rarely do they give profit. So better avoid them.

Therefore buy slightly Out Of The Money (OTM) options – 2-3% far. They are not costly and they give good profits when right in direction, and less loss when wrong in direction.

Find intrinsic value to know if the option is overpriced or underpriced – then do this:

Earlier it was difficult to find the intrinsic value of an option as a lot of calculations are involved in the Black & Scholes model formula to know its intrinsic value, but nowadays your broker will display an option’s intrinsic value.

If the price of the option is above the intrinsic value then it is overpriced and needs to be sold. If the price is below the intrinsic value it is underpriced and needs to be bought. This is an important factor when deciding whether to buy or sell options.

However, depending on just the intrinsic value is not an ideal way to buy or sell options.

There is no need to bother about single-day gains or losses in the stock markets. A single-day stock market loss or gain has no impact on long-term returns. Read below to understand better.

This is what happened on Tuesday, 4th of June 2024 – the day the General Election Results 2024 were being declared and the ruling party (BJP) was not able to garner seats as per their expectations. The markets had a great run before the results day because almost every exit poll in the country gave a clear majority to the current government.

But when things did not go as expected mayhem followed due to panic selling. This is what happened on that day:

Why it happened?

Because 70-80% of the investors (not real data but my assumption based on my experience over 20 years of investing and trading) are short-term investors (people who invest in a stock for a few days to make quick money), these are the people who panic and start selling. Then what happens is called the hyperbole effect. Media comes in and starts shouting on top of their voices – markets are tanking and investors are losing lakhs and crores. The novice investor sees this and in a panic sells his stocks.

Tip: Do not see live business news on TV or YouTube. I have stopped seeing it for years. Instead, read business news in newspapers online or offline. They have limited space and therefore cannot exaggerate news. Plus reading doesn’t make you panic, seeing live news does. Moreover, newspapers report the news the next day – by that time you have already avoided a situation which could have made you panic and take the wrong trade.

Most Important Advice: Do not sell a stock because everyone is selling based on news even if you by chance see it live on TV. Sell a stock only when you want to book profit or the company’s fundamentals have changed and it looks like it will take a very long time for the company to correct its fundamentals.

On that day (4th of June, 2024) this happened in terms of money:

The All India Market Capitalization index, tracked on the Bombay Stock Index, lost over 31.06 trillion rupees, or about $371 billion on Tuesday, June 4, 2024 alone. The losses meant the Sensex index erased all its gains this year in a single day, going from a 5.85% year-to-date gain on Monday to a 0.22% loss position on the next day.
Source: https://www.cnbc.com/2024/06/05/india-stocks-erase-over-371-billion-after-bjp-disappoints-in-elections.html

But who lost? Only those who sold their holdings in loss, not those who sold in profit. So please do not look at these numbers. These numbers are calculated based on overall index market capitalization (03-Jun-2024 close minus 04-Jun-2024 close multiplied by total market capitalization). This is not the total loss got by adding all the losses in each demat account. This is simply not possible but that data is very interesting and important. The real loss of investors will be much smaller than what is shown in the media.

Similarly, the markets gained by many trillion rupees the next day which does not mean that everyone who holds stocks in Indian markets made a lot of money.

Unfortunately, gains are never highlighted by the media – only the losses are blown out of proportion which gets them TRP (Television Rating Point) which in turn gets them more advertising revenues i.e. money. When this happens the business channels on TV and vloggers on YouTube make money – the investors who listen to them lose heavily.

Therefore I repeat the advice I gave above – Do not see live business news on TV or YouTube. It’s noise and it is better ignored.

Here is proof of why a single day’s gains or losses in the stock markets must be ignored. As of writing this post Nifty 50 has given a return of 6.67% from 01-Jan-2024 to 07-Jun-2024:

Nifty 50 returns from 01-Jan-24 to 07-Jun-24

Therefore you should ignore stock markets’ single-day losses or gains. It does not impact the long-term investors. The best way to avoid making panic trades or investing decisions is to stop seeing live stock market news on TV news channels and YouTube.

This is a copy of my newsletter sent to my subscribers on 01-June-2024. This was when General Elections 2024 were being held and the counting of the results was done on Tuesday – 4^th of June 2024.

It is bizarre that India VIX ended at at 24.60 on Friday – 31st May 2024, and is likely to cross 25 on Monday – 3^rd of June 2024 – but still, it is strange that the kind of volatility Nifty/Sensex should show is missing.

Nevertheless, you should be careful.

Here are a few things I have been telling you for the last few days which I am writing again to remind you so that you take action and save yourself from big trouble:

• Book partial profits in the stocks that are in good profit. you can of course re-entre after the 10^th of June 2024.
• Reduce the lot size of your trading in options and futures.
• Put a stop loss in the system to manage the volatility. This broker allows for keeping a target or stopping loss in the trading system. Once one gets hit, the other gets cancelled automatically. Also, they do not charge any brokerage to buy or sell stocks.
• Do not over-trade the next week i.e. from the 3^rd to the 7^th of June 2024. Stock markets are known to be volatile for a few days after the results.
• Do not buy any stock if you see them going up – the lure of buying a stock when they are shooting up due to a speculative rally may backfire. They will soon come down when the people who bought early start selling and booking profits.

General Election Results will be declared on Tuesday, June-04-2024. On that day the markets will witness huge swings up and down. I have already given you a trick to trade on results day. It takes the benefit of huge swings up and down.

But that was for option traders. What about investors if they see their stock value plunging by 20% or more?

Here is what they should do:

Do not panic. Historically the stock markets have swung back to their original position in a few months after a crash. The Indian markets reacted negatively just after the 2004 election results, but as time passed, the negative returns turned positive. If a crash happens after the results, it will not be any different this time. So do not sell your holdings in a panic. But if you know that you may panic and your stocks are in good profit then book partial profits and keep the money safe.

If your motive was short-term profits then book profit, and wait to reenter.

General elections will happen every five years so there is no point in taking out a microscope and keep reading news related to your stocks – it won’t help.

The market is full of investors and traders who trade based on predictions and speculations and on the results day it will double. This means those who trade rarely will also jump into markets to make some money.

The best way to avoid all this is to ignore all the noise. Just like nature – after a few months/years a storm comes and destroys nature. We then reassemble ourselves and start living a normal life again.

Bottom line:

Invest in equities only for the long term. Long-term is more than 5 years. Stick with your investment plan and do not alter it because of short-term market movements, like the elections or any other event.

Do not try to time the market it will lead to losses.

Of late, I have been getting a lot of WhatsApp messages and emails on what to trade on the expiry day. I can understand the eagerness to make money, that’s good but no one is looking at the other side of the coin.

The Risk Involved!!!

One thing is certain you will not make 1 lakh profit on the election result day, not even 50k, even 25k looks impossible… probably 2k to 3k is what you will be able to make. Is that justified against a huge risk of all the margins blocked for the trade?

I mean on that day (General Election Results Day – 4th of June 2024) – the real joy is watching the Television News Channels showing the voting numbers, analysis, chat shows, winners and losers candidates etc, not trading to make or lose 2k.

I do not see any fun even for a man desperately needing money to trade on the results day. Some days the risk factor is so high that it’s better not to trade.

You can easily guess the risk factor by looking at INDIA VIX which is currently at 22.86, well above normal (17 or below).

The higher the INDIA VIX the higher the risk.

What to Trade on General Election Result Day 2024?

Here is one trade that can be done if you cannot stop the urge to trade on Tuesday, 4th of June 2024 – General Election Result Day 2024.

Make sure it is Intraday only as INDIA VIX will most probably fall more than 10% intraday which will in turn crush the theta (time value) of the options by more than 10%, however, the delta will still be there so a small risk can be taken.

Here is the trade:

Buy a 5% up Call Option and a 5% down Put Option of any volatile stock or Index not expiring in the same week. This means the options you buy should expire only after 4+7 = 11th of June 2024. Keeping a few days in hand will ensure that theta decay will not do too much damage if there is no movement.

For your information, theta (time) decay is most of the options that expire first from the day you are trading.

Do not sell options or trade futures on the result day. The movement will be hard to manage.

What to do next?

Book profit on the side that gives 20% return then wait for a bounce back or keep an SL (Stop-Loss Order) for that side of double the profit you made. For example, if you made 2k on the call side, then kept an SL of 4k on the put side or exit at cost to cost.

Do not try to make a profit on the side which is open. Just exit at the cost you bought the option.

Do it early in the day else you may miss the profit on one side which will make the trade difficult.

So with this trade, you either make 2000 or lose 2000. That’s it – no extraordinary effort is required. Let me guarantee you one thing if you try to be smart on that day using any technicals, you will end up losing money.

Some days are just not meant to be traded. Even the best technical analysis will not be able to give you any high-probability signal to trade. If you still want to trade on the results day then I have given you a good idea. Please do not mess with the idea given above. Just try it and be happy with the outcome.

Hope that helps.

Disclaimer: The above is not an advisory service. It’s just a trade idea with low risk. 

You can also read:
Should you stop investing when the stock markets are all-time high

I am sure a lot of investors must be thinking they should invest now or not since Nifty has already touched 23,000 – its all-time high.

The problem is not with reaching 23k but this was too fast too soon. From 18k lelevs to 23k. This is an increase of 23.70% in 12 months as of 25-May-24.

Will this sustain the next 12 months also? I feel no. Stock markets usually give a return of 12% a year on average in the long term.

So is a fall imminent? Yes, I can’t tell exactly when that will happen but one thing I can tell for sure is that Nifty will not sustain these kinds of returns in the long term.

So what will happen now? It may fall a bit or go up a bit (the win of BJP is already factored in the markets), but if they lose hell will break. At least a 15% fall is sure.

What’s the best thing to do when the stock markets are at an all-time high?

• Book partial profit in the stocks you hold.For example, if you hold XYZ 100 stocks bought at Rs.50 now at Rs.75 then sell 40 at Rs.75 and keep the 60 stocks in your demat. This is called profit management.If after the election results the stocks you hold go further up it is ok you can book partial profits again but if it comes down you can buy it back or buy some other stock of your choice.
• DO NOT stop your SIPs (Systematic Investment Plans) in either stocks or mutual funds.
• The stock markets will keep increasing forever because some or the other stocks will go up – they will influence investors to keep buying other stocks. This cycle is never-ending. Therefore if you feel like buying more stocks, do buy but make sure you have done due diligence before buying. However, I would still suggest booking partial profits when the stock markets are at an all-time high  – and letting your SIPs continue.
• Stop Derivating trading (Options and Future trading) at least till the General Election 2024 results are out and a few days have gone by. Let things settle down and then trade when INDIA VIX recedes below 17. Right now it is at 21.71.
  It is expected to go up till the 4^th of June 2024 – the day General Election 2024 Results will be out. Wait for a few more days – 5 trading days – then start trading. If you are an exceptional trader then trade with 50% of your normal capacity. The next 15-20 days of less profit will not make much difference to your life. However, increased volatility will be hard to manage if you trade with a higher number of lots. The psychological impact can do the damage, not your trading skills.

Lastly, All-Time-High is just a temporary phase. Stock markets are known to give returns of 12% on average over a decade. But it doesn’t work like a fixed deposit. Stock markets go up and then down. If they do not breach their All-Time-High they will never be able to generate 12% a year on average.

So the final answer to the question – Should You Stop Investing When The Stock Markets Are All-Time High? Do not stop investing. However, if you are scared book partial profits but do not stop your SIPs or the monthly investments to create wealth over the long run.

INDIA VIX has increased by 54.09% in the last month. It is up by nearly 70% from 10 to 17 in the last few days.

Finally, the election factor is playing out in the market in full swing. I expect more upswing in the coming days probably up to 25.

I have written this earlier too so why am I writing again?

It is because INDIA VIX has gone above 17. Below 17 is considered a normal zone. But over 17 is considered a very volatile market or indicates some huge volatility coming shortly. This is true – the General Elections are ongoing. The 4^th of June will be the D-Day when the results will be out.

Technically and even historically on this day, INDIA VIX should be the highest. This time however things are different.

Indian markets have already factored in BJP’s win in this election,  however, if they lose INDIA vix may shoot above 25 and markets will witness a huge fall.

In a fall usually, the retail investors suffer the most, not the HNIs. They have a cushion and sell only a part of their holdings. Retail investors sell their entire holdings.

If you are reading this please do not make this mistake. Be strong in a fall and have control of your patience. These times teach you more than the easy times we have seen last year.

Date of posting: Saturday, 04-May-2024

Should You Sell In May and Go Away?

The selloff on Friday, 03-May-24 was so broad-based that two of every three stocks on BSE were trading in the red and nearly 247 exchange-listed stocks had hit their respective lower circuits, with investors losing Rs 3.21 lakh crore.

Take a look at the fall. This is the screenshot of EOD – Fri, 03-May-24:

BSE – EOD – Friday, 03-May-24

Interestingly this is the month of May and the saying Sell in May and Go Away is trending for obvious reasons.

Just Google and you will see that market analysts have also started saying this – some for and some against:
https://www.google.com/search?q=sell+in+may+and+go+away

This is the screenshot of the Google search “sell in may and go away” on Saturday, 04-May-24:

Note: The results may differ if you search a few days from 04 May 2024 or in some other month.

Now, have a look at INDIA VIX EOD – Fri, 03-May-24 – it increased by 8.72%:

INDIA VIX EOD 04-May-24

The increase in INDIA VIX is not because of May but due to the ongoing General Elections. I have already told via my newsletters that whenever some important political event happens the VIX will increase till the event is over. This increase is the effect of the General Elections.

Did you notice that stock markets fell and INDIA VIX increased on the same day? This again proves that Stock Markets and INDIA VIX are inversely proportional.

My View:

I have had enough of so-called market analysts. I used to read their analysis a lot – and then realized that learning from your own experiences is better. They are sometimes correct and sometimes wrong. It is their job to say something on the market and therefore they say. So it is not a good idea to depend on their views and make investment decisions.

My suggestion below is based on how stock markets work (the reality of stock markets) and what investors and traders should do.

What Should You Do?

For investors: Ignore the analysts. If you have bought some stocks for the long term – do not sell. For the time being, think that Warren Buffet is your analyst and just copy him. Of course, if you bought the stocks for the short term then sell them only if they are in at least 10% profit. Yes even for the short term your target should be to take away at least 10% from a risky investment – else why should you invest in the first place?

For traders: On 03-May-2024 India’s VIX increased by 8.72%. This is a signal of an increase in volatility where markets become unpredictable. So reduce the lot size and trade until this political event (General Election 2024) is over.

Note: If you are reading this post after the General Elections 2024, the logic of how the stock markets work will remain the same. If any political event is coming the VIX will increase and you should reduce the lot size and trade. Once the political event is over the VIX will normalize and the markets will also normalize, and you can resume normal trading.