Learn about common mistakes traders do while trading or investing in stock markets, options or futures trading. I have already emphasized a lot of times common mistakes stock investors and traders do while investing in stocks markets. However these are some very common and basic mistakes investors do:

1. Impulsive Trading:

This is the most common mistake traders do. For example today Nifty is falling. I can assure that Puts will be bought today more than Calls.

NSE 3-Feb-2017 at 11.19 am

Impulsive trading or investing is just like impulsive buying. Both are waste of money and time.

Without doing any research traders invest their money in either a stock, option or a future.

For example if they have decided to trade SBI, they will see its going up or down. If going down short the stock or buy a put as per their comfort strike price or sell a future. If that stock is going up, then they will buy it, or buy any strike call, or buy a future.

No plan nothing, just impulsive trading.

What happens after that is a different story. What is more important is that there is no plan in this trading. It is obvious that impulse traders never make money.

Impulsive Trading is emotional trading – a must avoid in stock markets.

Do not let emotions rule your trading style.

2. Intraday Trading:

In India Intraday Trading also known as Day trading all over the world is the most popular form of trading. From equities, to options to futures they try everything and keep losing. After a few lakhs of rupees lost these kind of traders either stop trading or try some other type of trading.
Forget stock markets for some time now.

In the real world who are day or Intraday traders?

Labours, rickshaw pullers, street shop owners, dhobis. But are doctors, engineers and top executives day traders? No. They all look at monthly income or yearly income. They are least bothered about how much they will earn is a single day. All they look at is yearly package before taking a job. Once they get it they do not even calculate total yearly income divided by 365 to get the figure of what they earn in a day. It’s actually foolish.

For some strange reason the same doctors or engineers when they enter the start trading business they begin stock trading as a day trader. I know how much ever the experts will write against day trading, this trend will continue and is likely to continue till stock markets lasts. Why people look at stock trading as a different business is what I fail to understand.

Stock trading is just like any other business. Do not treat stock market trading as a different business. Risk and reward both are there so you must take a balanced approach and think long term not Intraday.

Our job is to write against day trading but its not in our hands that those who read listen or not. So take your call it’s your money. If you are losing money day trading stop it today.

Recommended reading: No Plan Trading Is A Huge Mistake In Stock Investing

I got an email just now from one of my email subscribers:

Dear Dilip,

Many thanks in advance.

I replied with this:

In India there is very less liquidity in VIX future trading.

WARNING: Even if you find some liquidity there PLEASE DO NOT TRADE.

VIX future size is very big.

The intention to start VIX future trading was for HNIs and institutional investors, not retail traders.

Due to the above reason VIX lot size is kept big so that retail traders stay away from it.

VIX moves 1% easily on normal days. Tomorrow is the budget day, it is obvious the markets are going to be very volatile so will be VIX. One point against your trade, may take out a lot of money from your account and in panic you will close the trade.

Why do you think there is very less liquidity in VIX trading in India? The reason is written above.

In the US where there is good liquidity in VIX trading, still retail investors stay away. Reason is same. VIX trading is even more risky than options and futures.

Retail traders in US have more knowledge than traders our country, still they stay away.

Why VIX trading was introduced in many countries including India is a vast topic which is beyond the scope of this article.

Due to the above reasons please do not even look at the liquidity of VIX futures, you will be tempted to trade and may lose money. Even if you make money due to high risk you will exit in one point profit due to fear of losing.

What difference does it make? Nothing.

So just stay away from VIX trading not just tomorrow, but as long as the lot size is not reduced.

Please consider my emails as free knowledge, do not base your trades on them without doing thorough research.

VIX is important to see to guess options premiums and initiate a trade. VIX is an important part of my course. Delta, Gamma, Theta are not that important as the strike selection is well explained.

Once you know the strike selection Delta, Gamma and Theta are doing their job behind which is what is more important than to know what it is for a particular strike.

I know a lot of you look for Delta, Gamma and Theta to select strikes to sell or buy. In the course strike selection already takes care of that.

You must do the course primarily for the education you will get from it, the strategies themselves are bonus.

This email was sent to my newsletter subscribers on 30-Jan-2017:

This is very important message which I think i should share with all of you. It is my duty.

This is the time a lot of traders will start buying calls or puts in the hope the stock markets will move rapidly on Feb 1 2017, and Feb 2 2017, due to the budget announcement on Feb 1, 2017 instead of end of Feb every year as a usual practice.

Agreed the markets will move but there is no guarantee of who will make money.

If it goes up, call buyers will make money.
If it goes down, put buyers will make money.

Some trader will trade the long strangle or the long straddle.

So what is the problem? Here is problem:

INDIA VIX now is 16.49, that is 0.49 points up or 3.06% up from previous close.

This will increase till the budget day. Once the budget is out it will start to drop at a rapid rate.

Most option traders do not know that when VIX falls, the option premium also falls.

Now here is the problem. Even if you got the direction right, there is a chance that the Option will not be increasing in the premiums in the way you thought it will.

You will get disappointed and exit the trade in either a small loss, big loss or a very small profit.

I have said it many times in my blog and I repeat it again.

“There is no home run of money in stock markets or any business.”

Take out the history of any businessman or a businesswoman. He or she must have taken years to make a lot of money. No one ever got rich in a single business or a single trade.

Let us suppose you make 10k and exit. Will that change your life? No.

So why take the unnecessary risk?

That’s the reason I am telling you all please wait for the stock markets to stabilize, do not trade out of compulsion or fun. Please control your greed. This is the time to let fear take over and do not trade.

Of course I will email what to trade on the budget day or before that to my course subscribers. Since it is a part of my course I cannot send that email to the free subscribers.

Update on 31-Jan-2017:

The following newsletter was sent today 31-Jan-2017:

This is in continuation of my yesterdays email.

I said the VIX will increase until the budget day.

Today INDIA VIX has increased by 1.44% and is currently at 16.91 at 1.19 pm.

These are the factors that can move the markets due to General Budget 2017:

Date: Jan 27, 2017

Today I am very busy finishing writing for How To Invest Well And Retire Peacefully. Some people have paid and I have promised them that I will finish writing the eBook by this Saturday. If you are one of those who paid and by chance did not read my email please note that I will send the eBook this Saturday or maximum by Sunday. I cannot give you trash. I have to give you the best of the knowledge as much as possible. I hope you understand that it takes time to write a thing like that. I cannot spoil my name for some money. For me honesty is more important than anything else.

Anyway please check this post I wrote a month back:
8000 Is A Big Support For Nifty

Almost a month, and Nifty is now over 8664. This is 8.3% up.

Was there any Technical Analysis (TA) involved? NO. Pure logic.

The Very First Line Was This:

8000 Is a big support For Nifty because when it breaches a psychological level, greedy traders come in and start buying stocks to take Nifty high.

Then this:

If you refer my previous emails you will see that I had written that 8000 is a big support for Nifty. It is very hard for Nifty to break 8000 on the downside because there is no big negative news except demonetization that the market has already factored in. Moreover greedy traders come in and start buying stocks to take Nifty high.

The reason why it is not going up fast in spite of US stock markets hitting all time high is the liquidity is low. The retail traders are busy taking money out from the banks and put food on the table. Right now getting and buying the essentials of living a life is more important than investing money in stock markets.

Once this 500 and 1000 rupees notes demonetization effect gets over people will once again start investing in stock markets. I do not feel that day is very far as now days you do not see long queue in the banks.

Until the cloud does not get over there is going to be no trend in the markets. The best trade to do now is the non-directional strategies in my course.

There you go. All predictions coming true. This is known as coming to conclusion of what works in stock markets. No Price Action, Bollinger Bands, Candle Sticks, Charts etc. Just simple logic and it worked.

I remember one month back almost all big Technical Analyst were saying that Nifty can see levels of 7600 or less. I had different views and it worked.

My point is if you have simple logic of how markets works you can make money – rest is noise.

Over the long term it is logic that works not magic. This is exactly the things you will learn in my course. There is absolutely no speculations or magic, its pure logic of how options work.

I am not a magician nor an astrologer. I am a simple man, a simple trader, like you, trading from home and writing for my option course blog and helping traders.

I am very happy doing it. Let the world say whatever they want to say. It is their job, why should I bother? I just am bothered about what my brain says and what may happen due to current scenarios.

This is not the first time I have said something and it worked, it has happened earlier too. It is also obvious that I keep saying a lot of more things apart from what I tell to my free subscribers in the site and by this newsletters. They have paid me and they deserve more. I am obliged and its my duty to help them more.

I will keep doing it.

Thanks,
Dilip Shaw

Read how swing trading is done and types of swing traders.

What is Swing Trading

A lot of people get confused when they are told about Swing Trading. Lot of them assume that Swing Trading is same as Day or Intraday Trading.

Most of the positional naked traders especially Future traders are swing traders. It is important to note that they themselves do not know that they are Swing Traders.

In technical terms even day traders are Swing Traders, but Intraday trading is based purely on small moves so it cannot fall under proper Swing Trading.

Traders do know that for every fall in a stock there is a support and for every rise there is a resistance.
Swing Traders try to capture and benefit from the stock’s or any financial instrument like Options and Futures, movement especially support and resistance.

It is a different story that most Swing Traders end up in huge losses, so hedging is highly recommended.

How Swing Traders Get The Support and Resistance of a Stock?

Novice Swing Traders speculate the movement of a stock and initiate a swing trade by buying or selling a future, and they lose heavily.

Experienced traders study Technical Analysis to look for stocks with huge volatility or short term momentum.

Swing Traders come into action during the results season. As soon as quarterly result of a stock is announced they find the support and resistance of a stock and take entry of a trade.

How Many Types of Swing Traders Are There?

There are two types of Swing Traders:

1. Short Term Swing Traders.
2. Long Term Swing Traders.

Short Term Swing Traders are those who trade in derivatives like options and futures and hold the position till expiry only. Which means it may be one day till expiry day.

Long Term Swing Traders usually do not trade in derivatives. They buy stock in cash when they see support and hold for the long term. This may be from one month to many months. Warren Buffet is the world’s best Long Term Swing Trader. He buys a stock when he sees a strong Economy MOAT, and sells when it loses its MOAT.

What is “Economic Moat”?

Economic moat is the competitive advantage that one company has over other companies in the same industry; this term was coined by Warren Buffett, a renowned investor and executive at Berkshire Hathaway. The wider the moat, the larger and more sustainable the competitive advantage of a firm. By having a well-known brand name, pricing power and a large portion of market demand, a company with a wide moat possesses characteristics that act as barriers against other companies wanting to enter into the industry.

Economic moat describes a company’s competitive advantage derived as a result of various business tactics that allow it to earn above-average profits for a sustainable period of time. Companies that obtain defensible competitive advantage from patents, cutting-edge technologies and other cost advantages can have a wide economic moat that curbs competition within their industry. Also, firms that enjoy strong economic moat tend to demonstrate solid financial performance and rising returns on capital over time. The most common sources of economic moat are cost advantages, switching costs, efficient scale, intangible assets and network effects.

Source: Investopedia.

Who Are Swing Traders?

Mainly retail traders who are Swing Traders. Large financial institutions do not do Swing Trading as a lot of money of their clients is at stake. One big bad trade may wipe out a huge portion of wealth from a single trade. They fear that. Even if they want to do Swing Trading they do it only on a portion of their cash like 10% or less and hedge it to protect unlimited loses.

My course can help retail traders like you learn proper hedging methods to protect huge losses. Even small retail traders sometimes take wrong trade and keep it in the hope that markets will reverse direction and they will make a profit. It does not happen and one day they exit with a huge loss. Therefore it is highly recommended that you learn hedging methods and non-directional trading strategies where there is no need to find direction and still you can make a profit without bothering about where Nifty is heading the next day.

Time Involved in Swing Trading

Too much time is involved in Swing Trading. The trader has to keep monitoring the trade as long as the markets are open. Institutional traders do not like too much monitoring as they have other jobs like fundamental analysis to buy stocks for the long term, cash allocation, client management etc. Therefore only a small portion of cash is allocated to Swing Trading. The team which does Swing trading is different than the team doing fundamental analysis to buy stocks for the long term. Institutional traders mostly buy stocks of good companies for the long term swing trading. Only a small portion goes into short term swing trading.

Another reason why large institutions cannot do swing trading with all the capital is that large institutions have too much cash so they are bound to trade only in stocks that are highly liquid. If there is less liquidity their trade may not be completed. Therefore they buy-hold-sell stocks for long term, only a small portion goes into derivative swing trading. Some institutional traders do not do swing trading at all.

However most retail traders whether Intraday or day traders do swing trading and suffer huge losses as they are not able to:
1. Find the support and resistance, and,
2. Do not hedge their positions.

How Long Swing Traders Hold Positions?

Day traders do not hold positions overnight. They are very short term swing traders.

Positional traders may hold positions overnight or until expiry day, but usually these traders are looking for bigger profits so they do not clear the trade the same day. Most of the positional traders try to make 5% return from every trade.

For positional swing trading the risk is more. It is therefore very important that careful position sizing is done. If you are a swing trader please allocate only a small portion of your cash in large big swing trading else a huge portion of your trading money may get wiped out in one bad trade.

How Experienced Positional Swing Traders Calculate Support & Resistance Levels Of A Stock?

Experienced positional swing traders do calculate both fundamental analysis and technical analysis to arrive at the support and resistance level of a stock or Indices before taking a trade. These may include larger time frame charts including the 15-minute, 60-minute, daily and weekly charts. This is done because positional swing traders need more holding time to capture the price move of 5% or more.

Highly experienced positional swing traders look for multi-day chart patterns like moving average crossovers, cup-and-handle patterns, head and shoulders patterns, flags, triangles, key reversal candlesticks, such as hammers for reversal bottoms and shooting stars for reversal price tops. These help them to make a strong game plan. They are willing to give the stock space to move to capture the profits therefore their stop loses are big like 8-10% of the move, however profit taking also increases to 10-12%. As a big move cannot come in a day or two, these positions are held overnight to any day until expiry if the trade was taken in options or futures. But if the trade was taken in stock cash then they may hold for months.

What Is The Problem Of Derivatives Swing Traders?

Derivatives swing traders, short or long have a huge problem – it is the stop loss. Swing options and futures traders face a huge problem in taking a stop loss. Supposing their stop loss is 5% but the next day the stock gaps down 10%, they are forced to take a stop loss at 10%. This one loss takes them down by 2 profitable trades. This is the reason my emphasis is on hedging. If they hedged their positions properly it would have saved them from this huge loss and restricted it to may be 2% or less which is half of a profitable trade. Next trade if profitable they are in profit even after taking loss in the earlier trade.

With Intraday day traders too the story is the same. It is not uncommon for a stock to suddenly fall down 5%, then the day traders take a loss. If this was properly hedged, the losses would have been significantly reduced. It is also seen that position size of day traders is much more than positional traders as Intraday traders leverage their positions heavily by getting that extra Intraday trading margin. Positional traders do not get a such big leverage, so are forced to reduce position sizing.

Taking extra leverage is greed which sucks Intraday traders into betting big and losing big.

Are you a swing trader? If yes what problems you are facing?

Learn the difference between MARKET And LIMIT Orders and try to execute the one which can help you make more profits from the stock markets.

New stock trades do not understand the difference between MARKET And LIMIT Orders and by mistake press the Market Order button to order a trade in their system which gets executed immediately.

If you are trading in very liquid stocks then there is not much difference between Market And Limit Orders as the difference between ask and bid price will not be much.

However experienced traders know that if a stock, option or future is not very liquid there is a big gap between ask and bid price. Traders who press market orders get the worst prices, because they have to accept whatever rates the best seller or the best buyer is offering them. Hitting Market order is accepting the market price not bargaining the price as we do when we go to the super markets to buy clothes or vegetables.

Experienced traders look at the Ask Price and Bid Price before keeping a Limit Order.

In short Ask Price is the price a seller, (trader or a dealer) of a stock or an option is willing to accept to sell that stock or option. Best Ask is lowest price a seller is willing to sell stock at that particular time of trading.

In short Bid Price is the best price a buyer, (trader or a dealer) is willing to buy that stock or an option at that particular time. Best price is the highest price buyer is bidding or willing to buy the stock.

So why not hit Market Order and get the best price available? Here comes the bargain called the Limit Order.

Let say a less liquid stock (a stock where at that time there are less traders), LTP (Last Trading Price) is 10, and currently the Ask Price is 10.30 and the Bid Price is 9.90. In simple words, for this stock currently in the market there are only a few buyers and sellers, and the best selling price someone has quoted is 10.30 among the buyers the best buyer is willing to buy at 9.90 only. If this continues and no one is willing to drop or increase the price, the trade will not take place. They both are hoping that the seller decrease the price and the buyer increases it.

Here a novice trader come in and wants to sell the stock looking at LTP at 10 and hits the sell button at “Market Order”. To his excitement the order gets completed but to his surprise he was able to sell it at 9.90 not 10 as he thought of looking at the LTP.

LTP now changes to 9.90 as the last trade took at 9.90. He then calls the broker why it happened? The broker sees his trade and tells him since he hit the Market Order he will get the best buyer’s prices only, not the LTP or the best seller’s price as Market order instantly made his order get executed at the prevailing rate whatever is being offered. He then immediately asks what needed to be done to get a better price.

The broker answers he should have hit the LIMIT Order, not the MARKET Order. The trader feels dejected but what can be done now the order was completed. He then studies what is the difference between LIMIT Order and MARKET Order.

Difference Between Market And Limit Orders

He then finds out MARKET Order will get executed immediately at whatever prices prevailing at the markets, whereas,
LIMIT Order will get executed at the rate at which the buyer or seller want the trade to get executed at.

Looking at the above example.

An experienced trader wants to buy the stock. Experienced traders do not bother to see the LTP. Since he wants to buy he will first see the BID then the ASK price.

Ask Price is 10.30 and the Bid Price is 9.90.

He tries to lure the sellers, so keeps the LIMIT Order to buy the stock at 9.95. 0.05 points better than the best buyer. Now the trading system for this stock in all stock trader’s platform in India will change the BID Price to 9.95. LTP remains same as no trade has taken place.

Suddenly another seller comes in and keeps the LIMIT Order to sell at 10.20. Now all traders will see:
LTP 10, Ask 10.20, Bid 9.95.

The 9.95 buyer lures more and increases or modifies the Buy LIMIT Order to 10.01.
Now all traders will see:
LTP 10, Ask 10.20, Bid 10.01.

Seeing this one more seller gets lured into selling and reduces the Sell LIMIT Order to 10.10.
Now all traders will see:
LTP 10, Ask 10.10, Bid 10.01.

A trader increases BID to 10.05. One seller gets lured seeing the price at 10.05 and hits MARKET Order and the order gets executed immediately.
Now all traders will see:
LTP 10.05, Ask changes to the next best Ask Price, Bid changes to the next best Bid Price.

With this article hope it is now clear what is the difference between Market Orders and Limit Orders.

In the conservative options course we take benefit of limit orders, we do not hit market orders and get better rates and to get more profits. This keeps happening for life.

If you want to know about my options course please contact me.

Recommended Reading:

Ask, Bid prices and Spreads in stock markets

Learn what the is difference between Intraday and positional options trading.

Traders start with buying options due to the lure of limited loss and unlimited profits, forgetting that this is only possible if they are good traders. Fact is “limited loss and unlimited profits” is only on paper. I have not met, known or heard in media a single trader who bought a call for 10 and sold if for even 100, forget about unlimited profits.

Even Warren Buffett profits are limited every year. His Compound annual growth rate (CAGR) is just over 22%, but on a multi-million, sorry, multi-billion corpus. Still he went on to become the best stock market investors the world has ever produced.

This is where traders get confused by reading or being told by brokers that buying options is limited loss and unlimited profits. They do not try to know the facts if anyone ever has done it. Only after they start losing money they realize that the phrase, “limited loss and unlimited profits” is only on paper not in the real, stock trading world.

In any case somewhere down the line a buyer has to close the trade some day or the other. Let us assume an option buyer bought an option for 10 and sold it at 100. In this case as well where is the unlimited profit? Fact is once the profit was booked, the trader only made a limited profit of 90 points that is all.

So there is nothing as unlimited profits in any business in the world please get your mindset right before buying an option.
Once they start losing money buying options they start selling options. Then for a small time they see success and get very happy selling the options going worthless on expiry day. At least they are making limited profits. Then one day after three or four months a storm comes and all the profits they made in last 3-4 months plus some capital too is lost.

Traders then get confused. What to do, buy or sell? They are losing money by both buying and selling.

The problem is traders who lose money do not know hedging methods or are not willing to hedge because of greed that if I win I need all the money I made, forgetting that if they, lose they will lose all they made and that day is not far away.

If you study how the HNI (High Net Worth Investors) trade you will see that they always hedge their trades. They have millions of dollars at risk. One bad trade can wipe out millions of dollars. To avoid that they properly hedge their positions. On top of that they are never into Intraday or day trading. The most popular trading method of a novice trader, equity, options or futures.

Day or Intraday trading is a sure shot way of losing time and money. How many Intraday traders have become millionaires? NONE. Why? Because Intraday trading is the worst form of trading even for experienced traders. They know this therefore do not trade Intraday at all.

For example today if an option has been bought for 50, it may close at 40 and the Intraday day trader will take the loss. But the positional trader can carry that position for next 30 days or more until expiry. There can be a chance that that option may go to 70-75 someday before expiry and the positional trader can close the position for profits.

Another benefit of positional trading is it can be hedged, whereas Intraday trading does not need a hedge as it is monitored closely. Positional traders can trade and leave their trades do their job in the background while they continue their job. They can check their trades anytime they want and take their profits out.

This is benefit of positional trading. Grow your income while trading the stock markets and get your salary from your job or make money from your business too.

You can do the hedging options course to learn positional options and futures trading with proper hedging to take the fear out of losing too much money in stock markets.

Hedging works as insurance to protect your capital. When required hedging do their job perfectly to limit your losses. But hedging needs to be done properly. For that knowledge is required, which you can get by doing the conservative options and futures course.

In this article learn what is short selling of stocks, options and futures and how much margin is blocked.

A lot of traders fear short selling of options, however for some reason they do not fear short selling stocks and futures. This is a very strange traders mindset. In this post learn why you should not fear short selling options if you know how to limit losses by hedging.

What is short selling?

Short selling of any stock or index is done by experienced traders when they feel a particular stock or index may go down.

Short selling is mainly done on derivatives – options and futures. Short selling on stock can be done only on intraday day trading. Short selling a stock which is not there in your trading account and not closing it the same day may incur heavy losses as it goes into auction the very next day and a penalty is levied on the trader. Therefore it is highly recommended to save yourself from a penalty do not short sell a stock which is not there in your trading account or which you never bought. However in day trading it can be done.

How to Short Stock in Day Trading on Intraday Basis?

In your trading account select the option of MIS (Margin Intraday Square-off). This feature is given by every broker in India. It is made for intraday day trading. You have to buy back the shares sold before market closes, else in any case the risk management system will start to square-off all trades that are MIS and have not been closed by the trader. This starts 10 or 15 minutes before the markets closes for trading for all open trades in MIS. This is automatically done by most brokers in India.

How Much Margin is Blocked in Shorting a Stock in Intra-day Trading?

In India most traders block just 10% of total traded value of shares. For example someone wants to short 100 shares of XYZ Ltd. currently trading at Rs.150, total margin required is: 1000*150 = Rs. 150,000.00. However for MIS trading brokers will block only 10% of Rs. 150,000.00 = Rs. 15,000.00. (Rupees Fifteen thousand instead of One lakh fifty thousand.)

Why Only 10% is Blocked in Shorting a Stock in Intraday Day Trading?

The reason is pretty simple. What are the chances of a stock going up or down more than 10% in few hours? Very low.

Assuming in 3 hours stock goes up 5%. There will be a loss because the stock was sold not bought.

Calculation of the loss:

5% + 150,000.00 = 157,500.00
Stock went up by 157500 – 150,000 = Rs. 7500.00

Therefore total loss is Rs. 7500 + Brokerage + Taxes. 15,000 was blocked, so out of that Rs. 7500 + taxes are taken out as a loss and the rest released for next day trading.

Please note that same method of margin block is done when a trader buys a stock for trading Intraday day trading.

Short Selling of Options

There are two types of options – Call Option and Put Option.

Traders sell or short Call Option if they feel that the stock or index will go down (not go up as they have sold the Call Option not bought it).

Traders sell or short Put Option if they feel that the stock or index will go up (not go down as they have sold the Put Option not bought it).

Risk of short selling Call Option:

Risk of short selling Call Option is unlimited as the stock can go to any level after the option is sold. Profit of short selling Call Option is limited to the amount credited when the option was sold.

For example if the option was sold at 100 and the lot size is 75, the trader who shorted this option will be given (100*75) = Rs. 7,500.00, but this money will be blocked until the trader closes the trade. Profit or loss will depend on the close or the buy value of the option.

For example if the option was sold at 100 and was bought back at 50, lot size was 75 here is the profit:
(100-50) * 75 = Rs. 3750.00. This money is given permanently to the trader who shorted the option.

Calculating the loss of short selling Call Option:

If the option was sold at 100 and the lot size is 75, the trader who shorted this option will be given (100*75) = Rs. 7,500.00, but this money will be blocked until the trader closes the trade. Profit or loss will depend on the close or the buy value of the option.

If this option was sold at 100 and was bought back at 150, lot size was 75 here is the loss:
(100-150) * 75 = Rs. -3750.00. This money is taken away as a loss permanently from the margin blocked from the trader’s account who shorted the option.

If the option was sold at 100 and was bought back at 250, lot size was 75 here is the loss:
(100-250) * 75 = Rs. -11,250.00. This money is taken away as a loss permanently from the margin blocked from the trader’s account who shorted the option.

If the option was sold at 100 and was bought back at 550, lot size was 75 here is the loss:
(100-550) * 75 = Rs. -33,750.00. This money is taken away as a loss permanently from the margin blocked from the trader’s account who shorted the option.

As you can see a stock can go high to unlimited level so on paper shorting a call option has unlimited loss. However the trader who has shorted the call option can buy it back at any time before expiry to limit the loss. Therefore unlimited loss is only on paper not in reality.

There are ways to hedge the option sold which is well explained in my course. A hedged short option has even more limited losses on paper as well.

Risk of short selling Put Option:

Risk of short selling Put Option is very high not unlimited as written in many books and websites as the stock can go down to maximum 0. It cannot go to -1 or -2. Therefore risk of short selling Put Option is very high but not unlimited unlike short selling of a call option.

Profit of short selling Put Option is limited to the amount credited when the option was sold.

For example if the option was sold at 80 and the lot size is 75, the trader who shorted this option will be given 80*75 = Rs. 6,000.00, but this money will be blocked until the trader closes the trade. Profit or loss will depend on the close or the buy value of the option.

For example if the option was sold at 80 and was bought back at 10, lot size was 75 here is the profit:
(80-10) * 75 = Rs. 5250.00. This money is given permanently to the trader who shorted the option.

Calculating the loss of short selling Put Option:

If a put option was sold at 80 and was bought back at 90, lot size was 75 here is the loss:
(80-90) * 75 = Rs. -750.00. This money is taken away as a loss permanently from the margin blocked from the trader’s account who shorted the option.

If the option was sold at 80 and was bought back at 180, lot size was 75 here is the loss:
(80-180) * 75 = Rs. -7500.00. This money is taken away as a loss permanently from the margin blocked from the trader’s account who shorted the option.

Now calculating the maximum loss of short selling a put option:

Let say a stock ABC Ltd was trading at 200 when the option priced 80 was sold. Assuming the impossible that suddenly the stock fell to ZERO (0). This is maximum loss a seller of the put option has if the option sold was not hedged.

Assuming the option sold was ATM (At The Money) option. On expiry day if the stock which was trading at 200 closed at 0, and option sold was 80 will become 200. This is because of the intrinsic value of the option on expiry day is the difference of the price of the stock on the expiry day and the price of the stock when option was sold.

This option will become ITM (In The Money) and will be priced at 200.

Here is the maximum loss of the put option sold at 80 when the stock was trading at 200 and the option was At The Money (ATM):
(80-200) * 75 = Rs. -9,000.00

It is clear now why a seller of a put option is a huge risk, not unlimited risk while selling a put option.

It is highly recommended that a seller of options or futures must learn good hedging methods to avoid big losses and limit their loss to a large extend. If the losses are limited you can become a seller whenever you want and a buyer whenever you want.

So do not fear selling options and futures if you know how to hedge them. Do not sell naked not hedged options and futures.

My course will teach you the right methods to hedge your sold options or futures.

What is Margin Blocked on Options and Futures:

Since the risk is more in selling or options and buying and selling futures the margin blocked is more in shorting derivatives.

For positional trades you need to chose the option NRML (Normal). If this is chosen you can carry forward the option or future sold as long as expiry. You can close before expiry too. Since the position can be carried forward margin blocked is more and is decided by the exchange and differs from broker to broker and stock to stock.

For Intra-day trading of options and futures you need to chose MIS (Margin Intraday Square-off) option. Since this is squared off the same day risk is less so the margin blocked is also less. If the trader does not closes the position before end of trading day the system closes it automatically before trading closes.

MIS margin for Equity & Index futures is 40% of NRML margin.

MIS margin for Commodity futures is 50% of NRML margin.

MIS margin for Currency futures is 50% of NRML margin.

For any questions on selling options or futures ask in the comments section below.

Read to know why you should not try to time the stock markets as it can be very dangerous.

In this article we will know why investors and traders fail to time the stock markets and end up making losses. Therefore it is highly recommended that traders should not try to time the markets and learn non-directional trading.

Read this article to know why emotional investing and trading must be avoided. This is one of the most important reason why traders try to time the markets and fail.

Historically Investor Behavior is bad and influenced by fear and greed

There are systems to track every investments made by an individual in the stock markets and also total money invested and withdrawn.

When the stock markets were on a huge bull run from 2003 to 2007 too many investors and traders joined the stock markets to make money fast. I too was one of them. The lure of making money fast is nothing but greed which got many investors in the stock markets with a lot of money. This is poor money management.

See the graph how the Indian stock markets were in big bull run from 2003 to 2008. Then from 7-Jan-2008, everything started to collapse:

NIFTY 50 2003-2016 – Jan-2008 was the month when huge collapse of Indian stock markets started

This happened for almost one year till 1-Dec-2008.

NIFTY 50 Dec-2008 from where the bull run started

Nifty 50 index went from 6279.10 to 2682.90. This is a fall of 42.75% in 11 months. This is pretty scary.

What happened from 2003 to 2008?

A lot of people must have received calls from their brokers to invest more money as this or that stock is giving huge returns. Many investors must be hearing that their friends, relatives, colleagues or associates made a lot of money from the stock markets or were in huge profits. This lured them to stock investing or derivative trading. I was into all of them and lost huge.

Lesson in Investing:

Avoid what your broker is telling or what your friends are telling and avoid tips providers. Just do your own research before investing in any stock. Educate yourself on investing and trading. This is only way you can make money in any business. Do not forget that stock investing and trading is also a business.

The above is happening still now, it is unfortunate but how can we stop people from being greedy and invest more than they should. Proper financial management is more important than investing in stock markets. Before investing your money in stock markets you should know the maximum amount of risk you can take or your financial condition is allowing you to.

That said, everyone should invest in stock markets with proper knowledge. Those who invest with knowledge are ones who make money. The speculators lose out.

It is well documented that maximum investments in stock markets and mutual funds came during the 2003 to 2008, and huge withdrawals started from mid 2008 when markets had already fallen more than 20%.

This is a clear indication that investors do not have patience to keep investing money slowly at different times and take out money gradually when the stocks are giving them profits. There is absolutely no patience. As soon as they invest in a stock they start looking at its rate form the very next day. When they initially invested it was planned for long term, then what is the point of looking at it rates from the next day onward?

Some exit the next day itself whether in profit or in loss.

IMPORTANT NOTE: It takes T+2 (Trade day + 2 trading days), time for the stock to come into your demat account if bought. Please do not sell before the stock is not there in your demat account. If you do there will be an auction and you may have to pay a penalty. This penalty differs from stock to stock and time to time.

Bad Investment Plan

At least 80% of investors invest 100% of the money they want to invest at one time and take it out whether in profit or loss at one time. This is not a good way to invest in stock markets.

Good Investment Plan

If you have chosen to buy a stock you must buy it systematically for the next six months at least, keeping the money invested the same. Note that if the stock prices falls down, you can buy more with the same amount and if it has gone high you buy less. This will average out the price and it is much better than timing the stock markets.

Media Intervention

Those who were investors or traders during 2007-2008 must be remembering that during September – October 2007 period media was talking a lot about the bull run of the stock markets since last 3-4 years, and other speculations that this will continue.
As you can see usually media talks about the stock markets bull run only when it has already reached its peak. Before mid-2007 the stock markets bull run was not there much in media, but from 2007 mid onward they kept reporting about it, luring investors to invest in stock markets at the bull run peak. This is emotional investing.

Fear starts if the stock markets starts to fall swiftly, and everybody runs to take out whatever is left, and take huge losses.

Conclusion:

• It is very difficult for an average investor or trader to time the markets. Therefore it is recommended that do not try to time the markets and expect huge returns. Invest into a stock slowly and spread it over six months at least.
• With Option and Futures traders the story is the same. Both Option & Futures buyers and sellers try to time the markets and lose heavily.
• Avoid naked buying or selling of derivatives you will burn your fingers. You must learn to hedge your trades.
• It is better you learn non-directional methods of trading with proper hedging where you need not time the markets or bother about the direction and still make money.