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When a trader begins option trading they are bugged by payoff charts and diagrams. They try to know everything possible under the sun and try to make money. This is mainly with highly educated option traders.

By educated I mean traders just passed out from colleges who have access to smart phones etc. No there is nothing wrong in reading about options or futures or payoff graphs, Greeks etc., but having a wrong assumption about it is wrong.

What is a Payoff Diagram?

A Payoff diagram is a graphical representation of the potential outcomes of a option strategy. What can be the profit or loss and sometimes the success percentage of the strategy. It gives a visual representation of the possible outcome of a strategy if played at that time on a stock or indices.

A lot of Option traders rely on these payoff diagrams to plan their trades. It also helps them to evaluate how a strategy may perform over a range of prices, thereby gaining an understanding of potential outcomes.

But is a payoff diagram really helpful? I will discuss in this article.

Here is an email I got from one of site visitors:

The Email:

Hi Dilip,

I want to deploy more capital and earn consistent income from trading option strategies. And I am under the impression even after a trade is placed, you need constant adjustments to minimize your loss or maximize your profits. And for that you need knowledge of Greeks etc. Otherwise adjustments will be difficult to do.

Am I correct ?

Thanks.

Read this article to see how by just investing Rs.10,000 could have made any of your senior relative, one of the richest man in India. I am sure at that time the payoff graphs for investing in ITC and WIPRO might be same as investing in any other company – one straight line – which is same as buying any stock. But payoff worked wonders for these two stocks only – for the rest payoff charts and diagrams failed.

I know you must be thinking that payoff does not work for investing – it’s for options trading only. You are right but I am trying to give you some logic.

Here is the payoff diagram of the most dangerous trades done intraday/positional everyday by day & positional traders – the ATM Call or Put option buy according to their views:

The Long Option Payoff Diagram/Chart:

Long Call Option Payoff Diagram

The chart says: Limited Loss Unlimited Profit

But what is the FACT? This happens rarely – 80% options expire worthless.

But still a lot people rely on payoff graphs and take a trade. The result is known to them only after the trade is over.

Please remember – once the trade is over the stock takes over. Its now in the hands of the trader to take a profit or loss anywhere he likes. Now a payoff diagram is a trash/worthless.

Let me take another example. Make a payoff diagram or chart for Nifty Future buy and sell.

Both will be same but one payoff diagram will fail.

Don’t go for things that will confuse you. Blindly following anything is a mistake in stock trading.

Does Adjustments Work?

Fact is traders who keep adjusting their trades according to payoff charts or diagrams or any of the Greeks are bound to fail and make their brokers rich.

When automated trading has failed badly in the US how on Earth adjustments manually will work?

Read these articles to see how Automated adjustment trading has destroyed wealth:

The 7 worst automation failures

High-frequency trading and the $440 m mistake

That’s $440 million gone.

I have never seen a payoff diagram ever in my life. I have never adjusted a trade. Its either profit or loss for me – but I never panic and do any adjustments to a trade as I know all my trades are properly hedged – so why bother?

Adjustments Will Cost You Brokerage

Option Greeks will change for every 50 points move in Nifty. So for every 50 points move the trade will exit one position and get into another one. This is not free. He has to pay a brokerage for that and is it really an adjustment?

By shifting the trade he either took a profit or loss in the earlier trade. In most cases its a loss.

Basically he took a loss in one trade and entered into another trade. Where is adjustment?

Adjustments Will Give You Stress

As soon as the stock moves away – the trader will check option Greeks ans the stress follows. What to do now? Adjust? Ok done. Stock moves again. Stress for the trader. What to do now? Adjust. 🙁

While the broker will bless him a lot. 🙂

Adjustment is a psychological myth for a trader. Its the most foolish trade in the world.

Adjustments Will Cost You Brokerage

Conclusion:

  • Do not get stressed by looking at payoff graphs. If you have done your research and you are sure you want to take the trade – go for it. Payoff diagrams or graphs will only add to your confusion.
  • Set a target for profit or loss – do not disturb the trade in between or try to adjust the trade. Profit and loss is part of the game. Learn to be successful 80% of the times. Hedge your trades to minimize losses. This is more than enough. Most of the times you will get your target without paying for too much brokerages or getting too much stress.
  • If you hedge your trades – once the trade is done the max profit and loss is written on stone, so why bother about other things which are irrelevant.
  • Do not deep dig things – stick to the basics of trading you will win. By deep digging you will only confuse yourself.
  • An expert in Option theory is only expert in option theory – theory does not make money.
  • Payoff graphs looks beautiful when a trade is done based on that, but once the trade is over the payoff graph is a dead object. This people do not realize.
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    According to most Technical Analysis Indicators, Nifty is now in a sell zone.

    Moving averages for 5, 10 and 20 says STRONG SELL, however 50 and 100 says BUY.

    So basically you can go short on Nifty for the short term. Success rate is 50%.

    Why am I saying only 50%? Because this is what are Technical Indicators.

    Technical Analysis Indicators Change Every Hour Every Day

    They may also change EVERY Minute, Hour, Day or in a jerk due to the news.

    We are not computers that we will keep automatically checking Technical Indicators every second or read news every minute. We have better jobs to do than to stick to our monitors and keep trading and keep changing our positions.

    That’s simply not possible.

    Therefore it is always better to be a non-directional trader.

    What is non-directional trading?

    Well before I explain that let me tell you something. 80% of all directional options trades expire worthless. Rarely anyone buys In The Money Options as it is equivalent to futures trading, except loss is limited but In The Money Options are very costly so most traders buy Out of Money Options. OTM options 80% of them expire worthless.

    Hope I am clear now – this means all the money becomes ZERO.

    Non directional trading is different.

    Irrespective of a directional bias the trader takes a call. He does not know if the stock will go up or down but he still makes money.

    Yes this is non directional trading. Whether the stock goes up or down the trader makes money. Since they do not have to take a directional call they are TENSION FREE unlike directional traders who have to take a call based on either tips, TA, speculation or news.

    For how long will they make money if only 20% chance is in their favor?

    Over the years, I have learned how to exploit this non-directional trend and put the 80% on my side, buying and selling options in different trade structures allowing me to create income streams for my clients regardless of the overall market conditions.

    This is called non-directional trading and is meant to profit from the way options are made. Actually for what they were made to profit from and of course hedge them with options.

    You can also learn non directional trading and profit 80% of the times irrespective of the direction. In fact even after 100 years if Nifty is between 10000 and 11000 you will still make 3% average a month from these trades.

    You can do this course and learn non-directional strategies.

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    Today (Friday, February 23, 2018) is the first day of Mar 2018 derivatives (F&O) expiry and I am sure you will start with a “new plan”. Most speculative traders start their speculative strategies today. So what is you plan? Buy which Call or which Put or sell which Call and which Put? May I know why are you doing this trade? If your answer is “I think so”, then sorry to say you are gambling, not trading.

    How many times you have lost money because you took a trade based on “I think so?”.

    You have only 34 days to be correct (Mar 18 expiry is on 28-Mar-2018) – but what if not? I know then you will try Apr 18 expiry, to recover the money lost in May 18 expiry.

    How long will you keep doing this? Until you retire?

    Almost everyday I keep getting calls from traders who have lost money. No not almost everyday – now its everyday.

    Yesterday only someone called and said he lost 17 lakhs. 🙁 Here is one trader who lost 3 crores.

    Its sad that out of greed people are wiling to lose money, but are not wiling to learn.

    If you will not learn you will either speculate or take some useless tips paying them money or plain do frustrated revenge trades.

    DO NOT DO THIS – YOU WILL HARM YOURSELF.

    As an options teacher I can only tell you the truth and try to save your money but ultimately its your money, you are authorized to take a call.

    Hoping for your trading success.

    If you are busy and cannot monitor your trades every second then you can do my conservative option course. Its very easy to learn and trade.

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    Fear is your biggest enemy in trading. In this article you will learn how to convert your fear into profits.

    New traders start with greed but no fear. After a few losses their greed turns into fear and either they stop trading or they reduce the trading size quite considerably.

    Stock trading is a calculated risk, people who take calculated risk almost always make money – those who do not take a risk or take too much risk almost always lose money.

    If you fear trading you will never trade and never make any money or take a stop loss in panic losing money. Fear is responsible for a lot of mistakes new traders make.

    Fear is of three types:

  • Fear of losing more money and taking a stop loss before the original plan,
  • Fear of missing the profits made and therefore booking profits much early than desired in the original plan, &
  • Fear of the unknown and not taking the trade at all and repenting later of not taking the trade and missing profits.
  • These are some tips to manage fear and become a better trader

  • Record all your trades and study well your best performing trades:
  • Your past trades are your best teachers. Maintaining a trading journal is very important for a trader. If you will not maintain a trading journal you will forget your past trades and will never remember why you took that trade. Maintaining a record will help you to know which trades to take and which ones to avoid. If your confidence level is high you will not have any fear in trading.

    If you do not have a record you will never know the probability of a trade and you will always fear trading.

    No strategy wins 100% of the times, but any strategy that makes money 80% of the times and loses a small amount is considered a good trade. Positional trades needs hedging to make sure losses are small in case there is a gap opening against the trade. So you should learn hedging. You can learn hedging in my option trading course.

    Once you know that the probability of success is 80% and losses if any will be very small then you will never fear trading.

    Problem with new traders is that they do not know what to trade and end up speculating. Speculating is also one of your biggest enemy in trading. 100% of speculators lose money.

    If you know the probability of success in your trades then the fear will vanish automatically. Jus5t make your set ups and ignore everything else. However if you cannot assign probability of success to a trade you are gambling not trading.

  • Be Prepared for Any Situation And Develop A Routine
  • Markets move up and down but you must be well prepared for any situation. Preparation gives you confidence and eliminates fear. There should be a research time, there should be a time to take trade and there should be a time limit to take profits out. If nothing is planned you will speculate lose money.

    Why you are taking the trade is more important that what you are trading.

    If you know that a strategy works for you the your confidence level will increase you will not fear anything. By 9.15 am you must be ready with what to trade and wait for the opportunity.

    You must also know how much you’re willing to risk on each trade, what direction you want to trade – long or short and why.

    You must be ready with these questions before your trades go live:

    1. What will I do if the stock opens weak?
    2. What will I do if it opens strong?
    3. How much money you are wiling to risk if what you thought did not happen. For example you may have thought about a trade if the stock opens gap up, but actually opens gap down etc.
    4. If no.3 happens will you take the trade or not?

  • Manage Risk Per Trade To Eliminate Fear
  • Being greedy and keeping all eggs in one basket just because you made money in last trade is WORST MISTAKE OF TRADING.

    See this trader. He made Rs.19 Lakh in a few days and then lost Rs.36 Lakhs:

    Rs.36 Lacs Loss after making a profit of 19.5 Lacs

    So basically you win in a trade and lose control on risk management – greed takes over and you lose money.

    Do Not Forget Risk Management – this will control both fear and greed.

    Let me take an example. You think stock XYZ will fall and you shorted the stock with full margin in your account – after that you will tumble with fear. Even if stock moves up 1% from there you will fear and take a stop loss.

    Later to find after taking the stop loss, the stock fell down as you had assumed. Had you managed your risk well, you may have waited for a reversal.

    If you do the above mistakes you can do my course and learn hedging strategies to trade without fear and proper trading plan. You will learn which strikes to trade, what to sell and what to buy, when to enter and exit out of the trade. Hedge will manage your risk automatically so the trade will not bother you much as you will learn how to manage risk. The risk is just 1.5% of the margin block. Success rate is 80%. Over a long period you will make money without much stress. You can enroll for the course here.

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    PNB Scam has pulled Markets Down, its better not to trade/buy banking stocks now.

    But there is a way to turn your fears into trading profits. I am currently writing an article on it, will be live tomorrow or day after. Will let you know when live.

    Well its was made live on February 21, 2018, you can read it here.

    Markets are still awaiting the full description of the PNB scam, after that markets may bounce back.

    India VIX is on higher range means fear is still there in markets due to PNB scam.

    If you are a non-directional trader its a great time to trade, hard for directional traders as directional is not clear.

    If you want to be a non-directional trader and make profits in 80% of your trades you can do my Conservative Non-Directional Options Course and make monthly income for the rest of your life without taking tips from anyone or without any speculative trading. No need to spend too much time watching the markets.

    Just a small one time fee will change your trading career for ever. This course has helped many traders since 2015. See testimonials yourself.

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    If you want a PDF version of this post to read offline you can download it here. You can share it with your friends as well.

    If you are a new trader you must be struggling as a stock trader to make profitable trades. This article will give you 10 good tips to make your trading career successful.

    In short, three things are very important to be a successful trader:

    1. 100% Control over Greed and Fear,
    2. Proper Planning in Trades, and
    3. Proper Risk and Financial Management of Your Portfolio.

    Without control over the above-written points, it’s almost impossible to become a good trader. Treat your trading career as a job.

    Here are some more important tips to become a successful trader:

    4. Focusing is Important:

    Like an eagle, you must be focused on all your trades. This is the reason you should take a maximum of three strategies at any given time frame. If anything is more than three, you will lose focus. For example, if in one strategy there are three-four trades interlinked to each other – the total trades become more than 9 or 10. Anything more than that will be hard to manage.

    Record all your trades, then narrow down to the ones that work best for you.

    5. Use Moving Averages:

    For most of my trade setups, I use moving averages. I am a very SIMPLE TRADER so I go for Simple Moving Averages. A Simple Moving Average (SMA) is an arithmetic moving average calculated by adding the closing price of the security for several periods and then dividing this total by the number of periods.

    I look for a 20-day SMA which is good for short-term targets, and 50 day SMA which is good for long-term targets. On top of that, I do proper financial management also. For example how much to invest for a particular trade/investment. Some take a larger portion, some smaller, and some average depending on what my research concluded.

    The above combined simplifies my profit and losses. For example, say if I take a very small risk in stock and am willing to exit in profit only, then my maximum holding period is 6 months. But if the risk is large, then, of course, I keep a strict stop loss and when profits come I keep a trailing profit booking system to maximize the profits.

    It’s VERY HARD to describe exactly what I do else I would have made a course on lots of things to make money from stock markets.

    Now what I will say you won’t believe – for me making money from stock markets is now VERY EASY. I fail to believe why 99% of traders lose money when there are some very easy ways to make money. I feel strange that why I also lost money when I started trading. It looks small but that 7 lakhs were 95% of my total net worth. 🙁 To survive I had to take a personal loan of 1 lakh.

    Anyway, it’s now easy for me to make money from the stock markets. One of the easiest of them is already in my option course. In the course you will learn hedging options with options, hedging future with options and hedging equities with options. As far as hedging is concerned my course will teach you all the best ways to hedge Options, Futures and Equities making sure if you follow you will make small profits consistently, losses if ever be very small due to hedging.

    I also invest and trade mutual funds, invest in short-term stocks & long-term stocks with different risk management. There are so many ways to make money from the stock markets but it’s very hard to teach all of them to all of the people, so I have just limited it to my course. By doing it at least you will also start making profits. Making profits is more important than losing money – how much ever the profits do not matter. If profits are consistent, you can compound and make huge money over time.

    6. Study Different Time Frames:

    Especially if you are an Intraday day trader you need to study different time frames. Some stocks perform better on 5 minutes charts, some on 30 minutes and some on hourly charts. For volatile charts, 5 minutes is better, and for slow movers, a longer time frame needs to be studied.

    Daily chart patterns are the best way to analyze a stock move because it tells the bigger picture.

    7. Learn to Manage Your Risk:

    I have said this earlier and repeated it. Different trades need different setups and risks involved. Risk does not just mean the stop loss but it also means what percentage of your portfolio you are going to invest in a trade.

    Remember that no strategy is a guaranteed winner – the risk is involved, so you have to decide how much to risk.

    Proper risk management means sticking to stop losses, sticking to targets, and risking a small portion of your account on every trade. If you are a new trader it’s better not to risk more than 5% on a single trade of your portfolio.

    With proper risk management rules, you can be right half the time and still make money trading.

    8. Keep a Good Trading Plan:

    Your trading plan should come with a reason. Before taking a trade ask yourself – what makes you take this trade? If the answer you give to yourself satisfies you then take the trade. If the answer is because a tip provider said so, or a broker said so, then do not trade.

    Your trading plan must have a solid reason.

    9. Your Mental Capital & Mental Health, Are Important:

    Your mental capital is as important as the capital in your trading account. By mental capital, I mean control over your emotions – fear and greed and any other emotion that can destroy your trading plan.

    Losing your focus means losing money.

    An easy way to waste your mental capital is revenge trading. DO NOT TRADE TO TAKE REVENGE ON STOCK MARKETS. Stock markets do not know or even Warren Buffet – so why do revenge trading? The stock market is a non-living thing. If you trade to take revenge on stock markets you will destroy yourself, not the stock markets.

    10. It Is Good To Have A Mentor For Help In Trade Set-Ups:

    If you are a new or even experienced trader and losing money trading, it is better to get a mentor. Trading by yourself can be challenging and it will increase your time taken to learn good strategies. Finding a trading mentor is essential for your trading success. If you can get a mentor you will avoid trading mistakes yourself and save a lot of money that you can lose by speculative trading. You can learn from your mentor’s experience without suffering yourself. Finding a good mentor will save you years of suffering and lakhs of rupees wasted on researching yourself.

    I hope this email will help you a lot in becoming a better trader.

    P.S: If you want to trade without too much stress and want to scale the trading profits, then you can do my conservative trading course for monthly income. After payment, you will receive files in your email to study and trade. These are well-explained strategies explained in a step-by-step manner, with examples like how to manage the trade etc.

    The Course: Learn How To Trade Options Conservatively For Monthly Income – Based on Nifty Monthly & Weekly Options and Futures.

    Here are 100+ Testimonials, the minimum required is 50,000/- and the Return On your Investments, will be over 36% a year!!!

    My support will be there for one year on Call/WhatsApp/Email. Since the strategies are hedged you can trade with whatever amount you want (losses are limited to 1.5% of capital deployed). Approx returns will be 3-5% a month. The success rate is 70-80%. Will work in any market condition. Do not worry if you do not understand anything in the document, you can contact me to understand the strategies well.

    Click here to pay the fee onlineStart learning the strategies before your losses mount to many lakhs. After payment, I will send the strategies to your email. You can read and ask me questions to clear any doubts. You will get support on live trading as well for one year from the date of payment.
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    { 9 comments }

    On Feb 6, 2018 I had told my newsletter subscribers to buy stocks because Nifty may reverse anytime. See what happens after I send newsletters:

    Exactly after that see how Nifty has rallied:

    Today already 124 points up.

    However these are sent occasionally not regularly.

    If you want to make regular profits and not depend on my free newsletters you can do my course.

    Learn to trade yourself, it will help you for life. Do not depend on anyone else – especially tip providers as they will not make you money. Moreover can you get tips and become rich? Can you trade 10 lakhs on someone tips? You will keep paying someone or many people for months if you go for tips and you will lose money plus still not be able to trade on your own.

    Depending on someone’s tip to trade is a blunder. Educate yourself and became a better trader

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    Bulls Are In After A Fall

    After the Budget 2018, the 10% Long Term Capital Gains (LTCG) Tax news got the traders angry and bears took over.

    After a great fall finally slowly stability has come. Bulls have entered, but still these are fearful bulls. India VIX has dropped. Its 9.37 am on 07-Feb-2018, when I saw. It can change anytime if you are reading this late.

    You can start buying good stocks, or go for call options with proper hedge.

    You can learn hedging in my option course. If you hedge there will not be any tension or stress. Otherwise you can be at unlimited loss or huge loss.

    Do not try futures now as VIX is still high. You will see premiums of futures also high. High futures premium will also lose some time value plus 19+ VIX is dangerous to trade futures.

    Those who have done my course can go for the directional strategy with proper hedging. Markets may recover fast.

    Update on 23-Feb-2018:

    Markets are actually recovering fast:

    Graph of Nifty EOD 23-Feb-2018

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    Since last 2 days stock markets have fallen a lot. From 11500 to 10500 is a great fall.

    Do not forget that What Comes Down Has To Go Up is a great Mantra to trade and make money in stock markets.

    Pic updated on 15-Feb-2018:

    Nifty Fall Feb 2018

    Now is the time to buy stocks not trade. Some great stocks have fallen and its time to accumulate them.

    Look out for large-caps not mid-caps. Large-caps recover faster than mid-cap stocks. If you want a list of good large caps that you can invest for long term you can contact me.

    Today, India VIX is very high 33% up and above 21.

    Do not trade until it comes down to 16-17.

    By next week it should come down.

    Update on 15-Feb-2018 – India VIX has indeed come down below 17:

    India VIX EOD 15-02-18

    You can see latest India VIX here.

    What is the role of India VIX in option trading?

    It has a big role to play in deciding the option premiums.

    Higher the VIX, higher the premiums. If VIX drops option premiums also drop.

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    Today Nifty is seeing Amazing Fall – DO NOT TRADE. Its very dangerous to trade when stock markets are falling sharply.

    The reason is pretty simple – you take a short position and suddenly government releases a good news to arrest fall of markets and your trade will stop out.

    Check my earlier emails (if you are my newsletter subscriber). I had said clearly to be safe many times.

    Hope you listened and stopped trading before Budget Day 2018.

    10% Long Term Capital Gains announced in the Budget is the problem for fall.

    Anytime buyers will get in and when recovery will come it will be sharp too.

    Update on 15-02-2018:

    Buyers are already back, see this:

    Nifty Bounce-back after fall on 5th Feb 2018

    Do not trade anything until 12-Feb-2018.

    Its better to be safe and wait for things to get clear after a major event.

    Keep your money safe until its not a good time to trade. When opportunity comes start trading.

    If you are my course subscriber, I will send you email when to start trading.

    Controlling yourself to trade is also a BIG WIN over your emotions.

    As a trader you must learn to control emotions.

    You know what, since I was out of all derivative trades (not long term investments), by 30-Jan-18 itself, I will not even look at Nifty anymore after writing this post.

    Why I did not exit my long term investments?

    Because they are long term, not short term. Short term volatility – I am least bothered. Let them go down 5-8% I still do not care. I know with time since they are good investments they will come up. If you want to know the six stocks I have invested for the long term you can email me.

    Who will help me to make money?

    DIIs, FIIs and retail traders 🙂

    Good stocks have a limit of fall (unlike Satyam), after that limit is reached they will be up again. Thanks to DIIs, FIIs for it. 🙂

    Coming back:

    Nifty right now is 10675.

    Can you see how market pundits who speak a lot on TV (business channels) and online popular websites are humbled by markets?

    Time has proven them wrong time and again. History is proof of that.

    Before budget everyone of them said Nifty Target is 12000 etc etc. I am sure because of them many retail traders must have lost huge, especially future and option long (BUY) traders. In one day’s fall after the budget day 2018Rs 4.34 trillion in national investor wealth got wiped out 🙁

    I am sure many of my newsletter subscribers must have lost too. It’s sad but I did my job, asked you not to trade, but you did. What more can I do?

    This is the reason I do not listen to market pundits. Last time I watched any business channel was in 2015. After that it is only business news that is important for me not what experts are saying. They are paid to say so they will say.

    If you read other websites I am sure you must have read some experts saying go long, some saying go short etc.

    What I said? DO NOT TRADE WHEN THINGS ARE NOT RIGHT.

    I repeat start trading only from next Monday, 12-Feb-2018. It is better to save money than lose money,

    What did you learn?

  • Planning & Research for long term investments and short term trades has to be different.
  • Short term volatility is NOTHING for long term investments.
  • Short term volatility is SOMETHING for short term investments.

    So plan differently.

    Be conservative for short term investments (F&O trades), and be very aggressive for long term investments.

    Please note that market pundits say exactly opposite of what I said in the above sentence.

    If you want to be Conservative Option Trader, you can do my Course To Generate Short Term Small Income Consistently.

  • { 0 comments }
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