NOTE: Part of newsletter sent to my subscribers on 01-September-2015 at 2.30 pm.

Trading should be halted when VIX reaches 30, and also read to know what should be done if Nifty is down by 10% in one month.

India VIX has crossed 30 is now near 30.28. This is a bad situation for traders.

Those who have taken my course know that I stop all trading when VIX is near 30. Since it has crossed 30 – it is considered very dangerous to trade. I request you to EXIT ALL POSITIONS except cash equity holdings.

Re-enter when markets become normal and VIX goes below 25. It won’t take too much time. Since we are hedged the loss should be small.

VIX at 30 means there is a lot of fear in the market, and options premium have exploded. More importantly during these times we just don’t know how the markets will behave for next couple of days, so its better not to trade.

Those who took the course recently – do not enter now. This is not a good time to trade either for the buyer or the seller of options.

I will send an email when you can enter.

Those who buy options, please do not buy thinking VIX will increase further. It may or may not we don’t know. But usually when VIX is over 30, it only tries to calm and come down. VIX can drop anytime and option buyers will lose money. Sellers are at even more risk as VIX at 30 means anything can happen. When anything can happen, its better to watch the markets rather than trade.

So right now watch the fun from sidelines. DO NOT TRADE.

But if you have cash one trade can be done now – the conservative stock option trade. Since the premium will be very high you will get great money on margin blocked plus good stocks are down now and chances of making a good profit are very high.

Nifty Down is A Great Opportunity

Good blue chip stocks are down. Great time for bargain hunting. Look for your favorite stocks and trade the stock option trade, or just buy the stocks in cash, or make a reasonable investment in large cap mutual fund like ICICI Prudential Focused Bluechip Equity Fund or ICICI Prudential Value Discovery Fund.

We should not let go these small opportunities whenever markets gives us such great opportunity to trade. And you should know to some extend what may happen in near future. Since the markets are down more than 10% from its recent high – there is a lot of chance it will try to go up in near future. Which means that the stocks or mutual funds that you bought can be flipped for a small profit. The cash can then be free and hopefully if everything gets back to normal, you can start trading.

There is 1% exit load though in the above mutual funds, but when you buy mutual funds your risk is lower. If you do not buy stocks and buy these mutual funds, it almost guaranteed that when Nifty will be up by 10% within say next 2-3 months, chances of which are great – you will end up making more than 10% profit on your cash.

With one or two stocks that guarantee is not there but with these funds its almost guaranteed that you will make that 10%. The risk is the 1% that they will cut when you exit the fund within 365 days – after that there is no exit load. If you exit within next 365 days they will deduct 1% and give you the rest. That’s OK as you still get to keep 9% of the profits.

Some people say mutual funds also have an expense charge that reduces the profits. Frankly when Nifty will recover 10%, usually these good funds will make 11% or more since they are managed by good fund managers, and all the expenses including the exit load will be taken care of by these extra profits.

You can also buy Nifty BeES, but the problem with Nifty BeES is that it will mimic Nifty, so it cannot beat it. However on the plus side, there is no exit load and the expenses are also very low. If you have experience with buying Nifty BeES, then buy them, else I recommend good mutual funds, especially the large caps or large and mid-cap funds.

Mutual funds has a manager who tries to beat the Index – and if you see track record of good funds you will see that they actually beat Index by a good margin. I like that. The above two funds are great choice to enter now and exit when Nifty goes up. However you may have to wait for some time before Nifty reaches levels of 8500 again.

How to Invest in These Funds?

Ask your broker. He will have a platform to buy these funds. You can then ask collateral against these funds to trade options. Some give, some don’t, so please ask your broker. Or you can invest directly by going here:

https://www.icicipruamc.com/InvOnline/app/aspx/InvestOnline.aspx

Note: If you are directly investing using the above link then choose the “direct” fund option and not the “regular”. Direct funds have no commissions to be given to anyone, so their returns are slightly higher.

If you are a registered member of ICICI mutual fund, investing in these funds will take less than 5 minutes. The day you exit, you will see the cash in your bank account the next day.

Conclusion:

If you know what you are doing and why, then making money from stock markets is not a big deal. If you keep trading out of the urge to trade and speculations, then sooner or later you will only see losses in your account. You may have a lot of fun though with the thrill of trading.

Well trading is not fun – its a business. Those who trade for fun are the ones who are trading now and losing. Intelligent traders know there are some times when you should not trade – and that time is now.

Learn the best way to trade debit spreads – its a great trade for beginner option traders. Lots of tricks in the article so read carefully.

If you are a new entrant in the options world – a beginner – then you must know one trade and that is the debit spreads.

Note: If you do not know what a debit spread strategy is please read Call Debit Spread. In this post I will only explain how you can trade debit spreads in a better way.

Debit spreads can be traded both sides. Lets discuss:

• When you feel the stock may move up you can trade Bull Call Debit Spread: Here you buy ATM (At The Money) Call options and sell OTM (Out of The Money) call options to reduce the cost of buying calls.
• When you feel the stock may go down you can trade the Bear Put Debit Spread: Here you buy ATM (At The Money) Puts and sell OTM (Out of The Money) Puts to reduce the cost of buying puts.

Loss in both the above case is restricted to the premium paid minus premium received. That is your final net debit. Can you see how its much better a trade than simply buying options? Here either your option buy win or your option sell wins or both win and you can end up making even more than a naked option buyer.

Why is this a great strategy for new traders?

That is because right from the very beginning of their options trading journey they will learn the importance of hedging. Hedging is something that I have been emphasizing and educating traders ever since I started this blog. After I lost a lot of money in the stock markets I looked for strategies that only lost a limited amount and then I found about hedging. When I released its benefits I started telling it to my friends and now to my website visitors.

After talking with almost 1000 option traders till now, I can only confirm that people still do not like to hedge. Hedging is considered a waste of money. These traders pay heavily later for not giving due respect to hedging.

Therefore if you are a new trader and reading this you must start with the debit spread strategy. It will teach you the benefits of hedging.

Once you start valuing hedging, you will never ever take any naked trade, and I assure your trading account will only grow with time if you do not take silly trades.

10 Tips & Tricks on How To Best Trade Debit Spreads

1. If you trade options you must be familiar with the Options Greeks – Delta, Gamma, Theta, Vega & Rho. One of them, Vega, has a lot of impact on options premium. Vega is nothing but volatility in the markets. If there is too much volatility and fear – Vega increases and it in turn increases the premium of options.

When you are doing a debit spread, you want the options premium to increase because you are an option buyer. You buy low and sell high. So a debit spread is also a Long option + Long Vega. When both them work the results can be great.

Nifty options’ Vega depends on INDIA VIX which can be found here:

http://www.moneycontrol.com/indian-indices/india-vix-36.html

Trying to Time Debit Spreads – Give Yourself a Chance

If the markets are normal and there is not too much volatility, a drop in VIX by more than 5% from the previous day is a great day to trade the debit spread.

In India 12-14 VIX is considered as low, but it can remain in this range for months. That does not mean you should not trade debit spreads when its in this range. Since these are short term trades – when the VIX drops big from the previous day you can enter the trade.

Note: If you fix a range of VIX to trade debit spreads then it could be months before you get a chance to trade. So a good fall is good enough day to try to time the debit spreads and give yourself a fair chance to win. That does not mean the trade will be in profit – the VIX may decrease even further or the markets may move in opposite direction. But by waiting for the day for the VIX to drop, you will give your trade a better chance at success.

Remember by doing this you are only giving yourself a better chance to succeed – that does not mean that the trade will be profitable. For debit spreads to succeed the direction also has to be correct.

2. Debit Spread profit booking Trick – Book profits in short and let the long make money later – Suppose you took a Bull Call Debit Spread on Nifty thinking that it will go up – but Nifty is going down. Its ok the sold options are making money. Once the sold options have lost a considerable amount of premium, you can close them in profits and hope for a reversal. If it does great – you can book profits in your long options as well – if it does not still ok as you did make money from the short options – so the loss is very small.

3. Exit Point: If you are making a profit then you should exit once the indices has touched the short option’s strike. For example if Nifty is at 8500 and you took a debit spread:

Buy 8500 Call
Sell 8600 Call

Then you should exit when Nifty reaches 8600 – there are no profits after Nifty moves beyond 8600 – the shorted strike – so why remain in the trade?

4. Comparing a naked option trader who buys OTM options vs an Debit Spread trader who buys near the money options: Lets suppose your friend also buys options and you do debit spreads. The only difference is that he buys a 4% out of the money option and risks 40-50 points. His view is that if Nifty strikes 3% away option he will make good profits. However you buy at the money option and sell just out of the money – you are also risking 40-50 points.

Who do you think will make more over time? Obviously you because you are giving yourself a fair chance to make money while he is just trading on hope. Note that the risk is same in both trades but the one who is buying at the money options will make money more often than the trader who loves naked buys, but due to more cash risk, buys out of the money options.

Debit Spreads Removes Fear Factor – A Bad Emotion in Trading

Since debit spread removes fear factor of losing more money you can trade close to the money and give yourself a better chance to succeed than a trader who buys out of the money option.

Here is the reason: Vega effects the near the money options more than out of the money options and a movement of 1% is very easy to achieve for Nifty whereas a movement of 3% may take a lot of time and by that time the value of the OTM option may be less than the price it was bought.

Note that since both of them are losing only 40-50 points still the debit spread buyer is at advantage as he need not take a stop loss. He can easily follow the strategy of booking profit in the short and let the long stay active till expiry. There is a big chance that Nifty reverses and makes profit in the long trade as well. The trader who bought out of the money option has no profit to book – he may have stopped out a long back.

In a debit spread the stop loss is in built so you need not take one.

So next time you so a debit spread make sure you are buying at the money option and selling just out of the money.

5. Some traders leave the bought option till expiry to maximize gains: In this case also what if Nifty is exactly at the strike option of the trader who buys out of the money options? His option expired worthless, but the one who bought closer to the money made the max gains.

One Great Trick to Trade Debit Spreads

6. Here is one great strategy: Since Nifty historically moves up why not put a debit spread at the money on the first day of expiry and forget it till the expiry day? If my knowledge is correct the max loss and gain on this trade on an average will be 50. Since historically Nifty goes up – the trade over the years should be profitable.

Warning: This has not been tested. Someone with a software who can back-test this strategy can check it for the last 10 years and know. If you have such a software to back-test this please let everyone of us know in the comments section.

7. You can also trade every month both call and put debit spread at the money. Now when Nifty hits any side short strike – take profits out, close that side, and leave the other side open – wait for reversal and take profits on the other side as well. For this to work Nifty has to reverse.

8. On strong movements if you feel the profits gets limited you can take of the original debit spread and create a new one at the money. For example Nifty at 7700 – debit spread of 7700/7800 – Nifty at 7800 – books profits – create new debit spread – 7800/7900 – Nifty at 7900 – book profits – create new debit spread of 7900/8000. Nifty expires at 8000 – great amazing profits in all debit spreads. 🙂

Discipline Is Forced

9. Another benefit of this trade is that discipline is forced. It forces you to be a discipline trader as you will profit in one of the trades or both, reducing your losses.

10. One Last Advice: If IV is high then its better to do credit spreads. Just reverse your debit to credit – that is sell the one near to the money and buy the one out of money. When VIX drops you can profit.

Important: Since debit spreads depends a lot on VIX, and since VIX increases when Nifty falls – a Bear Put Debit Spread traded when VIX is low will perform better than a Call Credit Spread – both done at the money. However if VIX has already increased and dropping and Nifty is range bound, then the Call Credit Spread is a better choice.

Hope if you are a debit spread trader you got some knowledge of trading them better. If you have any question on debit spreads please do ask in the comment section.

NOTE: Part of newsletter sent to my subscribers on 26th of August 2015.

Since my last email yesterday, a lot of questions started coming on the directional conservative strategy of my course.

India VIX at 25.52 – What to Trade?

India VIX has started to drop, and it is inversely proportional to Nifty. So overtime Nifty will try to come back to its normal range 8000+. One good news -> over-reaction from greedy traders -> 3-4 days of trading and Nifty back at 8000+. 🙂

The directional strategy needs VIX to increase not decrease. So I would suggest do not trade this strategy right now. Wait till VIX gets below 20.

But on the other hand it’s amazing time to trade strategy 1. Frankly even if the strategy hits stop loss you will end up making a profit because VIX is dropping.

It dropped today by 5%. I assume it will keep dropping, though not in a regular manner but within next 20-25 days, it surly will be below 20. Probably before that.

Stock Markets are Down What Should You Do

Nifty has crashed. People sitting on cash, please buy some blue chip stocks for good and quick profits. And always own some quality stocks forever – these will take care of your retirement.

Some stocks should never be sold. For example if you buy a stock at 25 and it goes to 50, and then you sell them thinking you will buy again at 40. Then it may come down to 41, and go back to making a century and you will miss a great opportunity to make money. So these stocks should be sold on your 60th birthday. That’s the best gift you can give yourself on that day. Then invest the money in a liquid fund that gives around 9% per year and enjoy your retired life.

And yes keep some cash for trading. This money is in your control. Grow it slowly too. Can you see how the risk is divided?

Traders should keep some cash in hand for these kinds of opportunities. You should also know about covered calls when buying huge quantity of shares for monthly income.

Here are two articles I wrote a few months back which will help you to know more about covered calls:

How to Trade Covered Combination For Less Loss:
http://www.theoptioncourse.com/how-to-trade-covered-combination-for-less-loss/

Covered Call Option with Stocks:
http://www.theoptioncourse.com/covered-call-option-with-stocks/

Disclaimer: Just because I am saying, DO NOT buy Nifty Futures. Please do your own research before doing any strategy. Please understand that Futures have an Expiry and MTM (Mark to Margin). Nifty will not travel to that distance in a smooth path. It may go down, you will take your stop loss or be forced to exit the position by your broker or because of expiry. And then Nifty may start moving up again. What I am trying to say is, this is how markets move over time. The path it takes is rough, so predicting gets really difficult. I am predicting what will SURLY happen in near future – but I do not know when. So people who have done my course can take a calculated risk based on what may happen in near future. Not tomorrow or day after – but say within the next few weeks. Moreover we are more bothered about VIX, NOT Nifty’s direction.

Update on 27th August 2015 at 1.00 pm:

NOTE: Part of newsletter sent to my subscribers on 27th of August 2015.

As written on 26-Aug-2015, at the time of writing Nifty is already up by more than 120 points and now is at 7915 – less than 100 points away from 8000. INDIA VIX is also down by 13.28% and is at 22.13 – a drop of 3.39 points.

Like I said yesterday, that VIX and Nifty are inversely proportional. Since VIX was starting to drop, there was a huge chance that Nifty will rise and try to get back to normal range – exactly that’s happening today. But understand that the path will not be smooth. Nifty can again fall and rise, the point is usually markets overreact and then settle down to its normal behavior. We should know this and try to take benefits of these situations.

If you remember I had asked to do a Bull Put Credit Spread on a few stocks a few days back and all of them are much above those levels. This is how you can read markets and take a calculated risk. I am not saying that every time you will be correct, but over time you will see that what you expected has happened. On top of that all trades are also hedged, so even if we take a stop loss the loss will be so small that it wont hurt our trading accounts.

People with no patience and aggressive naked trades are the ones who keep loosing. People who take a calculated risk with proper hedging are the once who succeed most of the times.

Update on 28 August 2015 at 12.30 pm:

NOTE: Part of newsletter sent to my subscribers on 28th of August 2015.

As expected Nifty has crossed 8000 and is currently at 8075.
INDIA VIX again dropped by almost 5% and is at 20.95.
Very soon it should drop below 20.

China slowdown was an overreaction and those who jumped into the markets to buy quality stocks got a return of more than 10% in 3-4 days. That is why you should always keep some free cash to buy quality stocks whenever markets’ crash.

If you remember on 24 August 2015, I sent a newsletter and asked you to do Bull Put Credit Spread on these stocks:

YES Bank
Bank of Baroda
Tata Motors
ICICI Bank
Axis Bank
SBI

Since now all of these stocks have moved up, the credit spread must be closed in profits. There is no need to wait till expiry as the profits have come very fast. Free cash to get into better trades.

It looks like VIX will drop till 17-18 and stabilize until some good/bad news hits and it goes up again.

Great time for option sellers. Good time to trade Strategy 1 of my course.

Thank You.

Note: All those stocks that I recommended yesterday are up today by more than 3%. If you are making reasonable profits on the Bull Put Credit Spread please close the position and exit.

Update on Markets close 24 August 2015:

The Sensex crashed 1624.51 points, -5.94% below the previous close to end the day at 25741.56. Nifty shed 490.95 points, -5.92% below to close at 7809 after hitting an intraday low of 7769.40.

CNX Midcap was down 9.6 percent and the S&P Smallcap index closed down by 8.8 percent.

INDIA VIX was up 28.13 from 17.12 from previous close – that is an increase of 64.31%. HUGE.

Just selling was not the major reason. Stop losses got executed. And another major reason was unwinding of positions created by traders using borrowed money. In other words traders who didn’t have their own cash to trade were pressing the panic buttons.

That is why its is very important that you only trade with your money and also with that money which you do not need for at least next 3-4 years.

One day fall brings stocks to a 10 month low

And why it all happened? It was because of concerns of a deepening China slowdown. This is clear case of markets over reacting all over the world.

These are rare happenings though. It happens once in 3-4 years – but it can be devastating for a trader who does naked trades. Especially Future trading or options selling without hedge. Imagine a traders taking a buy call of Future on two lots on Friday. His losses stands at 490*25*2 = 24,500/-. That’s huge. And I can surely say this, if a trader sold Future 2 lots – he might have exited in 10,000 profit. Retail traders take losses more than profits, and so over time they lose money.

Yesterday a 65 year old trader called me for help – he was losing a lot of money on naked options selling. Things like this MUST be avoided. Please do not get old losing money in stock markets. Its not fun really.

I hope this mayhem teaches you the importance of hedging. This one day blow can take away months of profits. That is why for every trade insurance is very important. This one is guaranteed – one day disaster will strike, we don’t know when, but we should be prepared for it always.

By the way traders who took the directional strategy in my course and especially those who were on a “Buy Future” trade in Nifty made huge profits yesterday, though they were horribly wrong in their Future call. Yes you read that right – a 6% loss in Future in one day can bring fantastic returns in this trade. The profits from options will far exceed the losses in Futures. If you are correct, you still make money.

Do not believe?

Here is a real WhatsApp testimonials from one of my clients:

WhatsApp Testimonial on 24-Aug-15 for directional trade of my course – Results may vary for users

And here is a real email testimonial from one of my clients yesterday:

Deepak Testimonial on 24-Aug-15 for directional trade of my course – Results may vary for users – click to enlarge

You should learn such hedging strategies. This will help you for life.

Important note for traders who have taken my course: Practice this on stocks – imagine a Future buy on stock and the stock falling 50% next day – in one day you will be laughing all the way to the banks.

I get a lot of calls from my paid subscribers asking why should they hedge as the non-directional strategy makes almost the double like 6% in a month without hedge. I always tell them, time will one day tell why hedging is important. If you really want to prolong your trading career do not forget to hedge. Yesterday that time came. Those who had hedged took a small loss and exited their positions. Those who didn’t lost last 3 months of trading profits.

Since the last 3-4 months the money we used to buy hedges was getting wasted. However today the insurance did its job.

People who have taken my course reported losses from 0.8% to almost 3%. Imagine – days like yesterday come after a lot of years. In fact since I started this service – yesterday was the worst day ever. The trade still made an average loss of 1.5% from all customers.

This is very small loss. And see that it came after a meltdown of around 6% in Nifty in one day and VIX increase of almost 64.31%. This can be destructive for option sellers – but don’t forget we are buyers too. 😉

A person who does not hedge will make something like 5%, 6%, 4%, 3%, -21% = -3%.

But a person who hedges will make like, 2.5%, 3%, 2.5%, 3%, -2% = +9%

As you can see over a few trades the person who hedges will be in profit while the one who does not hedge will be in loss.

That’s the reason why I emphasize on hedging. Overnight stop loss DO NOT work. And you will have sleepless nights. That is not the correct way to trade.

All our trades in the course are positional trades. Therefore we hedge and play very safe. By hedging you stop a huge losses for ever.

Why am I telling you all this?

So that at least now you start learning the benefits of hedging and get out of this mindset of taking all or losing all. Its about making reasonable profits at the end of the year, its not about trying to make 1 lakh every month, but actually losing money.

If you still think my course has value and teaches you great hedging and strategies do it now, do not waste time. Else if you think it is not worth – its ok learn from some other source. But the point is learn good hedging techniques.

Anyone who lost a lot of money yesterday?

Part of newsletter sent on: 24th of August 2015.

Today what happened, happens once in 6 months. Sensex crashes by 1000 points and Nifty down by more than 4%. Chinese economy is bringing down the stock markets all over the world.

INDIA VIX is at 23.58 an increase of 6.47 points and 37.81% over Fridays close. This is very rare.

The truth is after three and a half months, stop loss is hit in our Strategy 1. We should accept it gracefully. The kind of losses that are being reported are like 8 points or 10 points which is cool.

Now is the time to go to Strategy 2. A lot of my paid subscribers of course will experience strategy 2 for the first time.

These events happens rarely – so stay put. We cannot be winners every time – today is one of those days. I am sure a 10 point loss is very much acceptable.

Those who have still not started – do not trade right now. Within couple of days Nifty will settle down then you can start trading strategy 1.

Imagine a trader who bought Nifty Future on Friday without a hedge. He is now out of the game – we are not. Compare this with our directional trade where you can now exit in profits, even after huge losses in the Future trade – this is the beauty of hedging.

This is also a great time to stick to the theory of “buy when everyone is selling”.

Some great stocks are down. You should buy them in cash NOT Futures. Please stick to what is being said.

If you really want to play with derivatives then I would suggest the following limited profit limited loss trade:

Sell ATM Put Option
Buy just 1 level below strike Put Option for protection

– Same number of lots, same expiry for both trades

This is a Bullish Put Credit Spread trade with limited profit and loss. Of course do it only if you do not have cash to buy.

Some of the stocks that you can do this strategy are:

YES Bank
Bank of Baroda
Tata Motors
ICICI Bank
Axis Bank
SBI

Warning: Do not trade them without hedging please like just buying Futures. Only do the trade that’s written above or buy in cash and hold. If the shares finishes above the current level by expiry you can make good money. You have more than 30 days for it – and this is a calculated and limited risk trade with high chances of success. Because in the next 30 days, there is a lot of chance that some good news will come and stocks will reverse and you can make a profit. If it does not happen, its ok as the loss will be anyway limited.

Markets over-react, we must be ready to take benefit of this over-reaction.

Thanks for being my subscribers.

If you think knowledge is important for stock trading and do not want to depend on tips providers, you should take the course. If you see value buy it. Please remember that option to pay 5000 for email support will not be there next month.
Option Trading Course:
http://www.theoptioncourse.com/learn-how-to-trade-options-for-monthly-income/

Note: This is edited part of newsletter sent to my subscribers on 20th of August 2015.

Today I got an interesting email from one trader who took my course.

This was his Nifty Future trade – the directional strategy – it can make money even if the Future trade loses money because of the options hedge. Of course, I will not reveal the hedge part of the trade as its only for paid subscribers of my course. 🙂

On 16th of July 2015, he had bought Nifty Future @ 8626, and on 28th of July he sold it @ 8350.

If it was a naked Future trade (a trade without hedge) he would have lost 8350-8626 = (-)276 points – that’s a lot of points. But overall when he closed it, he was in 50 points profit – which comes to around 5% of margin blocked in 12 days. Yet he was NOT happy.

This was his question:

After doing calculation in this trade getting 50 point minus charges around 30 point so only saving is 20 point even nifty future moved 276 point.

This is what I call GREED. You take courses for 15,000 or more and when you trade them you make losses or find out that the strategy cannot be traded in live markets.

Now you took a course for much less – your trade went horribly wrong – you still made 5% profit in 12 days, but you are cribbing on why this strategy did not make more? Isn’t this Greed?

My reply was simple: There is nothing to see. You were wrong – the trade still made a profit. Why crib? Just be happy. 🙂

I cannot understand where this greed ends? I mean tell any experienced stock trader that you took a Future trade and lost 276 points but still ended up with a 5% profit on margin blocked in under 12 days. I swear he will first stand and ask “What exactly did you do?”.

And this guy is complaining why the strategy did not make more? How much more you want Mr. Jha? Please tell me. I am sure he will NOT be satisfied even if he makes 10% on that trade.

You made money when you were WRONG – that’s it be happy – do not look at how much. The directional strategy is meant for that. If you are right its obvious you will make money, if you are wrong you can still make money – but it does not promise how much. You can lose money if the stock is in very narrow range and is going against the Future, however the loss will be limited. Since the whole thing is totally hedged by options you can always wait for the Future to reverse direction and hit the target. That’s the benefit of the hedged trades.

Therefore I strongly recommended hedging all your Future and Options trade. Read this article to know how to hedge a Future trade.

I feel hedging is better than stop loss. But that’s my opinion. I have written about it here and here.

I would be happy to take no loss when wrong in a Future trade. Dude, my prediction went horribly wrong – yet I am getting out in break even – hell I should be happy right?

If you really want to be a happy trader its very important that you be happy with even a small profit of 1% especially if that has come under 15 days because that converts to 2% a month. That’s more that enough if you can consistently make them and restrict the losses.

The best way to avoid being unhappy is NOT to look back at the trade on the expiry day and think what would have happened had you left the trade till the expiry day. The trade is over and looking back will only be painful, of course it can bring joys if it would have lost more. But it does not make any sense.

As you can see these things are a waste of time unless you are researching a strategy. The problem is these emotions can alter the way you trade. For example if you see that a trade that you closed in loss would have made huge profits had you left it till expiry will change your plan for the next trade. Unfortunately next time you may leave it as it is and not take a stop loss only to see it made huge losses on the expiry day.

Therefore once I have experimented and researched a strategy, I never look back and see what may have happened had I left the strategy till expiry day. For me once the trade is over I move on. But if the trade taught me something I will write it down, where I write results of all the trades so that I do not repeat the same mistake again.

To end this is my advice – control you losses (by hedging or stop loss) and be happy with the profits – even if small. Just don’t let greed overcome you – else you will never be a happy trader.

Its highly recommended that you do not trade Futures without hedging, however if you trade naked positional Futures you should take this course. It will help you a lot.

Note: This is part of newsletter sent to this website’s subscribers on 13th of August, 2015. Its partly edited for public viewing. Signing up for newsletter is free. You can find the sign-up box at the end of the post.

Nifty is at 8391 and VIX at 17.02. Its a great time for option sellers. If you have taken my course then you can directly trade Strategy 2 or enter Strategy 1 now. You will get good premiums. I also bet VIX will go down soon, since no major news is coming in short term. We can exit in quick profits.

Nifty fell because of China, it will rise because of India or some other country – who cares – when we are making money. 🙂

The more Nifty goes nowhere, the more non-directional strategies make. 🙂

Important: When you are trading options, do not forget the hedges. I get quite a lot of messages from people who have taken my course, saying why hedge when they can make more? Their rationale is that the trade produces an excellent return of 5% a month – it may vary though every month. Please remember that accidents don’t come telling in advance, they can come any day. You should be well insured for it. You will know the value of insurance that day and will be smiling all the way.

Ask yourself is making 2-3% a month worse than losing money every month in search for looking strategies that make 10% a month? They do not exist by the way. Even after 100 years you will not find that one strategy that makes 10% a month. (Most people who call me want to give them a strategy that makes 10% a month – how to tell them that options were not made to make 10% a month.)

Or, spending money on the course, looks like too much while a loss of 10,000 while trading is ok?

Money is money. Either it should return more money, or a thing that you need or knowledge. Otherwise money that has gone just went down the drain.

Update: Edited part of newsletter send to my subscribers the very next day, i.e. 14th of August 2015:

Refer my email yesterday where I asked my course subscribers to trade Strategy 2.

Nifty today is already up by more than 100 points and VIX too dropped by 5.11% to 16.15 from 17. This is big drop in options premium. Option sellers must be in good profits, so close your trade. Like I told Nifty went down because of China – it will go up because of India, and option VIX is poised to go down as well. It happened and result? We win. 🙂

Note that Nifty on that day rose almost 2%.

For those who think why every time I predict and the prediction comes true: (Another example was the Greece crises trade in month of July 2015.)

1. I don’t do any technical analysis because its based on very short term movement. I don’t care for short term movements. I take a call on probability in the next 30 days.

2. This is pure experience – the fact is that markets overreact – we should take benefit of this overreaction. Easiest way is to find out why there was a drop or rise? If the scale of drop or rise does not justify the news there is a 95% chance the stock will reverse direction within 2-3 days. Of course if the news is big, you should wait for things to settle down before you start trading again.

3. I can be wrong but I do not fear because I buy insurance first and then trade the original trade. You should practice this as well – buy protection first, then do the real trade. Make sure both trades are completed within 5 minutes. That makes sure if I am wrong its ok, all I lose is a few points. If there is protection, a big accident for naked traders, will be a small accident for you. After all the insurance guys will give you your money back. Probably you only pay 20% for the treatment (loss) + brokerage – rest the insurance trade will pay. That’s my thinking before I trade, so insurance comes first.

4. If VIX drops it tries to go up, and if it goes up it tries to go down – that’s just inbuilt – that will not change. Same for Nifty. Only exception is a major news that can change future. At those times just do not trade.

5. Its not important to be in markets every second or every day. People who can identify an opportunity – get in and get out are the ones who make money.

If you keep the above in mind two great things will happen. One – because of the protection you will not fear trading. Tow – because of the protection the losses if any will be small and you can be in the game for long and for better. One loss will not kick you out of the game forever. Hope the above helps in shaping you as a better trader.

Note that the above trade was done for a quick profit. When actually the profits came too quickly, there is no point in waiting for more. Why? Because that was the original plan. Moreover, you should always compare profits vs time. Frankly, I am a 2-3% a month man. Now when I am getting 1% or more profit in one day that too in a trade we took as volatility play, for me the return is equivalent to 30% a month because I got 1% in a day. In that view, we must exit as the trade did its job. This is how I control greed. 🙂

If you listened to my advice and traded too may lots – get out of a few, probably 50% of lots – rest when more profits come.

This is how you should trade. When you are in quick profit you should take some profits out. Your thinking should not be like, “I will take every inch because I am correct”. My dear buddy in half an hour things can dramatically change in stock markets. When the plan was volatility play to make quick profits then stick to the plan.

Those who are stuck in Strategy 1 – just stick to what is written in the course.

Just Enjoy the Profits that’s what I want.

Update: Edited part of newsletter sent to my subscribers on 17th of August 2015:

Clarification: Because of my Nifty prediction on Thursday that it will go up, I received quite a few emails and congratulatory messages. Fact is, no one can predict the markets but one can always take a calculated call. Now it does not matter it goes up on Friday or next Friday. For me it was a good situation to take a calculated risk and I informed you. That was the idea. Yes markets going up the very next day was a surprise and a welcome move.

When you are protected you know it does not matter even if Nifty goes a bit further down – this feeling of protection takes the Fear factor out. I am sure a lot of speculators bought Puts that day because of the falling markets – the very next day they must have stopped out with huge losses.

For example, I receive quite a few newsletters from a lot of websites and all of them recommended to be short on markets, with most saying short term trend remains down so be short. This is technical analysis – it cannot predict an overreaction. There must be thousand of followers and all of them lost. I pity especially the Future trades. 160 points loss – that’s a lot. I am not saying they are wrong and I am right, I am only saying predicting Nifty or any stock’s direction on a daily basis is waste of time and a Futile exercise. But taking a calculated risk for the next 15-30 days on what might happen is perfectly OK. It needs no software – it only needs common sense.

And everyone has it. 🙂

My Best Wishes.

You must file your taxes every year.

Remember that last day of filing tax for financial year 2014-15 is August 31, 2015. You can file after that too, but you may have to pay a fine which should be avoided to save money.

If you are not a tax expert you should outsource this to a tax professional.

Even though you outsource, as a stock trader its always good to know some basic rules of Income tax.

So here are some very basic rules:

1. Trading Profits treated as Business Income – All profits made in derivatives (Future and Options) and Intraday trading (day trading) are treated as business income. Business income is added to your total income from all sources including salary or other businesses.

2. Trading Losses are carried froward and can be adjusted against the profits made from any business (not just stocks) for eight years. Losses cannot be adjusted against salary income. Intraday losses cannot be adjusted against business profits or salary income, they can be adjusted against any Intraday or speculative losses for the next 4 years.

Important Note: If you do not file your IT return by the last date you cannot carry forward the losses incurred in this financial year. In case you make a profit trading next year, you will have to file taxes on those and you will not be able offset the profits by adjusting against the losses you made trading this year. So please file you taxes before 31 August 2015.

3. Long Term Capital Gains – Any stock or “equity” mutual funds bought from a legal stock exchange or fund house held for more than 365 days (1 year) is treated as long term capital gain and is 100% exempted from tax, even if profits runs into lakhs of rupees. All dividends are also exempted from tax.

NOTE: If you are doing a SIP (systematic investment plan) on a mutual fund then for profits on investments made in last one year will be treated as short term capital gains.

4. Short Term Capital Gains – If you sell a stock or “equity” mutual fund before 365 days then it falls under the short term capital gains. Here you will have to pay 15% of the profits made as tax.

5. Debt Mutual Funds – If sold within 3 years profits are added to total income and taxed accordingly. If sold after 3 years profits to be calculated after indexation and the remaining profit to be taxed at 20%. No need to show any profits “without” indexation since you have already shown after indexation.

Note that every year government declares a percentage to calculate indexation. After this is deducted, a major chunk of profits from the mutual funds will be out of tax preview and the holder only needs to pay a small amount as tax essentially making the entire profit tax free.

6. Fix Deposits – All profits made from fixed deposits are added to your total income and taxed accordingly. It does not matter if the FD was done for 1, 5 or 10 years. Therefore its highly recommended that you keep excess cash in debt “income” mutual funds rather than Bank Fixed Deposits. Debt “income” mutual funds give an average return of almost 10% which is better than current FD rates. On top of that if you can hold them for more than 3 years, you need not pay taxes on profits made. If you bring into inflation – FDs give ZERO or NIL returns.

If your total profits from F&O trading + salary or business income is less that 2.5 lakhs in a financial year there is no need to file income tax return. But I strongly advise you fill because it helps in improving credit and taking loans.

Disclaimer: I am not a tax expert but this is something that I think everyone should know. These rules may change from time to time and I will write a new page for the next financial year or edit this one. Filing taxes is not as easy as it looks out to be. So please consult a tax professional. I outsource my taxes to a highly qualified tax consultant. This saves my time for financial calculations and to pay taxes, plus he makes sure there are no errors and I pay my taxes on time.

How to get a tax adviser who charges reasonable rates?

One of the best ways is to ask your friends to recommend one. Or search your FaceBook friends or their friends – I am sure there are plenty of tax professionals in India and you should get a good one.

You can also Google – just type your place name + tax professional. Search the same in FaceBook – I am sure you will get one.

Most of them charge anywhere from Rs. 2000 to Rs. 10,000/- for calculating your income, making a P&L statement and filing taxes depending on how complex your financial statements are.

Tip: These statements are big so I recommend not to keep a hard copy, as within years it gets huge and tracking gets difficult. You can always ask them to give you a soft copy. Open an account in DropBox and keep all the files there. DropBox will give you 2 GB storage free for life. This is enough for your whole life. Create folders for every year – keep soft copies of your bank statements, P&L statements created by Taxman, and income tax return files. Everything can be kept in a pdf format. Later on if required retrieving them will be easy and it saves a lot of time.

Again, please file you taxes on or before August 31, 2015 for FY 2014-15. DO NOT get lazy. There is plenty of time – get all papers (soft copy only) by the end of this week and hand over to the tax professional by 17th of August 2015 (Monday). Tell them to calculate and fill the tax returns before end of this month. Save the money you will have to pay as late fee by filling taxes this month itself. Please do not miss the deadline.

IMP: Please just do not rely on this post. It has very basic information. Filing taxes is complex and better done by a tax professional so please consult a tax professional.

If you are a tax adviser or professional please leave your thoughts in the comments section. This will help stock and option traders looking for information on filling taxes in India.

Many Thanks.

In this article we will learn how to best hedge a future trade, what is a bad hedge and where hedging is not required.

Yesterday one of my subscribers mailed me this:

I need your help in one of the future transaction which was done prior to my subscription to your course.

I have purchased one lot of LUPIN – (AUG 2015 Future) at a price of Rs. 1751/- without hedging. Although for last 3 – 4 days it is showing up movement, I intend to cover it by selling 3 to 4 lots of PUT Strike price of Rs.1600/- presuming that it will not go below 1600/-.

May I request your help in the matter.

See the trade. This trader is in profit. Now he wants to make “even more” by selling not one but 3 to 4 lots of Puts on a strike where he feels the stock may not go.

Obviously my reply was: If Lupin falls – you lose money in BOTH Future AND Puts sold. Can you tell why are you doing this?

I am looking for some kind of answer like – I think Lupin will not go there (and I can make more money).

Hey you may be the best technical analysis guy out there or you may have a great sixth sense of the stock markets but there is no place for “I think”, “I feel” or “I hope” in the stock markets.

What if some regulatory news comes in and the Stock opens gap 15% down tomorrow? He loses a lot of money in both Futures and Puts sold.

This is the kind of trades people do and lose money. They do anything that they feel will happen or will not happen and when they lose money they complain that stock markets are nothing but scam where no one can make money. If you let greed and other emotions rule over over trading decisions then you deserve to lose. Do not blame the stock markets, blame yourself.

Best Hedge For Future

The best and very simple hedge for a Future trade is this:

Buy Future, Buy ATM (at the money) Put, or,
Sell Future, Buy ATM (at the money) Call

Both on the same stock and expiring the same day.

Of course there is a much better way to hedge futures in my course – there the hedge can sometimes overcome the losses in the Future trade and actually make a profit in the trade. If possible a hedge should have such capabilities.

Can you now see the grave mistake by this trader? You cannot have a trade where both positions either make money or loses money. A hedge is a trade that works exact opposite to the original trade. Like in the above example if Future makes money the option loses and if the Future loses money the options make. The loss in any case is limited.

The worst case scenario is when a trader actually ends up making a profit in such a dangerous trade and then doubles or triples the number of lots in the very next trade because he feels he has a great sixth sense to predict stock movements. This time the stock does not behave the way he wanted and he loses double the profits he made in the last trade. Should he then blame the stock? Unfortunately this keep happening for years. Why? Because hope has no end.

The trader then tries some other strategy – makes a profit, then makes a loss, changes strategy, makes profit, makes loss – the cycle continues. The trader keeps jumping from one strategy to another to find that one “golden” strategy that works. Years pass and nothing happens. Traders keep blaming their luck. Ultimately after years of trading their account show a huge loss.

Almost all phone calls I get have the same story.

In my view people who trade naked Futures (trading Futures with NO hedge) are the greediest traders. Tell me what does it costs to buy at least one at the money option for protection? If you think buying at the money is costly at least go for an option half the cost of the at the money. At least the trade will get some protection from unlimited loss.

What is a Real Hedge?

A real hedge is a hedge which makes sure the losses are limited and small.

For example if you buy a future and sell a call – and think you have done a great hedge – its wrong. Selling a call has a limited profit. After that the losses can be unlimited. So in my book that’s not real hedge.

Some people think selling a put is a great hedge against selling a call and vice-versa. When I asked this trader where is the hedge in this? This person was very excited to declare that since when one loses money, the other side makes – its a great hedge.

Its not because one can lose unlimited money while the other will only give a limited profit. Where is the hedge for the unlimited loss?

If you are selling an option you should buy another cheaper option to hedge.

I am Technical Analyst and I don’t need to Hedge

Real story: Four Gujarati brothers living in Chennai (yes Gujaratis live in Chennai too. 🙂 ) trade for a living. Each brother is given a certain amount to trade. This certain amount is not small. Each brother’s account is around Rs.75 lakhs. They have a WAR room (a room where all planning is done and strategic decisions are made) with latest computers, many trading terminals, large screen where stock movement can be seen, a highly paid software that gives signals to buy and sell to trade. In short the (unnecessary) accessories to trade must be worth 50 lakhs. Not to mention the monthly bills for trading software and other equipments plus the office space which again is not required. When I heard this obviously the first question I asked was how much profit he was making this year. For the first 6 months of this year his 75 lakhs account was down to 72 lakhs.

When I asked him what trades they take (though I knew what was coming) – he said they traded naked Futures.

Frankly trading Futures with no hedge and the account going down by just 4% in 6 months is a great achievement. He is lucky not to see a 50% drop which is quite common.

If you too trade Futures without hedge think about it. These brother have a world class infrastructure, latest trading software and computers which automatically generates trading signals – still they are unable to make even 1% profit in 6 months. How on earth are you going to make huge profits?

I told him one simple thing – why don’t you hedge? He was like – well what is that? I told him go back and track had you bought one Put for every Future buy and bought one Call for every lot Future sold then what would be the results today.

Unfortunately since they have done thousands of trades in the last six months it was virtually impossible to track all trades. However I can tell with guarantee the results would have been much better – possibly some profit. Because he lost only 3 lakhs, which means if the hedge was in place it would have severely reduced the losses while the profits would have been more or less the same.

So even if you are the best technical analyst in the world, you cannot do great without hedge.

Note: People who think buying costly trading software and other systems can bring great profits, think again. It is not the system that makes profit – it is what that has been fed in that system that makes profit. In other words system generates signals based on the algorithms made by the trader. If the traders’ thinking has flaws, the system will generate only flawed signals and you will never make money. And good traders don’t need machines. 🙂

Automated Trading is Getting Popular – Do They Too Hedge?

I don’t have much knowledge about automated trading, but I really don’t think they hedge. Here is the reason – most automated trading is intraday (day trading). In day trading it is the strategy and the discipline that takes precedence over hedging. Since hedging also involves paying for more brokerage, an automated system where human interaction is next to nil and does multiples of trades in a day, they do not hedge the trades. Automated trading is a system based day trading and highly disciplined trading with zero emotions – so hedging is not required.

Also please do not have the misconception that all Automated trading is the same. Its not. An automated trading works on the software controlling it. Company A may be trading in Futures with different set of rules while Company B may be trading in options with a different set of rules.

In the US even retailers can do automated trading. In India for retailer’s automated trading its banned. Some institutional investors do automated trading.

Verdict on automated trading is yet to come out, I am really apprehensive on this kind of a system.

In automated systems the trades are in and out in seconds, sometimes milliseconds. When you are in and out of a trade in seconds its scalping and not trading. Scalping is an art which is beyond the scope of this article but I will write on it some day.

Note that some people in India calls Scalping as Scrapping. Well Scalping is the correct word.

By the way, if you can practice and master the art of scalping, you can really make good money in stock markets day trading (intraday). 🙂

Conclusion