Thank You All for Ganesh Chaturthi 2015 wishes on my mobile. It is is a blessing to be blessed from people whom you do not know personally.

I feel very fortunate that you all trust me and wish me good luck on almost every festival.

A VERY HAPPY GANESH CHATURTHI to You & Your Family wherever you are.

Now coming to our business. 🙂

FED meeting has began and results will be announced Thursday at 2 p.m. (1800 GMT). So in India it will be around 12 tonight.

One thing will SURLY happen tomorrow. VIX will fall. It is currently at 22.00.

Why? Because all the speculations on what the FED will do will come to an end.

Fear factor will go out. So VIX must decrease. So will the option prices.

What else will happen?

One out of the following 3 things will happen, but mostly a copy of how US markets behave:

1. Nifty may move up taking the result as a good move.
2. Nifty may move in a 30-50 point range, ignoring the results.
3. Nifty may move down, taking is at a negative sign.

Depending on how it moves one trade can be done tomorrow.

If moving up: Sell ATM Put and buy 100 points below put.
If moving down: Buy ATM Put and sell 100 points below put.

You may close it tomorrow itself if making more that 10 points profit that is 1% return or close it if you lose 10 points. That is it. Calculated risks often work. Intraday 1% return is excellent.

Because VIX will fall continuously, taking just the buy call option will get very difficult. Options premium will depreciate fast. Even with the move in Nifty upwards, they will not move much and you will get disappointed. So the trade is Sell ATM Put and buy 100 points below put.

However when Nifty falls, VIX will NOT fall as steep as when Nifty will move up – so the trade – buy ATM Put and sell 100 point below put.

No naked trades please do hedge. Save your money.

People who know me know that I always look far at least 15-20 days, not what may happen tomorrow. Looking at Nifty move I will do strategy 2 of my course directly. And will wait for 15-20 days for my profits.

However tomorrow is also a great day to trade strategy 1 if Nifty fails to move or is moving range bound. If is takes direction – trade strategy 2 directly.

Aggressive directional trade can also be taken, but reduce lot size as losses are small but profits huge. 🙂

Trade Well – Trade with your Brian Not Heart. And be patient.

Keep Learning.

Note: Part of my newsletter sent to my subscribers sent on September 14, 2015.

Refer my email dated: SEPTEMBER 10, 2015

You can find it here:

http://www.theoptioncourse.com/todays-view-on-nifty/

I had written to take this trade:

For example consider this trade right now:

Sell: 24-Sep-15 PE 7,700.00 at 152.00
Buy: 24-Sep-15 PE 7,600.00 at 115.00

Why? Because INDIA VIX is at 24.88 – which is great for option writers.

Max profit in this trade is if Nifty is above 7700 on 24 September 2015, the expiry day – which will be 152-115 = 37 points and max loss will be 100-37 = 63 points.

So now either you lose 63 or make 37 – there can be no other loss. But what if Nifty goes up tomorrow by 100 points and VIX drops? You will be in 10-15 points profit in one day and close the trade. That’s it – all worries gone and you made a quick profit.

This is what happens when you hedge your positions.

Right now INDIA VIX has fallen to 24.56 and

24-Sep-15 PE 7,700.00 is at 92.00
24-Sep-15 PE 7,600.00 is at 67.90

So the position is making around 13 points profit. 152-92 = 60 and 67.9-115 = -47.1

60-47.1 = 12.9

This is a return of 1.3% in 4 days.

Those who traded, may close the position as this is considered a good return in 4 days itself.

As you can see INDIA VIX was 24.88 and today its 24.56 – so not much of a fall – BUT Delta & Theta made the profit. Nifty moved 100 points up and 4 days passed.

What if Nifty had fallen 100 points?

Depending on VIX, the loss would still be 10-15 points BUT for a naked seller it would be 60 points and thats huge.

He would have stopped out with huge loss in just 4 days with Nifty moving 100 points only. But the hedged trader can wait for Nifty again to go up and take his profits. In any case the max loss is 63 points.

Frankly most of these kind of trades make money.

I hope you understand why my emphasis is on hedging.

Enjoy the profits.

Thanks.

Note: This is part of newsletter sent on 22-September-2015 to my newsletter subscribers.

Until the China dilemma passes, it looks like VIX is here to stay.

And when VIX stays and is not willing to go down, then 2 things happen:

1. Option prices just DO NOT melt,
2. There is too much movement in markets.

So until VIX is not dropping what can you do?

Well some cash can be used in buying slightly OTM options. But remember – risk management is very important here. You should trade this with less than 1 or 2% of your capital. Option can expire worthless so risk management is very IMPORTANT.

Before you pack your bags from your office and go home read this:

http://www.theoptioncourse.com/out-of-the-money-option-buying-strategy/

Do it for next month though. Give your options some time. 🙂

Why we buy slightly out of the money options during volatile times?

Since VIX is high, the ATM options will be very costly and if VIX drops they can melt away fast. OTM options on the other hand will be cheaper and during volatile times will increase faster in percentage terms than the near the money options. But the most important reason is risk management. Just because the markets are volatile you should not buy ATM (At The Money) options.

Note for those who have taken my course: Due to too much volatility why not buy a few extra OTM options – this reduces profits slightly but eventually when a huge movement comes the whole trade can be in profit. And if the movement does not come and VIX drops, we profit anyways. 🙂

Try it – Do not try to make 30 points every month. When times are tough sacrifice some profits to buy extra protection.

Hope it helps during these volatile times.

In this post you will understand that there is no point in trying to have a view on Nifty each and everyday. It is a futile exercise and a waste of time and should be avoided by traders.

What matters is your strategy, plan and discipline, view is secondary to these things. I am not saying that you should not have a view at all, you should have a view, but it should always be a medium to long term view and you should take a positional trade according to that. After all your today’s view on Nifty, even if correct, will not make you rich.

During these volatile times, I am getting a lot of questions on whats my view on the markets.

Frankly, I never have any view – I just do my job with a proper plan, discipline and most importantly hedging my positions. And I do not care what the “EXPERTS” are saying.

Let me tell you that even highly experienced technical analyst views goes for a toss during these kinds of markets.
For example yesterday every analyst declared that Nifty will soon hit 8000.
And today they have changed their view to 7200. 🙂

So my advice is just ignore the noise around and do your job.

And if you are a derivative trader then I request you with folded hands to please “hedge” your trades. You do not know what may happen overnight. Only a good hedge will protect your money.

Hedging reduces your risk drastically and allows you to sleep well.

DO NOT GET GREEDY – The markets are ever ready to eat your money. DO Not let that happen.

During these turbulent times a hedge will act as a great money protector.

For example consider this trade right now:

Sell: 24-Sep-15 PE 7,700.00 at 152.00
Buy: 24-Sep-15 PE 7,600.00 at 115.00

Why? Because INDIA VIX is at 24.88 – which is great for option writers.

Max profit in this trade is if Nifty is above 7700 on 24 September 2015, the expiry day – which will be 152-115 = 37 points and max loss will be 100-37=63 points.

So now either you lose 63 or make 37 – there can be no other loss. But what if Nifty goes up tomorrow by 100 points and VIX drops? You will be in 10-15 points profit in one day and close the trade. That’s it – all worries gone and you made a quick profit.

This is what happens when you hedge your positions.

Compare this with trader who sells naked 7700 PE options. If tomorrow Nifty goes up great, probably he makes 20-25 points. But what if it falls another 100 points? He will stop out with 50 or more points loss, whereas the hedged trader can wait for Nifty to reverse, go up and take profits out. He can wait because he knows that his max loss is only 63 points and that there is no point in hurrying to take the loss. Markets can go up and down. Today if it has fallen down, tomorrow it may rise again.

September 2015 expiry is still 14 days away. Just 1 day rally and a drop in VIX will do its job.

Disclaimer: If you trade the above strategy the risk is yours. Of course the profits is also yours. 🙂 The information is for your study only and is not a recommendation to buy or sell these options. Do let me know if you close the above trade in profits.

So, if you want to be a good trader and enjoy trading and create wealth over the years, please learn to hedge.

In this article you will learn how you can trade mutual funds and increase returns, on top of what you already make in mutual funds.

If you invest in stocks markets you should open up and look for opportunities at that time, that may bring profits fast at the level of risk you comfortable with.

If you are narrow minded like, “I trade Futures so whatever happens I will trade only Futures”, Or “I trade options so I will trade only options”, Or “I trade in Nifty so I will trade only in Nifty” etc., then you will miss great opportunities to make money in stock markets.

Well nothing wrong to trade only those indices that you love to trade, but it is all about making money and I believe money is money, the source is not important. If you made a profit it does not matter from where it came – options trading, equity cash, futures, mutual funds, Nifty BeES, whatever. Similarly if you lose, it does not matter from what kind of trading you lost. You made money or you lost – the “means” has no value after the trade is done. It is the “end” that matters.

This is the reason I sent an email on 4-Sep-2015 to buy ICICI bank as relative valuations were looking very attractive. The idea was to diversify risk and trade something other than options from part of the trading cash.

Diversifying risk is very important especially when an opportunity is knocking at door. I also said that do not invest more than 5% of the amount in your trading account.

Why I did not advice to do a bull put credit spread?

1. Markets very turbulent. It may take time to settle down.
2. Put spread will have an expiry or time limit – so that gets risky during this kind of market.
3. Risk reward favored buy and hold in that stock rather do a option trade of put spread.

Remember when the markets are falling everywhere then valuations goes for a toss even in good companies. I can guarantee you this, many tips providers will have given a buy Future call on good stocks that fell because their system generated buy call (200 day moving average broken so buy etc.) – but all their subscribers lost money big time because when markets falls good and bad does not matter. When a good stock falls it looks like it won’t fall further and people do the mistake of buying Futures and unfortunately end up with losses.

And here is the worst part – when it falls they average it out by buying one more lot. If it does not recover just one trade is enough to take out a couple of lakhs from your account. You wanted to make money fast – now pay.

At least put spread is better as it is a limited loss strategy.

But like I said – a loss is a loss and we all hate taking loss, isn’t it?

Therefore I advised you to buy the stock and hold. Even if it makes 10% in 6 months (256+10% = 282) that is a return of 20% in one year, and in my books and that is much better return than making a loss.

A late profit is much better than a quick loss.

On Friday 4th of September, 2015 Indian Stock Markets gave us an excellent opportunity to trade.

1) Nifty was at around 7600 which is 15.50% lower than its March 2015 high of 9000.
2) Some some blue-chip stocks were down by 20-30% than their recent high.
3) All equity mutual funds were also down by 20-30%.

ICICI Bank of course was bought, but then I thought that it was not enough as I have significant exposure to mutual funds as well – why leave a great opportunity to make money from them as well.

I am sure you being an option trader know about the two kinds of Mutual Funds – The Equity Funds (that invests in stocks of companies) and The Debt Funds (that invests in corporate and government bonds, and other fixed income securities).

Best Way to Make Money from Mutual Funds

The best way to make money from mutual funds to invest in 3-4 good equity mutual funds via the SIP (systematic investment plans) route. You decide how much you can invest per month and how much you want to invest in each of the mutual funds and sign the SIP form. That’s it on investment day the money gets out of your bank account and gets invested in mutual fund. You don’t have to do anything. Its all automatic. With time the fund grows big and returns gets compounded and after a few years if the markets and the fund performs you can exit with a lot of money without paying any taxes.

I offer a course on choosing the best mutual funds to invest. You can read about the course here.

Most people use mutual fund investments to plan for their retirement which is a very good thing to do. If you are still not investing, I highly recommend you start investing in them as soon as possible. This course will help you to retire rich with crores.

Now this is a very simple way to make money from mutual funds.

However you can try to actively manage “a part” of your mutual fund portfolio as well. When I say a part it means that here too risk management takes precedence. If you start actively trading the full amount in mutual funds then you will end up making a mess and probably lose money.

How To Trade Mutual Funds

To actively trade mutual funds you must have an online account to manage your mutual funds. Otherwise it gets very difficult to manage them. Signing physical forms and depositing them in the funds house is very tedious and time consuming job and hence not recommended.

If you do not have an online account for your mutual funds its highly recommend that you open an online account.

Instead of Fixed Deposits, I keep extra money in liquid or debt mutual funds. For one they are tax efficient and two, they give slightly better returns than bank fixed deposits. And three, they help me to trade funds as well.

My wife makes some money every-month by doing freelancing work and she only does one thing – Fixed Deposits in nationalized banks. Well I am not against it as I consider her better than 95% of traders who lose money trading. 🙂 And it also helps us to diversify risk on our combined portfolio.

The simple investment via SIP is going in some funds as usual. People who have taken my course know that I hate trading options on cash – its a leveraged product so why trade on cash? You should always trade on collateral against shares, not cash – therefore I give the stock option trade in my course.

So the story is I am held up in ICICI Bank – on 4th September 2015, I bought more – when rally comes the returns are going to be amazing.

Read this carefully – Nifty is an index collection of 50 top stocks. Here is the list of those companies:
http://www.moneycontrol.com/terminal/index_v1.php?index=9

Obviously if Nifty is down, these large companies are down as well. Which means when Nifty goes up these large companies will also go up. That also means the rise is going to bring most profits to large cap mutual funds rather than small or a mid-cap funds. Well they will also gain – some more than large caps – but here we are taking a calculated risk – not a speculation. So I had to select a large cap fund.

Instead of doing FDs, I park extra cash in liquid funds. This invest well course will help you to chose the best liquid or debt funds.

Now comes the part on how to trade mutual funds.

It is very important that your risk is diversified. Some of your savings must go into liquid funds and some in equity funds.

If you are keeping all money in only a single fund you are doing a mistake.

I have said this earlier. Proper Risk Management Is Very Important.

How to properly diversify your risk in Fixed Deposits, Mutual Finds and Stocks is described well in my how to invest well and retire rich course.

With liquid funds you can decide how much you want to withdraw. In a FD you will have to close the whole account, that’s another benefit of liquid funds.

A lot of traders do this mistake of jumping the next big opportunity full force with ALL the cash they can bring to the table. This is a huge mistake. If that trade fails you lose a lot of money. Therefore Risk Management is VERY Important.

You should take a calculated risk with a calculated amount of money – BOTH are important.

Will Proper Risk Management Work Every time?

No. But overall the results over long term 5-10 years will be better than not managing the risk.

I keep booking profits at regular intervals in equity mutual funds, just like people do in stocks. But not every equity mutual find performs well. It is just 10% of equity mutual funds that perform better than Nifty. Therefore if you want to trade equity mutual funds well it is very important you choose the right equity mutual fund. My invest well course will help you to choose the top mutual funds to get great returns over years.

I keep booking profits if Nifty kept rallying. Overall my portfolio is doing well. There was a time I had no idea to choose good funds and even if there was a rally, my mutual fund portfolio did not perform well. I used to be sad. But no more. I know if a rally comes I will be in good profit.

While trading funds, SIP investment is important, because if you try to time the markets with all your money you will be proved wrong over time – but if you do SIP its a calculated risk – you will see that it is working. And if there is a sudden rally, you still participate.

Does This Opportunity Come Every Year?

Yes almost every year. A 10% fall is common, and a 10% rise too. If you cannot identify stocks to buy or if you cannot identify good mutual funds to invest you can do my course. It costs less than what you miss in a small rally every year.

Here is the link to the Invest Well Course To Identify Good Stocks to Invest and Good Mutual Funds to invest for the long term:

https://www.theoptioncourse.com/how-to-invest-well-and-retire-rich/

Over a period of 10 years imagine the kind of wealth you can create if you invest in good stocks and mutual funds.

Why Not Invest ALL Money in Equity Mutual Funds, Why Liquid Funds?

Pretty bad idea really. There is some cash that you may require urgently, may be tomorrow – who knows. Since the stock markets are highly volatile – the equity funds may be in the negative when you need funds and you may have to book loss to redeem your money. This urgently needed cash should be kept in liquid funds rather than your bank savings account. With time it will grow.

If you really want to make money from stock markets then you have to broaden your way of thinking. Keeping all your eggs in one basket is a bad idea. The day the basket falls you may lose a lot of money.

To help you become a better stock and mutual fund investor I offer this course:

https://www.theoptioncourse.com/learn-how-to-trade-options-for-monthly-income/

In fact even in options trading if I see a better opportunity and I don’t have cash, I close a few lots of my current trade to free cash and get into a better looking trade. Since all my trades are always hedged I can close them at my will with a small profit or loss and get into a better trade.

I do the same with stocks and mutual funds.

This is how I trade stocks, mutual funds and options & futures.

My portfolio is well divided and the risk is well managed. I am not worried if there is a great fall in stock markets.

If you open up there are a lot of opportunities to make money from the stock investing, mutual funds, option & future trading.

Note: This post is part of the newsletter sent on 04-September-2015 to my newsletter subscribers.

Frankly, I do not like giving tips for paid or free. But sometimes it’s very tempting that I cannot stop myself. 🙂

Right now ICICI Bank is currently at 256 and is looking very attractive to buy.

It is almost 35% down from its recent high of 393.

There is NOTHING WRONG with the bank – so this is a clear panic sell. Compare this to HDFC Bank and AXIS Bank. They are not that down. This is known as Relative Valuations. Bargain hunters look for it as well.

According to WikiPedia:

Relative valuation also called valuation using multiples is a generic term that refers to the notion of comparing the price of an asset to the market value of similar assets. In the field of securities investment, the idea has led to important practical tools, which could presumably spot pricing anomalies. These tools have subsequently become instrumental in enabling analysts and investors to make vital decisions on asset allocation.

According to InvestoPedia.com:

A business valuation method that compares a firm’s value to that of its competitors to determine the firm’s financial worth. Relative valuation models are an alternative to absolute value models, which try to determine a company’s intrinsic worth based on its estimated future free cash flows discounted to their present value. Like absolute value models, investors may use relative valuation models when determining whether a company’s stock is a good buy.

If you have free cash you can buy ICICI Bank equity in cash for a quick 10-15% return probably in 2-3 months.

IMPORTANT: DO NOT BUY MORE THAN 3-5% OF ALL YOUR TRADING ACCOUNT HOLDING. ITS IMPORTANT TO DIVERSIFY RISK. JUST BECAUSE YOU BELIEVE IN ME DOES NOT MEAN WHAT I SAY WILL ALWAYS BE CORRECT. TAKE YOUR OWN DECISION.

I hope you understand this very important thing – learn to diversify risk. This 10% profit will definitely come soon – but still, you should know where to draw the line and how much to invest.

I have done a few things as well. Will share in a separate email.

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.