Learn why averaging out options does not make sense – it is a pitfall of losses.

In one word if I have to answer that if averaging out options makes sense. The answer is

NO

Why? Because when you buy options you are racing against time. This time can be few months, or few days or even few hours.

The option you are averaging has to be above average for you to profit – for that it has to take a “U” turn.

Assuming Nifty ran from 8000 to 10000 levels like it did from Jan 2017 to July 2017 and a trader thought it will run more and bought 10100 Call Option at 100. Now Nifty fell at 9900, the trader bought few more lots at 75 premium of the same strike. Nifty falls more, on hope that it will reverse, the trader buys more at 40, and “averages” the option at 50. The option is right now at 40.

Next day Nifty does not move, India VIX drops and option price drops to 35. The trader gets nervous.

He starts praying to the almighty forgetting that he did the mistake, not almighty.

Nifty starts to recover, but time remaining is 1 day. Nifty is still 200 points far from the 10100 strike.

What are the chances of 250+ points move in next 2 days? Less than 1%.

This is life of an option buyer trading on hope.

Please refer this article – option trading is science or art. I had said both option traders trading on Greeks and hope lose money.

The above article is inspired by a real trader who called me yesterday and told his story sobbing.

This is what he did this month itself, August 2017 – please do not attempt this:

Buy OTM (Out of Money )10500 CE, then buy more to average it out
Buy OTM (Out of Money 10100 CE, then buy more to average it out
Losing a lot of money mid-August, so in frustration:
Buy ITM (In The Money) 9500 CE (ITM options are VERY COSTLY – NEVER BUY ITM OPTIONS), then buy more to average it out.

Now tomorrow – 31-Aug-2017 is expiry. All his OTM options will expire worthless. Means his money to buy these options will become ZERO.

Not sure what will happen to ITM option of 9500 CE since he did not tell the price at which he bought, but I am sure losses here will be more than the OTM options he bought.

At last he did the course and his financial destruction will stop.

Let me warn you. If you are trading in hope or speculation – and /or you are averaging out options to make money – YOU WILL LOSE MONEY AND IT CAN BE UNLIMITED MONEY.

Traders who are firm believers of Technical Analysis and try to trade Greeks of Options, they feel option trading is a science. They try to derive a formula so that they come out winners every time.

Traders who trade on hope think option trading is an art. They “Feel and Trade”.

As it is obvious they both lose money.

No one can predict what is the future option Greek for a given option. Neither can anyone predict what premium the option will have in 2-3 days time. This is the reason most option traders who trade on hope or who trade trying to manage Greeks lose money.

One of the biggest losers are the Delta Hedging traders. This sounds so technical that traders get attracted to it.

In US Delta Hedging is automated. It is done my software perfect to manage Delta of options. The trades are so fast that humans will not be able to manage it. Within milliseconds an option is bought and sold which is impossible to be done by humans.

On top of that the automated system keeps a check on Delta of every option strike of that stock or Indices. As soon as the Delta is breached, it gets out of one position and gets into another in less than half a second.

However these are done by high net worth individuals or finance institutions. It takes millions to make a automated system to trade.

Since it is out of reach for retail traders they should trade with a proper plan, else there can be losses and it may continue for years.

Trading on hope is self-explanatory. Another great way to lose money trading the stock markets.

So who makes money? Trades who trade with a plan. Without planning you cannot manage your finances so how can you win trading options?

Want to learn how to trade with a plan? You can do my make monthly income from options course. Traders who have done it are doing well today. They were losers before doing my course. For any questions contact me.

Trailing stop loss is a great way to increase your trading profits. Not many traders use trailing stop loss to increase their profits.

Today many online brokers have platforms where traders can use trailing stop loss and increase their profits.

Trailing stop loss is also used by experienced Intraday traders.

Stop loss is different that trailing stop loss.

For wealthy traders trailing stop loss is a boon.

What is trailing stop loss?

Trailing Stop Loss is a taking profits off like a ladder.

Some profits on the first ladder, then some off next, then some more on the next and all in the fourth or fifth ladder.

Example of A Trailing Stop Loss to Take Out More Profits

Trader A buys 100 stocks of company XYZ at 500. His target is 550 or above. Stock moves to 545. He sees it and keeps a sell order of 50 stocks (50%) at 550. Stock moves up and reaches 550. 50 of his stocks gets sold at 550. He keeps a stop sell order for the rest of the stocks at 540. Stock moves up to 565. Seeing this the trader moves his stop sell order for the rest from 540 to 560. Stock goes to 570. The trader moves the stop sell to 565. Stock now moves to 578. The trader moves the stop sell to 575. Stock comes back bit down and the stop sell order at 575 gets hit. All stock gets sold.

Here is the calculation: Stock sold at (550 + 575) / 2 = 562.50

So a stock that was supposed to be sold at 550 got sold at 562.50.

The trader made extra money because he followed the trailing stop loss method.

Trailing stop loss is a great method to make more profits from a profitable trade.

Is it possible in futures and options trading?

Yes it is possible. However more skills and experience is required.

Is this possible while taking a loss?

Ideally loss should be fixed and taken immediately. However one can try to take 50% loss at a certain stage then wait for a pullback then take a profit or get out cost to cost in the remaining. But if pullback does not happen then the trader should exit at a certain point all of their holdings.

It is always better to take a loss at a predefined place but keep a trailing stop loss (actually profit) in ladder fashion written above.

Is it Possible To Automate Trailing Stop Loss to Take Out More Profits?

Yes institutional investors and fund houses especially in USA have automated many trading strategies including trailing stop loss orders to decrease loss and increase profits. However the software to automate trades are very costly. A multi million dollar fund house can afford such machines and software, but for retail traders the only way out to get more profits out of trailing stop loss is to do it manually.

Hope you learned a valuable lesson today. More will keep coming.

Happy Trading.

Here is one email I got from a novice trader:

Mr. Dilip, I am totally novice into options and while talking to good reputed stock brokers, assessing my risk capacity and capital investment (max 30k), they have informed me to do in derivatives (options) trading, where you pay minimum margin and also will get time to put in your stop-loss gap and other triggers, where you can earn minimum profit of Rs.5,000/- pm or more.

Next, in the cash or equity segment, you have to pay entire margin money and the sale value after brokerage and other taxes parentage will be far less than options trading.

But to me all these terms are very new and not able to practically do the things.

So, persons like me who are very conservative, middle aged and income generation is more priority, what will be your suggestions.

Read the first paragraph carefully. Traditional brokers who have a target to achieve making money from brokerages will tell anything to their clients so that they generate a brokerage.

One of the best ways to make money from brokerage is to sell a dream like in options you can invest 5k and make 10k.

Well technically its true but not many are able to live that kind of dream every day.

Invest 5 and make 10 is 100% return. A new comer will dream something else when he listens to this. He will dream like – invest 10 lakhs and make 20 lakhs (this may be his savings), or invest 20 make 40, now invest that 40 and make 80…the dream goes on and on.

What happens next? The poor trader immediately agrees to their brokers advice and ask them to buy the trade they recommend. Brokerage made. Target Next customer.

Why brokers never suggest Futures? Because 50% of their clients do not have the margin required to trade Futures. What is the point in selling a dream to someone who does not have the cash to buy that dream?

Note: Future trading requires more money as margin than Options buy trading. Option selling requires same margin as Future buy/sell, so options selling is never sold to the clients.

Money getting double is a great dream to sell and it will continue.

Now the real answer:

1. Stock trading is a business and risk is involved.

2. Option buy and sell can double your money but the chances are less than 1%, as either the trader exists at 2-5% profit or takes a stop loss at 50% or let the option expire worthless (all money gone down the drain).

3. Option buyers must always hedge their positions but that still does not guarantee profits. Naked option buying a very risky. Unfortunately this is the most sought after trade by option traders because option buying is very cheap and comes with limited loss.

4. Yes you get more leverage with less money in options, but you should know that it has an expiry time and you should be correct in your trade before the expiry comes.

5. See point no 1. Stock trading is a business but what business you can start with 30K? Even if you make a return of 10% on 30k that is just 3000. What difference does that make?

Change your mindset of investing less and making more. Options are a great tool if you learn to trade them properly.

Arbitrage is done my big financial institutions. It is simultaneous selling and buying of two similar financial products to take benefit of difference in prices.

Though arbitrage is no more popular now, it was very popular a few years ago. Trading volumes were less so arbitrageurs took a lot of benefit. However now trading volumes have increased and there are a lot of systems that make sure there is not too much volatility in markets.

But still arbitrageurs exist.

Some traders use automated trading systems to arbitrage.

One Simple Arbitrage example – This is called Pairs Trading

A trader can buy one stock and at the same time sell one stock from the same business sector. If one side move comes more in that sector the arbitrageur can make money. However this is very risky due to the nature of stock markets.

Earlier it was not that hard because stocks of the same business sector used to move in same direction, however now stocks at company dependent not sector specific dependent.

One Example of Risky Arbitrage

Acquisition of one company of another company is very common. This news is open to all and is known sometimes 30 days before the actual acquisition actually takes place. Suppose news has come that company A will acquire company B, then arbitrageurs will buy stocks of company B and sell stock of company A. This is very risky arbitrage strategy but there are people who try it.

Selling in One Exchange and Buying in Another

This can be done my institutional investors only who have the right to sell or buy the same stock at different exchanges.

Suppose a company stock is listed in New York Stock Exchange (NYSE) and also in London Stock Exchange (LSE). Now because of different demand and supply, prices can be different in different markets. Let say company A is 45 in NYSE but 46 in LSE then an arbitrageur will sell in one stock market and buy same number of shares in another. After sometime one will give profit.

But they need to enter large positions to make huge gains.

Please note that earlier not many traders had the software or technology to know these arbitrage opportunities but in this modern world there are technologies, media, software etc that almost everyone has access to. Therefore these arbitrage opportunities are no longer available. Still arbitrageurs exist and try to take benefit.

I keep getting emails form traders losing money while trading however sometimes the losses are so much that I feel like telling you to make sure you are also not in the same page.

Here is the email from my free subscriber I got a few days back. My reply is in bold.

Hello Dilip,

Good day. I have been following your mails and I understand that your courses would help traders earn up-to 5% a month on the capital invested, through options trading. I have done options, strictly CALL and PUT and I have gone through all the trouble and mental stress you were talking about in your mails in 2015.

I lost about Rs.8 Lakhs right from the day I started in stocks from 2010, till 2016. Out of that, 1 lakh I lost in options. I was under the impression that I could gain all my losses, through options, ended up losing 1 more lakh. Other losses being through buying and selling of stocks in cash market, bad judgements, etc.

Well with 99% losers story is same including me 🙂 This is life do not worry.

Even though I am well educated, am not good in math. Probably that could be one of the reasons for my losses, but, it could be my notion. My question is, will I be able to understand and use the strategy of yours effectively, even if I am not good in math and analytical strategies? What level of intelligence would be required to become unfailing in the market?

Not knowing math is NOT a reason to lose money. Yes you will be able to able to understand and use my strategies in live market because it is written that way. Technical Analytic is not required. Class 4 math is required and some hard work. See even people not good in English have done my course and doing good. In simple words it is easy to understand.

Honestly if I had that money I lost, I could have used it in better ways. Sir, I am not asking anything for free from you as I know how frustrating it would be for any one. I had the above doubt in bold above, which I would like you to clarify as you only can answer me.

Lost money is lost money it does not matter where you lost. Now you will not get that money back. Only way out is learn to trade well and make sure you are not losing anymore trading options.

Start learning to trade options well by doing my course today and stop losing money trading options.

Novice traders are confused to see Bid and Ask when they trade options in their trading account. In this article you will learn what is Bid And Ask Spread In Options Trading.

Ok let me start here. Have you ever walked in a bank and did you see this? USD Sell price and Buy Price? Did you notice that sell price is always higher then buy price? Why because banks cannot make money if they buy and sell USD at the same price.

When a trade is going on in a market place there has to be some kind of negotiation. This depends a lot on supply and demand.

Supply is how many people are willing to sell that stock or option in a market place.
Demand is how many are willing to buy.

If there is not much gap between the supply and demand the spread between the bid and ask will be smaller.

Live Example of Supply and Demand Working

Assume that stock markets are open for trading. There is one stock XYZ which bagged a project worth millions. Obviously the company’s stock demand will increase. Assuming that its price currently is 300 in the market place.

Let us assume that there is just one seller and one buyer for that stock.

Stock at 300. Seller keeps the sell price at 301 in “Limit Order”. When a seller keeps a price to sell he is “Asking” a price to sell. Therefore Sell price is the “ASK” in Ask and Bid.

The buyer sees the Ask price at 301, but wants to negotiate. If he hits “Market Order”, he will get the stock for 301, however he wants to buy thousands of stocks so wants to negotiate the price.

He keeps the buy price at 300.50. Buy price is the “BID” price in Ask and Bid.

If none of them changes their price the stock will not be sold.

However after some time let us assume that some bad news has come in the stock and one more seller pops us and sets the sell price or Ask price at 300.60 (seeing the Bid at 300.50).

Note that the Best Bid and the Best Ask prices are shown to everyone in the market place so that no one is cheated.

After some time another seller pops up and is in a hurry to sell his stocks in panic. He keeps “Market Order” and hits submit. The share gets sold at 300.50 as this was the best BID price at that time in the market.

Hope it is clear now:

1. What is Ask and Bid price.
2. Why there is a difference between Ask and Bid price.
3. The price difference between Ask and Bid price is called the Ask and Bid price spread.
4. The Ask and Bid price spread is wider if traders are less for that stock at that time, and
5. The Ask and Bid price spread is smaller if traders are more for that stock at that time.

Same is applied in derivative (Futures and Options) trading too.

If you have any questions please write in the comments section below.

Moving Average aka “MA” is a very popular technical analysis tool. This is very useful for short term traders. Moving average is based on past prices. It helps traders to find the direction or the trend of the stock for the short term.

Two commonly used moving averages are the Simple Moving Average (SMA), and the Exponential Moving Average (EMA).

Simple Moving Average is very simple. It is average closing prices of a stock over time.

Exponential Moving Average (EMA), is also the average of closing prices of a stock over time, but it gives more importance recent closing prices.

Moving averages are used to determine the trend of stocks. It can also help to know the support and resistance level of a stock.

Explaining Moving Averages

Assuming stock XYZ closed at the following prices in last 15 trading days:

Week 1) 102, 104, 110, 105, 107

Week 2) 106, 111, 108, 105, 108

Week 3) 112, 109, 113, 115, 119

How To Calculate the 10 Day Moving Average

Adding the first 10 days moving average:

102 + 104 + 110 + 105 + 107 + 106 + 111 + 108 + 105 + 108 = 1066

Moving Average of Day 1 through Day 10 = 1066/10 = 106.60

You can similarly calculate the Day 2 to Day 11 moving average for 10 days.

However for long term prediction 200-day moving average works better.

See the image below – It is a graph of closing prices of last 200 days of a stock:

For short term:

When consecutive two highs are less than the previous one it is time to sell. When consecutive two lows are higher than previous one it is time to buy.

As I have said earlier, for long term prediction 200-day moving average works better.

For 200-day moving average follow this rule:

Sell the stock if the price of the stock falls below the 200-day moving average.
Buy the stock if the price of the stock rises above the 200-day moving average.

Important Note:

Please note that 200-day moving average will only predict but not confirm the direction of a stock. Therefore it is not a gurantee that if you follow only the 200-day moving average the stock will move the correct direction. There are other indicators as well that that Technical Analysts follow all over the world.

If you are a long term investor there are simpler ways to find stocks to invest for the long term.

Learn Intraday trading tricks, techniques and ideas for Nifty and Indian stock markets.

Retail traders journey starts from investing then to Intraday day trading. Intraday trading is very attractive especially to the younger generations. However most lost money because they either speculate their trades or take to tips providers.

What is Intraday Trading?

Intraday or day trading is buying and selling or selling and buying a financial instrument in same trading day. It attracts traders because they are eager to make money every day.

It can be a very good way to trade if you are good at it else day trading has lots of dangers involved. 95% intraday traders lose money. Almost 100% intraday traders lose money. Trading without plan, no financial management, no basic knowledge about trading – all this combined make traders lose money.

Here are some ideas to become better Intraday trader.

Get knowledge

Any business needs knowledge to succeed otherwise the business will fail. If you want to become a better trader it is very important to know what you are day trading and why? How much money you are willing to risk. You should know basic trading procedures – like difference between “MIS” and “NRML”.

For intraday day trading MIS orders are used. MIS stands for MARGIN INTRADAY SQUARE-OFF. These orders are closed before the market closes the same day.

For positional trading NRML orders are used. NRML stands for Normal Margin. These are derivatives delivery based trading. These can be squared off any day before or on the expiry day.

Intraday traders must keep a watch on the business news and related information that can affect stocks. Government policies, its economic effects and the companies it may effect. Like the recent news of Cigarette taxation to raise revenue made ITC stock fell by 15%. Those who knew this would have shorted ITC and made a lot of money in a single day.

Yesterday I read a news and traded Axis Bank and made quick Rs. 850 in 40 minutes of trading. See this image:

If you read current business news before start of day trading chances of winning will be more.

You Must Know The Amount You Are Willing To Trade

Intraday trading is more risky than positional trading because there is no way to hedge an Intraday trade. Hedge is very important in positional trading as it can limit losses to a large extend in an event of a stock market crash.

There is no need also as the position is closed the same day. But you cannot have a job and still do day trading. Intraday day trading needs your 100% attention else you can never become a good day trader.

Therefore it is very important to know how much you are willing to risk every day. This may change from day to day depending on your view. If your view is very strong then you may increase the risk to give some room for the stock to move.

But risked amount should not exceed 3% of the margin blocked for the trade. Average is 1-2% per day. Profit percentage should be double of the loss percentage every day.

Never day trade with borrowed money, you will trade in panic.

Never trade with the money you need in the next six months. You must be absolutely sure you have money to manage your daily expenses for the next six months.

Keep a Separate Time to Day Trade

Even if you are a full time Intraday trader you must fix a time to trade. Intraday trading is very stressful so it is highly recommended that you fix a time to trade. Note that you cannot take break in day trading. You have to watch you trades like an owl. If a break is necessary then put a stop loss order and profit booking order both in the system, then ask your broker to cancel the not-executed order once any one is executed – either the stop loss or the profit booking order.

Some people trade Intraday who have night-shift jobs. In that case you need some rest. You cannot trade without proper sleep and with bad health. In that case make sure you set your time to trade and take rest.

For example it could be from 1 to 3.30 pm. You can take rest before that to prepare well for Intraday trade and your night-job.

Start Day Trading With A Small Amount

When you start Intraday trading it is almost likely that you will lose money. Therefore it is very important to start small. Do not start with more than 10000 rupees. Try to trade with this money for one or two months then if making profits increase the amount.

Do not increase your trading money if you are losing money. This is one of the worst habit of traders. Once they have lost money they bring more money to take a “revenge” on stock markets. Remember stock market is neither your friend nor your enemy. It is an indicator or demand and supply. If there are more buyers than sellers it moves up, if there are more sellers than buyers it goes down.

If you try to take revenge on stock markets you will never succeed. If you trade with a plan you will.

Take Only Two Trades A Day And Learn From Every Trade

As a beginner Intraday trader it is important that you do not take too many trades in a single day. Start with one or two stocks trading a day and then you must learn from every trade. Write down every trade details in a notepad and what you learned from it. Make sure whatever you learn from every trade, you never repeat that mistake again. This way within six months you will be a better trader.

Do Not Trade Penny Stocks

Penny stocks looks great to trade because of their movements. But they are not stable and could result in fatal loss in a single trade. Penny stocks are not liquid as well. It is better to avoid them and trade only in the large cap stocks.