I usually refrain from advising my subscribers from taking any trade for short term as I am a firm believer of non-directional trade. But today I am making an exception. In fact sometimes when the markets are showing indications of good day to trade I will give you some advice which I feel is correct.

It is quite reasonable to understand that it will help people who have taken my course more than who have not. Still it will help everyone to some extent.

Greece Crisis is no small news. A big Euro country may or may not default. We do not know. As a trader I do not speculate. My only friend is Volatility and what may happen to Volatility. Its a guess, but I take a calculated guess.

VIX today (29-June-2015) is currently at 18.18 – a 15.36% increase over previous close. Options premium have exploded. 18.18 is well above average. It is great time for option sellers.

Now let us think like a trader. Tomorrow (Tuesday, 30-June-2015) some news is expected. Once the news is out I expect the volatility to drop. If not tomorrow, within a few days, say by next week it should try to come back to normal. Options premium will also drop benefiting the sellers. This is a great time to do Strategy 1 of my course. You are getting great premium, so you can also go slightly further than whats in the course as we only target a small profit and options premium is also more. So just be safe. Nothing big to worry if something goes wrong Strategy 2 is there. Nifty will not go that far in 60 days. 🙂

Two things may happen:

One,Euro countries will try their best to make sure Greece does not default as it may damage their economy. This is a 80% chance. If the news is good VIX will drop and Nifty will make a bounce back. BOTH will happen. If it does, get out from the strategy 1 as your profits will come very fast. There is no need to wait further.

Two, if Greece defaults then the strategy 1 may or may not hit the stop loss. Remember this time you are pretty far, so if it takes too much time to hit stop loss, you still end up making money. So no need to go to strategy 2. But if there is a small loss, strategy 2 is there to recoup losses. 🙂

Tell me what else can happen?

I hope you got an idea of how I think before I trade. If you become a disciplined trader – this is how you will start thinking. It helps over the long term.

Please remember to manage risk. Just because I have asked you to trade does NOT mean you take too much risk. Only trade with what you can manage.

For those who have not taken the course you can sell options and hedge them by buying further out of the money options. Do not do this on too many lots just because I have said. I cannot elaborate further as this article will come in public domain and will not justify people who have paid for the course.

My costumers who have already traded strategy 1 need not do anything. Just follow the rules. Increasing risk is not recommended. However if you have cash left to trade a few lots you can try making another Strategy 1 in 1 or 2 lots only.

Disclaimer: In this post I have suggest my newsletter subscribers and customers a good trade and a great time to trade according to my view and experience. If you are reading this after the Greece news is out PLEASE DO NOT TAKE THIS TRADE. VIX will change and we will have to try some other strategy. Please do your own research before trying any strategy. Stock markets investments are subject to markets risks so please trade with care. Trade with the amount you can manage well. Thanks.

A lot of you might know the Iron Condor trade. However if you do exactly the opposite it becomes a Reverse Iron Condor trade.

Reverse Iron Condor is a slightly risky trade with limited profits and limited loss for the trader. This trade cannot be traded every time as the chances of this trade not making any money is more than the chances of this trade making money. Why? Because time is enemy of the this trade. If what the trade wants does not happen fast, the trade will lose money. We will shortly know why.

If you trade Reverse Iron Condor 5 times, most likely you will win 1 time out of 5. So the success rate is almost 20%. Therefore timing this trade is very important. We will discuss best time to trade Reverse Iron Condor and a lot more.

Reverse Iron Condor Explained:

Reverse Iron Condor as the name suggests is nothing but an Iron Condor traded reversed. An iron condor trade is nothing but doing a short strangle combined with long strangle. The reverse iron condor is also doing a short strangle combined with long strangle. The difference is that in an Iron Condor trade, the trader sells the strangle that is more costly and buys the one that is cheaper (essentially done to save the unlimited loss), but in the Reverse Iron Condor trade the trader buys a more costly strangle near to the money and sells a further away and cheaper strangle. This is primarily to save money buying the costlier option.

If you did not understand it is OK, we will discuss further. We will also discuss how to be successful trading the Reverse Iron Condor.

How To Trade Reverse Iron Condor:

1. Buy near the money Call options,
2. Buy near the money Put options,
3. Sell far out of the money Call options, and
4. Sell far out of the money Put options.

Note that for a perfect Reverse Iron Condor all strikes should have the same lot size and done on the same expiry and on the same stock.

When Should You Trade Reverse Iron Condor?

This is very important so please read twice: You should trade this when you expect volatility to increase or you expect one sided movement (any side) for some time due to any reason like an upcoming news or any other event on a stock or Nifty. Note that the increase in volatility does help a reverse iron condor, and a drop may hurt – but its the movement any direction that makes it profitable. An increase in volatility will also negatively effect the short options, so overall it decreases the profits. Moreover reverse iron condor is not played with at the money (ATM) strikes where the volatility increase has huge impact. Movement is what is really required to make this trade profitable.

Lets make this thing very clear – when you expect a huge movement near term in any stock or index either side you should trade reverse iron condor. Aggressive traders like to trade long strangle – a long strangle is nothing but a reverse iron condor minus the short strangle. Prime reason is to benefit fully from the movement (and make a lot more money if right). However when it does not happen a lot of money is also lost. Reverse iron condor is created to limit the losses of a long strangle. Since the losses are already limited taking the stop loss is optional. Another benefit of this trade is we will know exactly where to take profits out. That we discuss later.

Lets us Trade a Reverse Iron Condor Now:

Nifty on June 12, 2015 closed at 7983. Now taking 8000 as ATM (at the money) I will try to trade a Reverse Iron Condor.

Remember that Reverse Iron Condor should be traded closer to the money because we need movement here. Deep out of the money options will not move significantly with the move in Nifty, therefore they are not good candidate of the reverse iron condor (they are good candidate of iron condor though). Still if the movement does not come the trade will lose money.

So we trade the following:

1. Buy 8200 CE @ 23
2. Buy 7800 PE @ 36
3. Sell 8400 CE @ 6 and
4. Sell 7600 PE @ 11.

See the image below to understand the profit and loss of the reverse iron condor:

An important point here: Don’t think that just if Nifty hits any of the short strike the trade will be in profit. That may not be the case. If Nifty goes up the Call buy and Put sold makes money, but the Call sold and the Put bought will lose money. So there is no guarantee that if any short strike is struck, the trade makes money. And yes volatility also plays some role here if not a major one. If it drops there will not be any significant profit in the option bought and the whole trade can be in loss. However if the sold strikes are struck – in our case the 8400 CE or 7600 PE, the the trade can bring substantial profits.

For 8400 and the 7600 to be hit every time the chances are low, therefore its much better to trade Iron Condor than a reverse iron condor.

Now lets calculate our max loss in the trade.

23+36-6-11 = 42 points

And lets calculate the maximum profit this trade can make:

To make the maximum profit on expiry Nifty has to be above 8400 or below 7600.

If it is at 8400 on expiry day:

8200 CE will be 200: Profit: 200-23 = 177
8400 CE expires worthless: Loss: -6
7800 and 7600 both the puts expires worthless: Loss 36-11 = -25 points.

Total profit in the trade: 177-6-25 = 146 points.

The risk reward is great in the trade: 42:146. You either lose 42 points or you make anywhere between 0 to 146 points.

Read the previous line again – You either lose 42 points or you make anywhere between 0 to 146 points.

Some traders think that risk reward ratio of 42:146 means either they lose 42 points or make 146 points. This is wrong. To make the max Nifty has to be above 8400 or below 7800.

As an example if Nifty is at 8300 see what happens:

8200 CE will be 100: Profit: 100-23 = 77
8400 CE expires worthless: Loss: 6
7800 and 7600 both the puts expires worthless: Loss 36-11 = -25 points.

Total profit: 77-6-25 = 46 points.

I hope you understand how this trade makes profits or losses. It depends on where Nifty is on the expiry day.

The trade looks great right? Yes, but the same issue of option buyers will haunt you in this trade as well.
1. No movement for a long time – the option will lose premium.
2. Volatility decreasing – again the options lose premium. If volatility decreases significantly, even if a movement comes the trade will be in loss and then you will wonder why such a thing is happening.

So When does it Work Best?

Trade the reverse iron condor when you expect a major news is coming in a few days. The volatility will increase – people will either sell or buy stocks creating a movement. Both works in your favor. Just before the news is out you should also close your trade and take profits out.

Where to Book Profits?

The trade can make max profit at 8400 or above or 7800 or below. So why wait for further increase or decrease if these levels have been reached? After that you will not make any profit anyway so you should exit when these levels are breached.

Where to Book Loss?

Unfortunately there is no definite answer. You can wait till expiry and lose all points if you are comfortable with the max loss or you can take stop loss when you reach a point where you are not comfortable with more loss, or when only a few days are left for expiry and there is no news to come before expiry. Nifty will not move dramatically so you should exit.

Whatever be your stop loss strategy you should stick with it for all trades you take in life.

Whats the max loss where you should be comfortable? This depends from person to person. But for me I am not comfortable if the max loss is 30 points or more.

Points to Remember Before You Trade Reverse Iron Condor

Never trade this if you are not comfortable with the max loss. If you still want to go ahead and trade you can stick to a max loss. If there is no movement in few days just get out of trade.

In fact most professional traders take this trade for 10 days before any news is expected. If they make a considerable profit, they exit but they stick to the 10 day or before exit rule. Which means they exit if the stop loss is hit or exit when the trade hits its 10th day. Whichever comes first.

I hope this article will help those traders who love to buy both call and put option (long strangle or long straddle), and think that every time Nifty moves they will be in profit. When it does not happen they scratch their heads thinking why they did not make a profit.

Buying long straddle or strangle makes profits rarely, else we all can trade long strangle or straddle and make a lot of money. 🙂 However reverse iron condor is a better trade than long strangle because it limits the losses.

Have you ever traded this strategy? If yes please share your experiences or ask any question on reverse iron condor. I will be happy to answer.

Since the last few months Nifty is range bound and I am sure traders who have taken my course would have definitely made money. There are many strategies that are made for a range bound markets. Please read and follow your favorite strategy for such times.

Unfortunately last few months were pretty bad for option buyers because there was no clear trend expect once when Nifty fell down almost 600 points. After that the story is range bound and no real clear trend for buyers. Let me tell you that historically Indexes behaves this way only leaving little opportunity for option buyers to make money.

The Reserve Bank of India (RBI) will most likely leave its benchmark interest rate unchanged at 7.50 percent at tomorrow’s ( 7 April, 2015) policy meeting. It may also reduce it by 25 basis. We don’t know. But what we know is that Volatility will take a beating.

India VIX today is at 16.91, I can bet by the time trading ends tomorrow it should be lower than this. Remember historically the average VIX is around 15, and if no major news comes in June, I think the VIX will go back to mean.

Its going to be even more tough time for option buyers. If you are really keen in buying, then my suggestion is that wait till the news is out and let the VIX settle down. Once it does the direction will be clear and like always Nifty should move in that direction for a couple of days. But option buyers should remember that they are against time and Volatility. If what they are predicting does not come true, they should quit in couple of days.

If you are not in profits, hoping that markets will move as per your trade is not an answer. Option buyers, unlike option sellers do not have time and its for their benefit that they understand this and quit if markets do not favor them. When they favor, we all know that making 100 points is quite easy.

So lets make a trade plan for trades who love to buy Nifty Options. Note that real scenario may be different and you must make your trade plan according to your own experiences.

We are assuming a situation where the trader always buys ATM (at the money) options. I personally feel though they have the maximum time value, it is the at the money options that has the balance of being reasonably priced and appreciate quickly if the trade is favorable. OTM (out of the money) options do not move as fast as you may want them to due to low delta, and unfortunately may not make a substantial profit when you are right. Out of the money options are the ones who will bleed you to huge losses overtime. ITM (in the money) options on that other hand are very costly and though they have delta more than .5, they also lose money pretty fast if the stock goes against your view.

All in all, the At The Money options are your best candidate for buying. They are highly liquid too.

With the above in view lets chart out a plan for trader who buys options.

After a few paper trades (should be done for at least 3 months) you find that every 4th time you get lucky and make a quick 100 points profits. You are targeting 30 points a month, and you also take 4 trades a month. Note that 30 points a month is around 3% per month for seller, but for buyer its a lot of money (almost 20% we will soon see how.)

For example its 24 days to go for the June 2015 expiry (expiry is on 25th June 2015). The ATM call option (CE 8,400.00) today closed at 152.40. We take 150 as average.

If you make 30 points on this (though every time the price will change, we are assuming 150 to be average) profit is: 30 * 25 = 750. Cost to buy = 150*25 = 3750. ROI (750/3750)*100 = 20%

I hope 20% a month is good enough for any trader, even the worst of Greedy traders. 🙂 Some traders have an amazing mindset. A few days back I got a call from one such trader from Assam. When I told him my course will help him learn to make 3% a month, he said this is too less and he is not interested in my course. I then asked him the obvious – how much per month are you making now? He said he is losing money. 🙂

See the mindset. A trader losing money, but not satisfied or interested in making 3% a month. I am sure if he makes 10% a month in one of those lucky months, he will take a bigger risk the very next month to try to make 20% and lose it all. Greed never makes money. Greed has no limits. Greed is a killer.

Ok back to topic. We were making trade plan for the option buyer. 20% by the way is huge money a month, and I don’t think there are many traders who have achieved that feat over 5 years of trading.

If your target profit in a lucky trade is 100 points and your target is to make 30 points in a month, you can lose a maximum of 100-30 = 60 points in the remaining 3 trades. So in three trades you can lose 60/3 = 20 points. We got our stop loss. You take a trade and take your stop loss at 20 points max. But please note that for this to work you have to win 1 trade out of 4 and make more than 60 points to survive the game. You can also tweak your plan to make it smaller.

For example if you are taking a stop loss at 10 points then you can take your profits out at (10*3) + 30 = 60 points. For a 60 point profit for the At The Money option with delta of 0.5, Nifty has to move approx 100 points FAST – say 2-3 days. Remember after the option goes into the money, the Gamma changes the Delta and it also increases to more than .5, so a 120 point move is not required. Moreover if Volatility increases, you may not even need 100 points.

But in the above strategy, hope has no place. You will have to take a stop loss if the trade did not go according to the plan.

When should you buy options?

Traders do not know when to buy options. Well here are a few pointers:
1. Buy options when the news is out, volatility has crushed and direction is clear.
2. Buy well before (at least 7 days), when a major news is awaited. You must exit though before the news and volatility gets reduced. You may take another trade after the news. In a situation like this the long strangle works better.
3. Buy when you are absolutely sure of the direction, whatever the case may be.

When to Exit?

Exit when the target profit is achieved, or
Exit when your stop loss gets violated.

But make sure you have a plan and you are making the same points of profits and same points of losses as per your plan. Stick to your plan. Do not alter in every trade, you will then lose money.

Your plan should be based on the fact that option buyers win 1 out of 4 trades.

Remember even if you make 10 points a month as an option buyer, that is more than 6% a month and is a great return for any trader. In real world its very hard to make even 5% a month consistently for a long period of time.

Other Important Notes:

Suppose you met the target of 60 points in your first trade in the month, now is there any need to try another trade that month until some really great event is happening? If you speculate thinking you are at no risk, you will lose 10 points and take a few more trades and you end up making the same 10-20 points that month. This is foolish. The idea is to use these points as a hedge for next month’s trade. So please do not trade that month.

Like this if you have 3 months (absolutely possible) of 60 points each in a year, you will have an excellent return that year.

How to Compound This?

This is quite tricky as its very hard emotionally to buy naked options even worth Rs.50,000. At the back of his mind the trader knows that it may go to zero. Losing 50,000 in one trade is not a great idea, but hey we are taking a stop loss right? Keep that in mind – buying will get easier.

But how on earth you will get courage to buy options worth Rs.2 lakhs even with a 20 point stop loss? Yes it is very difficult, and it is the major reason why I hate buying options. In fact this is the major reason why majority of the option buyers lose money. They make a profitable trade by buying options worth 5,000 then immediately afterwords they buy options worth 50,000 and end up losing much more than the money they made in previous trades.

What Is The Way Around this?

You need to take the stairs, not the lift. For example for the next 6 months decide to buy options worth Rs. 5000. Then increase this amount to Rs. 6000 for the next 3 months. If successful take additional risk of Rs. 2000, and then after 12 months of successful trading make it Rs. 10,000/-. You got the point. Increase your risk slowly overtime.

Another way is to sell some out of the money options as a measure of hedge. Oh I love hedging. This reduces risk, but it also reduces profits when you are right. The idea here is that you need to make a plan. And this is only possible once you start paper trading or put small money on risk when you actually decide to trade with real money.

After a few trades you will know the answer to this: Should you go for naked option buy or hedge it by selling out of the money option. Only you can answer this – so go and do some trading.

Full Disclosure: This is not as easy as it sounds. For example you have to be correct in every fourth trade and get your maximum points as per the plan. You can reduce the profitable trades to from 60 to 30 points, but then the points for the stop loss trades also gets reduced and thus they do not get enough room to move and hit stop loss pretty fast.

You should therefore practice and come out with a plan of your own and just not copy what is written here. This is a guide for option buyers who speculate and lose money. Hope this article helps option buyers.

Note: In reality option traders almost always lose money. For one trade to win out of 4, your timing has to excellent and you may need some luck too with direction. In my course you will learn how to sell option and hedge it properly. You also do not have to predict the the direction of the markets. Mostly you win, and those small occasional losses can be taken care of. Click here to read more about the course.

Wishing you the Best.

Iron Butterfly is one trade that a lot of traders in India try. So this article may be help to a lot of traders.

When To Trade Iron Butterfly:

This trade can be done when there is a sudden rise in volatility and the trader expects the volatility to drop in a few days and the stock to be range bound. Both volatility drop and passage of time helps the iron butterfly trade.

How To Trade Iron Butterfly:

Four trades are involved:

1) Sell One ATM (at the money) Call Option,
2) Sell One ATM (at the money) Put Option,
3) Buy One OTM (out of the money) Call Option, &
4) Buy One OTM (out of the money) Put Option.

The OTM call option is bought to protect the unlimited loss in the sold call option. And the OTM put option is bought to protect the unlimited loss in the sold put option.

NOTE: The trade brings profits only if Volatility drops in a few days, if it does not the trader should close the trade. If not closed the trade will be in loss with even a slight increase in volatility.

Max profit is attained when on expiry day the stock is exactly at the sold option strike and all options expire worthless. See the image below to understand:

This is very important: Iron Butterfly is a Volatility play and NOT a directional or non-directional trade like what most traders think. Its results depends a lot on what happens to volatility after the trade is made. Direction of the stock within a small range will not effect much if lot of time remains for expiry. However if stock moves a lot fast, and volatility does not decrease, the trade stands to lose.

Why Iron Butterfly depends a lot on volatility?

Because ATM options have the highest time value or theta – volatility therefore has a lot of affect on these options. For example if Nifty is at exactly at 8300, then both the ATM options will have zero intrinsic value which means whatever premium they have is nothing but time value and prevailing volatility.

Assuming that both ATM call option and PUT option have a premium of 150 at the start of the month, if Nifty does not move (which is impossible), both the options will become zero on the expiry. The buyer loses everything and the seller gets to keep all the premium. This is the reason why most trading happens on ATM options.

Interestingly professionals rarely trade ATM options, they almost always trade OTM options. So who trade at the money options? Traders who love to speculate and love to lose money. You will therefore see the tips providers, especially the ones who sell intraday Nifty option tips will ask you to buy ATM options. And if you have taken any tips from them, you must have lost money. 🙂

Sellers of ATM think they will keep all the premium or most of it as the stock will not move in future because its not moving now. Buyers think exactly the opposite, that the stock will go up or down so let me take a balanced risk. They do not buy ITM (in the money) as they have to pay a lot. And they fear buying OTM (out of the money) because they know chances of winning is less. So they buy ATM options. And since the buyers usually want to make money both sides a straddle is bought. Meaning they end up buying both ATM call and put. WORST TRADE EVER!

Sellers and buyers cannot time volatility, so they both lose. Buyers exit seeing the value not appreciating and take a loss. Sellers see the stock moving, their heart beat pounds, and they exit in a small profit or huge loss. 🙂

When I get calls from traders who are stuck at this position (buy both at the money call and put options) I actually get very angry. Their point of view is that they will make money wherever the stock goes because they are trading both the directions. Little do they realize that they have traded long volatility (it has to increase) and time is running against them like a time bomb. OR the stock has to trend in one direction too much in too little time. Both of the above is impossible to time.

And due to the same reason, traders sell ATM options because they want the maximum premium. Can you now sense what’s the reason for ATM option trading? Greed. Result is that most ATM Buyers and sellers lose money. 🙂

You can now guess what I will say next. Avoid trading Iron Butterfly. You cannot time volatility, and volatility does most damage to ATM options. A 10% drop or rise in volatility is common. So if you trade Iron Butterfly, sometimes you will make good money, some times you will lose. Overall the trade will not be profitable over a long period of time. Hope those who trade Butterfly now understand why you lose money when you sell ATM options. That’s because either the stock trends too much, or volatility increases.

For ATM option buyers its even more difficult, they have to fight time, the volatility has to increase and the stock has to trend and trend fast. If volatility drops, the premium too drops and overall they lose.

Iron Butterfly – the risk and reward:

Both the risk and reward is limited.

Now let me take real premiums and try to explain Iron Butterfly.

Date: 1 May 2015. Markets closed. Spot Nifty: 8181. We treat 8200 as ATM.

Sell 100 ATM (at the money) 8200 May 2015 Call option: 174
Sell 100 ATM (at the money) 8200 May 2015 Put option: 127
Buy 100 OTM (out of the money) 8300 May 2015 Call Option: 121
Buy 100 OTM (out of the money) 8100 May 2015 Put Option: 92

Total margin blocked: 8 lots sold * 14000 = 112,000, buying comes for free.

Note: An experience trader will wait for the volatility to reduce, and he will take out his profits. Where you are satisfied with your profits is something that no body can teach, but whenever there is a reasonable profit, they quit. It is the inexperienced traders who wait for the expiry because they want to take 100% of the profits which rarely happens.

However we need to calculate the profit and loss on the expiry day to explain this trade.

On May15 series expiry if Nifty is at 8200 the trade hits is Max profit:

Lets calculate:

All options expire worthless.

8200 May 2015 Call option: 174 * 100 = +17400
8200 May 2015 Put option: 127 * 100 = +12700
8300 May 2015 Call Option: 121 * 100 = -12100
8100 May 2015 Put Option: 92 * 100 = -9200

Total profit: 17400+12700-12100-9200 = 8800

ROI: (8800/112,000) * 100 = 7.85%

On expiry day if Nifty is at 8300:

8200 May 2015 Call option will be 100: (174-100) * 100 = +7400
8200 May 2015 Put option expires worthless: 127 * 100 = +12700
8300 May 2015 Call Option expires worthless: 121 * 100 = -12100
8100 May 2015 Put Option expires worthless: 92 * 100 = -9200

Total loss: 7400+12700-12100-9200 = -1200

On expiry day if Nifty is at 8100:

8200 May 2015 Call option will expires worthless: 174 * 100 = +17400
8200 May 2015 Put option will be 100: (127-100) * 100 = +2700
8300 May 2015 Call Option expires worthless: 121 * 100 = -12100
8100 May 2015 Put Option expires worthless: 92 * 100 = -9200

Total loss: 17400+2700-12100-9200 = -1200

So the trader profits only if Nifty closes close to 8200. Even if it is 100 points away the trader loses money.

What are the chances that Nifty will close exactly where it began at the start of the series? Very low. Therefore professional iron butterfly traders trade this as a volatility game, and exit as soon as there is a drop in volatility. A slight movement will not be able to damage the iron butterfly because the sold options are hedged. The sold options’ delta is higher than bought options’ delta and theta has Max effect on ATM options, if volatility drops this trade can give 2-3% return in days. That is enough for professional traders.

Do NOT wait till expiry, your profitable position may get into trouble. Though the loss is small, it may happen every time you trade. So waiting till expiry is not recommended.

If you are waiting till expiry in any trade than it is not the strategy that will make money for you, it is your luck that will. How many times were you lucky trading?

You can wait till expiry only in the strategies that are planned that way, for others you should exit when you are making a reasonable profit.

Conclusion:

• Iron Butterfly is done by selling at the money options of both calls and puts and buying just out of the money options to protect them.
• It is a volatility trade and not a directional trade or non-directional trade. Timing of volatility is important, else the trade may lose.
• Therefore it is traded by professional who have an idea of when the volatility is skewed and may drop.
• Waiting till expiry is not recommended.
• Exit whenever you are making a reasonable profit.

Have you traded the Iron Butterfly? If yes when do you exit the trade?

Recently I am getting a lot of emails from a certain stock tip providing company that says: “Double Your Money in 3 Months.”

REALLY?

I mean dude start with 1 lakh yourself and end up making more than 31 crores in 5 years. Why are you selling this service when you can become extremely rich in matter of years? Your subscription collection will be paltry in 5 years, compared to what you can make in few months.

That’s the difference between my course and tips providers. They prey on lazy trader’s dream to get rich fast without any work, which never gets fulfilled. How can Gods make a lazy fellow rich? Try to recall one name who made a lot of money from tips providers? You won’t find any, because they do not exist.

All rich people (except those who won a lottery) are highly qualified and have knowledge of what they are doing – jobs or business. Even if your father gifts you a business, he will first ensure that you join the company and come to the office like a regular and know the nitty-gritty of the company. This will ensure you get full knowledge of the business. You get to know the vendors, best rates to buy raw materials, best rates sell the finished product, employee structure, job delegation, government laws, day to day management etc before taking full responsibility of the company. If this process is not followed, it won’t take much time before their kids will destroy the business.

On the other hand tip providing is something like this: you become the manager of the company with zero knowledge of running the business, and someone will send you SMS on actions that needs to be taken. You blindly follow their tips and your company makes lakhs every month. How is that even possible?

Do you think a business can run where a son/daughter takes control of their father’s business without any experience and every time there is a problem, their father sends them an SMS and the problem is solved? Eventually the business will be doomed.

Stock markets are no different. You will not succeed if you do not know what you are doing. You will either depend on someone, or will speculate. Both are dangerous.

If you do not want to learn then I guarantee you will lose money. If you still think tips provider will make you money then read why they will not make any money for you.

When you pay a advisory service for tips, the first month you will make great money but the very next you lose it all and probably even more. Not only you will lose money but you will also not learn anything. And that’s the worst part. Lose money, lose time, buy stress and gain nothing in terms of knowledge.

I am sure those frustrated with the tip providing services must be agreeing to what I just said.

When I first paid a tip provider a few years back, I was very happy & excited. In fact I couldn’t sleep the whole night, because I thought in 24 hours I will be 5000 richer and this will happen 22 days in a month. And in 2 months I will kick my job good-bye. I paid Rs.4000 for getting equity intraday tip. At the end of the month I was minus 10000. 🙁 This doesn’t even include brokerages.

I thought maybe they were bad, so I looked for another tip provider. This time I paid 5000 for stock option tips. I could never get their rates – NEVER. Either they just sent rates that retailers couldn’t trade, like say exactly when markets opens. Or they just send rates that did not exist. When I called them they asked me to try Futures. I paid them again. That month I lost close to a lakh on their tips.

Then a friend told me Nifty options intraday makes a lot of money. I Googled, paid someone with a great performance history. First month I doubled my money. So I increased the max risk to maximum I had in my account. In 2 months I lost more than 70,000.

Almost 5 lakhs I lost on my own speculations, and thanks to the tips providers I lost another 2 lakhs.

That was enough. I remember then I told to my self, I am not weak, if there is someone who can help me than that’s ME.

The next day I started reading. You know what,

“God Helps Those Who Help Themselves.”

VERY TRUE.

I guarantee all those who are making a lot of money in stock markets have reached there by hard work and are not spoon fed by someone. They don’t depend on tips. They are least bothered by what experts saying. They know what they are doing and follow their plan. The belief is there because of knowledge.

This article will be worth if you understand that you are not weak. I am sure all of you are doing good in life, this itself shows that you have the ability to learn. Its just that you got a bit lazy and this is exactly these tips providers are looking for. They will make full use of your weakness. If you fall for them you will lose your hard earned money. Do not blame them, its you who wanted to make money without any work and lost. So blame yourself.

I do not promise anything that’s is not possible. Believe me I can lie by saying, “buy my course and make 10% a month and blah blah.” You know what, I can make a lot of money by doing that. But no, my integrity is more important than that money. I can earn a lot myself by hard work, I don’t need to lie to make money.

I charge a small fee so that you give value to the course. If you find Rs. 100 on road, you will spend it on some useless item. Anything for free doesn’t have value. And I also have to give you support for life. If I offer this for free, my life will become hell. Plus it eliminates lazy traders who just want tips. I too get a lot of emails for tips. I delete those emails or tell them to learn and not depend on someone else.

However the fact is if you are smart, you can make more than 2-3% a month, but you need knowledge even for that. That’s it – do not try to double your money every three month – that’s is where even Warren Buffet failed. How will you do that with some tip provider?

A lot of traders love to trade Futures. Unfortunately most of them play it un-hedged or naked. Futures is highly leveraged derivatives and has a Delta of almost 1. Which means it moves 1 point with every 1 point move in the underlying. Isn’t this trying to take too much of risk? Remember you are leveraging your money.

Whatever, if done well, rewards are amazing. Futures can make you a fortune pretty soon or can take away all your wealth within months. Unlike options where the losers bleed slowly, Futures will bring results pretty fast.

That is why you will rarely see a Future trader who has lost a fortune. However you will find many option traders who have lost a lot of money in the markets like here and here.

Simple reason is that Futures traders lose a lot of money in 1 or 2 months and then they quit. Option buyers on the other hand bleed slowly. They lose small sums which are not painful, then they get their salary and try again – this time for a recovery – lose some more – next month by luck they recover some money. Then brokers tell them to keep trying, and after years and years of trading they find that they are deep in red amounting to lakhs. By this time their brokers are running all the way laughing to their banks and the trader stops trading frustrated promising never to return to the stock markets. Money Lost – acceptable – Time Lost without any meaningful knowledge is not acceptable. But then it gets too late.

Sometimes it gets so bad that these people do not even invest in any stock or mutual funds. They only invest in bank FDs. That is where they lose even more.

However, there are some who make a lot of money. I was told by a trader who took my course that there are two brothers in some town in Tamil Nadu who are making a killing trading Futures hedged with options. They are making a profit of almost 20-30 lakhs every month on a 1 crore account. Well that works out to a cool 30% return. That does not mean everyone can do it. They must be following a solid strategy and most importantly they are highly disciplined.

We will go to the topic soon but before that let me explain how these brother might have reached there.

1. First they got some education on trading.
2. Then they must have tested a few strategies that their system may have provided or they may have developed themselves.
3. These strategies may have been tested on paper or one or two lots max for at least 6 months.
4. Then once they got a strategy that suits their personality and trading style and also bring in good results – they would have gradually started increasing the lot size of the strategies.
5. And then in few months time, a time comes when you finally see profits of lakhs a month. 🙂

Yep some knowledge, some hard work, and some discipline but see if you are highly disciplined and have a sound strategy making a lot of money from stock markets is not that difficult. But you need knowledge, patience and discipline – that’s the key.

So why am I telling you all this? Because the strategy we are going to learn in this article involves combination of Futures and Options.

The Ratio Put Selling Trade:

When your view is that the stock may remain range-bound, you can:

1. Sell/Write one Future, &

2. Sell/Write two ATM Puts.

Risk vs Reward:

Risk: Unlimited
Reward: Limited

See the image to understand:

As you can see the risk is unlimited to both sides. Frankly I do not like any trade that has unlimited risk. This trade has risk on both sides. In my book its not a good trade.

NOTE: If you have a job or business – taking any trade with unlimited risk is NOT recommended. Why? Because you cannot monitor the markets 9-3. If some bad news comes while you are in an important meeting, a lot of money can be lost. On top of that your broker will call you and the only thing you will tell him at that point is to take the stop loss. By the way at that point what else can you do? But if you were trading full time may be you would have taken a stop loss much earlier. Still I would rather not suggest unlimited risk strategies. The reward is not worth the risk. Stay away. There are better trades. Just search my blog. 🙂 Or other blogs.

In my course the directional strategy is a beautiful combination of Futures and options but the hedge is such that there is no unlimited loss, in fact there is no need to take stop loss as the Max loss is so small that a trader can just leave the trade one full month to hit target. What are the chances that it will hit the target if you leave the trade till expiry? Well a lot.

For example on 6-Apr-2015 I had sold Nifty FUT APR 2015 at 8671.5, after that Nifty rallied almost 200 odd points but I did not take the stop loss as the position was hedged, now I am waiting for the profits to arrive. Even if it doesn’t I am OK as the loss I will take on expiry day will be small. But if Nifty falls even 100 points from here my trade will be in profit. What are the chances? A lot. I still have 15 days to go. 🙂

Lets do a real trade on Ratio Put Selling (Prices as on 14-Apr-2015):

Nifty Spot: 8834.00 (We treat 8800 as At The Money (ATM))

NIFTY Future 30Apr2015: 8855.00

NIFTY 30Apr2015 PE 8800.00: 75.00

The traders view is that Nifty may be range-bound or will fall slightly from here till expiry on 30-Apr-2015. The trader plays the ratio put selling.

Sells 1 lot of Nifty Future at 8855 and also Sells 2 lots of 8800 PE at 75.

Note: In such trades where the risk is unlimited and you cannot stop yourself trading, its highly recommended that you trade in 1 or 2 lots only. If you take a big risk and if Nifty really falls (your view is right) but falls too much suddenly you will have to take a huge loss. On the other hand if Nifty rallies, you still take a loss.

Now lets calculate the max profit and break even points.

The trade makes great profit if the stock stays at around 8800 till expiry or expires exactly at 8800. Lets calculate the profits.

Very Important Tip: Futures premium will vanish and it will show exact price of Nifty spot on expiry day. (This is a great reason to actually short futures and buy the stock in cash. This trade is known as arbitrage. In arbitrage some profits are guaranteed. Its very difficult to find stocks with very high Future premiums, otherwise no one would trade Nifty options. If you can make guaranteed 2% a month by arbitrage what is the need to take risk? The markets makers were quick to realize this so you will see that stock Futures do not have a very high premium. Nifty has, unfortunately you cannot buy shares of Nifty. Someone mailed me and asked if they can do the arbitrage with NiftyBeES. The answer is NO because Each NiftyBeES unit is 1/10th of the Nifty Index value, and Future is 1. So the whole trade will get very complex and unmanageable. If someone reading this has some experience in NiftyBeES please share in comments. Frankly I have never seen or read anywhere traders hedging Futures with NiftyBeES.)

Coming back. Nifty expires at 8800.

Profit from Futures: 8855-8800 = 55 points. 55*25 = 1375.

Both the Put options expire worthless. 75*2*25 = 3750.

Total profits: Rs.5125.00

ROI: Approx 14,000*3 will be blocked. (For each Future and option sell in Nifty approx 14k is blocked)

14,000*3 = 42000 = (5125/42000)*100 = 12.2% in less than 15 days – amazing returns – but it comes with unlimited risk, so trade with caution.

Calculating beak even points:

This is slightly difficult to calculate as two lots of options are sold.

On the up side both the Put options will expire worthless:

So the profits: ((75 * 25 ) + (75 * 25 )) = 3750.

Now the trader can take this as max loss.

3750/25 = 150

8855 + 150 = 9005.

So 9005 is our break even at the upside after this the trade starts losing money.

Calculations:

At 9005 the Future will lose: 8855 – 9005 = -150 * 25 = -3750.

Since both options expire worthless and trader makes 3750 from the put options this trade will break even at 9005.

On the down side:

If 9005-8800 = 205 points was our BE, it should be same on the downside as well.

8800 – 205 = 8595. This is our BE at the downside.

Calculations:

At 8595 the Future will make: 8855 – 8595 = 260 * 25 = 6500.

At 8595 the puts will be in the money:

8800 – 8595 = 205-75 = 130. So a loss of 130 points = -130*2*25 = 6500.

So at the downside 8595 is our break even. Below that the trade starts losing money.

Where to take a Stop Loss in Ratio Put Selling?

We just discussed the break even points – if it is breached you should take a stop loss.

So in the current scenario the trade is safe from 9005 to 8595. Almost 400 points movement. Which means approximately every one times out of 2 the trade will hit stop loss.

Note that both 9005 and 8595 are Nifty Spot prices, not the Future price. Now tell me do you want to trade this?

Note: You may rollover the trade when SL is hit, but whether you make a profit or loss will depend on time taken to hit breakeven and volatility. If volatility has dropped and too much time has been taken to hit BE, on the upper side the trade may be in profit. In that case why should you rollover? On the lower side volatility may not have dropped, in fact increased and since falls are swift, the trade may be in loss. In that case you may rollover.

Conclusion:

• Ratio Put Selling involves One Future Sell and Two ATM Puts Sell.
• It has a unlimited risk and limited reward. Unlimited risk trades need your full attention. Please do not attempt if you have a job.
• Its important that you calculate the break even points and take stop loss when its breached.
• You may rollover the trade once SL is hit. There is no need to rollover if the trade is in profit when SL is hit.

What do you do when you sell Future and its going against you? Do you hedge it or not? Please comment. Your questions and my answers will help other traders reading this.

Thank You.

A lot of times when a stock falls we get an idea that it may not fall further or may remain there for sometime in a range bound region. In such a scenario you can trade a ratio put spread.

How To Trade a Ratio Put Spread?

1. Buy X no of ATM (At the Money) Puts.
2. Sell X*2 (double) number of OTM (Out of the Money) Puts.

See the image below to understand the trade:

Note: If you but 1 lot ATM put, you need to sell 2 lots OTM puts. But this can change depending on your view. For example if your view is pretty strong that the stock may not fall further, you may sell more than double number of puts than the number of puts bought. The point is you are taking a credit. You can sell as many puts you want, but the risk also increases.

For example you can trade buy to sell in this ratio depending on your view: 2:5, 3:5, 2:10 – the combinations are virtually unlimited.

As you can see the 2:5 trade is riskier than the 3:5 trade as more lots are sold compared to the number of lots bought, but if the view is right the 2:5 will make more money than 3:5 trade. Every trade has a tradeoff. 🙂

Risk vs Reward:

Reward is limited to the premium received from the sold options plus any premium got by selling the bought options.
Risk is unlimited if the stock falls.

When to Trade Ratio Put Spread?

When a stock has fallen and your view is that it may not fall any further or may fall 1 or 2% max till expiry.
Volatility does not have much impact in this trade as some Puts are also bought. However profits do increase when the premiums are high as the trader gets a good credit. Usually when a stock falls, the volatility also increases, thus it’s obvious that premiums will be high and you should get a good credit.

Once the trade is done Volatility does not have a huge impact. Because if it falls you make money from the options sold, but lose money from the options bought. However if you have sold more than double the number of options bought, volatility decrease may help the trade. The sold options will make more money than the losses from the bought options.

Note that it’s highly recommended that you DO NOT sell more than double the number of puts bought. Risk is unlimited on the downside. If the stock keeps falling you may have a huge loss.

Where is the Maximum Gain?

On the day of expiry if the stock is exactly at the strike price of the sold options. The sold options expires worthless and the bought options have some intrinsic value – they do not expire worthless and give back some money to the trader.

Which Stocks to Target?

Stocks that do not have huge movement whether they fall or rise. HDFC bank is one such a stock. The idea is if the stock does not move – you should make a profit in a few days and exit the trade. Do not wait till expiry.

Lets take another example. Reliance Ltd. Recently the stock has fallen a lot and your view is that it will remain here or increase slightly in the next one month.

(Disclaimer: This is a virtual trade. Please do not copy. If you want to trade, please trade at your own risk.)

See the graph:

See that the stock has fallen a lot since the last one year and you think that it may not fall further. You trade the ratio put spread on Reliance.

Now let me get real prices of Reliance Puts.

RELIANCE 30-Apr-2015 PE 820.00 16.00 (ATM Put)
RELIANCE 30-Apr-2015 PE 800.00 9.00 (OTM Put)
1 lot = 250

Buy 1 lot 820 PE = 16*250 = 4000 (Debit)
Sell 2 lot 800 PE = 9*250*2 = 4500 (Credit)
Note that 4500-4000 = 500 is NOT max profit.

Now if on 30-Apr-2015 the expiry day, Reliance is exactly at 800 (the sold Put strike price) this trade will make max profit.

The 800 PE expires worthless = 4500 Profit.
The 820 PE will be at 20 = 20-16 = 4*250 = 1000 Profit.
Total Profit: 4500 + 1000 = 5500.

The trade made profits from BOTH the sold and the bought options.

Calculating ROI:

Approx Rs. 52,500 will be blocked. (5500/52500)*100 = 10.47%.
This is a great ROI.
If stock is above 820 on expiry day, which is highly likely, I still make Rs. 500 profit – a 0.95% return.

Lets take another example on Nifty.

30-Apr-15 PE 8,500.00 120.00
30-Apr-15 PE 8,400.00 85.00

Buy 100 8500 PE: 120 * 100 = 12000.00 (Debit)
Sell 200 8400 PE: 85 * 200 = 17000.00 (Credit)
Total Credit = Rs. 17000 – 12000 = Rs. 5000.00

Max profit calculation:

Nifty at 8400 on expiry day (the shorted put strike):
8400 Puts expire worthless: 17000.00 Profit
8500 Puts at 100: 100 – 120 = -20*200 = -4000 Loss
Total Profit = 17000 – 4000 = Rs. 13,000.00

ROI:

Margin Blocked: Rs: 1,08,000 approx.
(13000/108000)*100 = 12.03% return in 30 days.
Even if Nifty is above 8500 the trader makes Rs. 5000, approx 4.6% return in 30 days.

Yes Nifty gives more return than stocks for the same trade. The reason is the premium of the options vs. the margin blocked. To attract traders to trade in indexes the market makers make sure the premiums in the index options is better than the stocks, on top of that due to lower risk less margin is blocked. That is the reason why you see more option trading happening in index than stocks. This is true for all the stock markets in the world.

Calculating Break Even:

If you are getting a credit trading put ratio spread, there is no need to calculate the upper break even. If you are paying a debit you may have to calculate the upper break even as well. However since this trade is mostly done on a credit lets calculate the lower break even on the Nifty trade.

Since the break even will depend largely on the points received and paid you may need to calculate your break even every time you trade.

In our case it is 150 points below the sold put strike.

8400 – 150 = 8250. If Nifty is at 8250 on expiry day:

Buy 8500 PE is: 8500 – 8250 = 250-120 = 130*100 = 13000 profit.
Sold 8400 PE is: 8400 – 8250 = 150-85 = -65*200 = -13000 loss.

Hence if Nifty is at 8250 on expiry day, this trade will be at break even. Below 8250 it loses money.

What is the risk in the trade?

If Nifty keeps falling the extra options sold on the 8400 strike will increase in value and start making losses. Remember these are not hedged so losses can be unlimited. Therefore to restrict losses it is important to take a stop loss exactly at the strike price of the puts sold. If you leave and Nifty reaches 8000 – you may suffer heavy losses.

How to increase the return?

If you are a technical analyst you can sell the puts at the support level strike. However there is no guarantee that the stock may not fall further.

If volatility is VERY HIGH and you assume after the news it may crush, then you can sell more than double the number of puts you bought. However please do not increase the buy : sell ratio of 1:3 – means 1 put buy and 3 puts sell.

If volatility gets crushed after the news, you can immediately realize a good profit and square off the position. It does not matter even if the stock moves down slightly after the news is out. The volatility crush will help the sold puts and since you have sold more than you have bought, the whole trade will be in good profit in only few days.

It gives the best return on expiry day. Should we wait till expiry?

Traders waiting till expiry are trading a bad strategy. No trade should be done to be taken off on the expiry day. Profit or loss should come much before to expiry day. That predetermined profit or loss should be there in your mind when starting the ratio put trade. Once its achieved exit and look for another opportunity.

Conclusion:

1. Ratio put trade is done when the trader thinks the stock may rebound or may not fall further.
2. It is done by buying ATM put and selling double the number of OTM puts.
3. If stock is at the short put strike on expiry day maximum profit is achieved.
4. If stock is above the bought puts still some profits can be made.
5. If stock keeps falling the trade can lose a lot of money, so traders should take a SL when the stock has reached the short put strike to limit losses.

Have you ever traded ratio put spread? If yes let us know what happened in the trade.

You can download the PDF version of this post here.

Stock market investors in India and around the world want to make a lot of money by investing. That is the sole reason they invest. Else there is no reason to take a risk. Most of us want to make one crore or millions of dollars from the stock markets.

Well good news is its not that difficult to make one crore. In fact you can make crores. The bad news is you yourself is your biggest enemy of your own investing. Our own self-destructive speculative trading and the mindset to get rich quick from the stock markets is the biggest obstacle to make crores from the stock markets.

Another problem is that investors do not diversify their portfolio. When I talk with traders like who lost 2 crores or even lakhs, I found out that the real problem is greed & ego. The feeling that “I can do no wrong with my investments” and “the markets will favor me” is a grave mistake of investment. Why should the markets favor you? Because you want to get rich quick? Is that a valid reason?

However if you trade cautiously, take calculated risks and trade very conservatively, you can accumulate huge wealth over the years trading the stock markets. Mind it we are talking about accumulating wealth over the years and NOT days or months. This is possible only through conservative trading and NOT aggressive trading. You may want to check out my conservative options trading course where you can learn such strategies to make money slowly but consistently in the stock markets. It is doing good for a lot of traders all over India.

A few days back I got another dreaded email: (Sender’s name withheld for privacy. Edited for grammar and spelling.)

I am a heavy loser in share market. In the last 25 years I lost about Rs. 25 lakhs. I lost a huge amount at the time of Harshad Mehata scam. After every three four years gap I collected two or three lakhs from my very hard earned money and lost in share market in hope that one day I will be winner. May be this was due to ego that one day I will be a good trader. I want to take one more last chance, with rest of my remaining capital of 1 lakh.

Which software will be required for me to achieve the above target? Do you know any good tip provider to fulfill my requirements? I can’t lose more then 10% of my capital, and when I lose 10% I will quit from market. I have also spent a lot of money on a lot of trading software and tips providers.

Is there any kind of hope for my kind of student?

The first thought that came to my mind was there is no hope for this kind of trader because even after losing for 25 years, he just wants a software or a tip provider to help him make money. He does not want to learn anything. If you cannot help yourself how can you expect a software or a tip provider to help you?

What a waste. No I am not talking about money, but TIME. Rs. 25 lakhs is NOT in any way bigger than 25 years. When I asked this trader what have you learned in your 25 years of trading, the answer was shocking. He we silent. Which means he learned nothing in the last 25 years. This is sad. If you are passionate about something – go into details to learn about it.

The last thing you should do is keep trying the same thing again and again without any research or knowledge. If you do the same mistake every time, how can you expect a different result every time?

How many of you reading this are doing the same investing mistake again and again thinking that this time the outcome will be different? I bet if you haven’t learned anything and are still speculating, you will get the same result every time you trade. You will waste time and money. After years you will feel guilty about what you did with your money. Please don’t let that happen to you.

When I asked him why he kept repeating the same mistake, he said he feels sad about it now. He said he wanted to get rich fast and kept trying the same thing. He has also hinted in his email that it got into his ego to beat the markets. Well emotions don’t work in stock markets. They do not know you.

I then told him he could be worth 500+ crores today – repeat 500+ crores of rupees – had he not done those mistakes with a only paltry investment of a few thousands rupees 25 years back. He was shocked. He asked me how. I know you also want to know how?

Lets discuss. 🙂

Imagine a stock investor bought 1000 shares of ITC ltd. at Rs. 10/- in 1975. Total investment amount = 1000 * 10 = Rs. 10,000/ -. He met with an accident and went into coma.

Agreed this is a very unlikely situation, but for now lets believe it. Please note that Rs. 10,000 is NOT a very big investment even in the year 1975. Calculated at 9% inflation rate, at today’s value it is equivalent to Rs. 314,094.20. If 3 lakh is not a very big amount today, 10,000 would also be not that huge 40 years back, but still significant.

Lets get started. The investor is in comma and this is what happens when he is sleeping:

1975 – Bought 1000 Shares of ITC Ltd. at Rs. 10 per share. Total investment amount Rs. 10,000.00.
1978 – ITC issues share bonus 1:5. Current shares: 1000 * 5 = 5,000.
1980 – ITC issues share bonus 1:5. Current shares: 5000 * 5 = 25,000.
1989 – ITC issues share bonus 1:1. Current shares: 25000 * 5 = 50,000.
1991 – ITC issues share bonus 2:5. Current shares (50000*5)/2 = 1,25,000.
1994 – ITC issues share bonus 1:1. Current shares: 125000 * 2 = 2,50,000.
2005 – ITC issues share bonus 1:2. Current shares: 250000 * 3 = 7,50,000.
2005 – ITC declares share split 1:10. Current shares: 750000 * 10 = 75,00,000.
2010 – ITC issues share bonus 1:1. Current shares: 7500000 * 2 = 1,50,00,000.

1000 shares convert to 1.5 crore shares.

Lets assume the investor got cured from comma and was perfectly OK last month and suddenly realized he had invested Rs. 10,000.00 in ITC in 1975.

He calls his broker and asked him to sell all shares in his account. ITC shares reached 390+ last month.

390 * 1,50,00,000 = 585 crores. Assuming that more than 215 crores dividend was also given.

Total profits = 585 + 215 = 800+ crores on an investment of just Rs. 10,000. Remember all this is TAX FREE because any investment in shares for more than 1 year is not taxed. Dividends from shares is also not taxed.

Compare this to a bank Fixed Deposit: Investment of Rs. 10,000.00 in 1975 re-invested with interest as soon as it got matured every year for 40 years today would be worth only Rs. 3,14,094.20. A little more than 3 lakh rupees. I have not even deducted taxes. A fixed deposit in bank of any amount for any period of time is taxed. So the investor will be left with less than Rs. 3,00,000.00 (3 lakhs). Poor returns.

(That does not mean you should never invest your money in fixed returns. Some money should go to very secured financial instruments, just for diversification of portfolio. Stock markets are volatile – you may need some money very soon – this should be in fixed income instruments. Click here to read how I diversify my portfolio. If you are young, most of your savings should be invested in stocks of good companies.)

Another example:

Had your relative invested in 100 shares of WIPRO at a price of Rs. 100/- per share in 1980 and forgotten about it – this is what would have happened to his account. (Note that unlike ITC shares, WIPRO shares are being bought at a premium.)

Total investment: 100 * 100 = Rs. 10,000.00
1981 – WIPRO declares bonus 1:1 = 100 * 2 = 200 Shares
1985 – WIPRO declares bonus 1:1 = 200 * 2 = 400 Shares
1986 – WIPRO declares split 1:10 = 400 * 10 = 4000 Shares
1987 – WIPRO declares bonus 1:1 = 4000 * 2 = 8000 Shares
1989 – WIPRO declares bonus 1:1 = 8000 * 2 = 16000 Shares
1992 – WIPRO declares bonus 1:1 = 16000 * 2 = 32000 Shares
1995 – WIPRO declares bonus 1:1 = 32000 * 2 = 64000 Shares
1997 – WIPRO declares bonus 2:1 = 64000 * 3 =192000 Shares
1999 – WIPRO declares split 1:5 = 192000 * 5 = 960000 Shares
2004 – WIPRO declares bonus 2:1 = 960000 * 3 = 2880000 Shares
2005 – WIPRO declares bonus 1:1 = 2880000 * 2 = 5760000 Shares
2010 – WIPRO declares bonus 3:2 = 5760000/3 = 1920000*2 = 3840000+5760000 = 96,00,000 Shares

100 shares of WIPRO became 96,00,000 (96 lakhs) Shares in 2015 (or in 35 years).

WIPRO is currently trading at around 650.

650 * 9600000 = 6,24,00,00,000.00 OR Rs. 624 crores. 🙂
Dividends = Rs. 200+ crores
Net Worth = 624 + 200 = Rs. 824+ crores.

Profit of more than Rs. 824 crores by a throw away paltry investment of just about Rs. 10,000 in 35 years without doing any hard work. How is that for a return? Most people do work for 30-35 years. Someone who had done that could have retired now with worth more than many rich industrialists/entrepreneurs in the world. 🙂

Had you father invested in shares worth even Rs. 1000/- (one thousand only) in your name in 1975 in ITC or WIPRO, you would be owner of many of crores today. 🙂

Now the first question that may come in your mind is, how can we know that a stock will give such a return in a few years time. Good question. But the fact is almost all big companies returned almost the same amount. Mid-caps were better. May be you would have made 100 crores with some other company but does that really matter?

What about diversification? Some in ITC, some in SBI, some in HDFC etc? What about more investments every year along the way? Can you get the idea I am talking about? By the time you retire you will have accumulated so much wealth that not only can you live very rich life but you can pass this great wealth generated to your children and/or grandchildren.

There is a living person who invested in stocks using the same strategy above and made billions of dollars. He is none other than Warren Buffett. He is probably the most successful stock market investor of our time. He is also one of the most riches man walking on Earth today. Stock markets made him rich but it was not overnight. It took him years of investment. Once some reporter asked him what was the best time to sell a stock? His reply was NEVER.

Yes it took him a lot of years to become very rich, but how you want your investment to perform 10 years from now? Ask yourself.

How to make crores from the stock markets now?

So you want to know how you can repeat the same performance now? Answer is the same. Something that does not make money will never make money and something that does make money will make money. This theory will hold true years from now.

You need to identify stocks that you want to invest into and keep investing into them till you retire. Choose 5-6 great companies and start investing today. Forget this money till you retire.

Of course diversification also means not investing everything in just one place. What if your stock portfolio does not perform? For that you must trade as well – but trade conservatively. If you are conservative with your trades you should be able to make money over time. Even a 20%-30% return a year is much better than speculating options and losing money. Results can be great if you compound that money. We are talking 10 years from now, not tomorrow.

With stocks you do not have control over price. With trading options conservatively, you have.

Your age is running out. If not now then when?

I got this comment from Mr. Noble which I think is quite interesting so I am posting both the comment and my answer here to benefit all. Most people do not read comments.

It is possible to speak these ideas from hindsight. The markets have matured and we are not in 1975. Investments now requires a different kind of approach. This may not work as we are in a different market cycle. Also cycles can not be identified beforehand. The companies existing today may not be around in another 30 years.
Thanks,
Noble

My answer:

Noble,
You are absolutely right the markets have matured and we are not in 1975. But that stands for every business. If you want to start a company – you need to just jump into it with some research and money. A lot of people have ideas to do business but will give themselves excuses like – today’s economics is different than what is was 20 years ago, there is a lot more competition blah blah. These are the people who never are able to start a business and in spite of being intelligent, die working their life in a 9-5 job. Had they not given themselves any excuse and given it a try for at least 1 year – I am sure most would succeed.

The point here is if markets have changed why can’t you?

The biggest change that has happened is that today shares and even IPO (Initial Public Offering) are sold at a premium.

So if a great company like ITC or WIPRO comes with an IPO today it would be at least in the price band of Rs. 300-350 per share. But if you count inflation, going 30 years back probably Rs. 300/- would be equal to 23 – double that of 10. So maybe not 800 crores, but you make 400+ crores – does it really matter?

Yes it’s difficult to pick companies that will keep growing for years, but it’s not difficult to pick a few that are doing very strong today. Keep investing in them for a few years, and when you make a healthy profit – take your money out. Then according to those times pick another set of great companies and start investing. Rotate your money and compound. 🙂

It is not that difficult. For example I lost money from 2007 through 2011. A lot of investors lost too. My psychology was exactly the same on the lines of what you have written. It’s a different market, it’s hard to find great companies to invest blah blah – the result I lost money because I had no discipline or a planed approach to investments. And I wanted quick results. You have to learn to live with the volatility of the markets.

Let us take an example. At that time IT and banking sectors were doing well. Had I invested gradually in Axis Bank, SBI, and Infosys (all giants) – my investment would have grown by at least 500% – this in just eight years.

So stop giving excuses. Just start investing. I bet in a few years time you will see the benefit.

Do you invest directly in stocks? If yes let me know which stocks you invest and how you plan your investments. Your comments will help many investors reading this blog.

Thanks.

You must have got some idea about ratio call write strategy by the name itself. Basically it is selling options against futures or stocks. Frankly these kind of positions work only if your view is right else there can be unlimited losses.

Whenever in any trade there is a chance of unlimited loss, I get uncomfortable. Though I agree at some point we will take the losses out by getting out of the position, but the potential damage it can do by that time is unknown. Since the damage is unknown, I usually do not get into these kind of positions. Actually its in-built now, all these unlimited loss trades or speculative trades does not exist for me.

But ratio call write trade is one of those better trades, and I feel if this article helps traders looking for ratio call write trade, then that would be great.

Ratio Call Write is somewhat like a covered call but comes with a slight twist. Covered calls are usually done on stock vs. options i.e buy stock and sell call. However buying stock and selling call is not unlimited risk. Here we will see why a similar trade is at unlimited risk.

The View:

The view of the trader is that the stock will stay in range for the next few days and the volatility will fall. Even if the stock falls or rises by a couple percent points the trader may close this trade for a profit.

How To Trade The Ratio Call Write Strategy:

Buy X Lots in Nifty Futures / Stock Futures or Stock in Cash
Sell 2*X Lots ATM (At The Money) Call Options current month

Which means if the trader buys 1 lot of Futures, he needs to sell 2 lots ATM Call options. If he buys 2 lots of futures, he needs to sell 4 lots of ATM call options.

Note that in covered calls only the same number of ATM/OTM call option is sold, but here the trader sells double the number of call options.

You must be thinking this is a better trade than the covered call because not the same number but double the number of options are sold, but you will be surprised to know what may happen. In short, if risk is concerned, covered call is a better trade than ratio call write.

Risk vs Reward:

Risk is Unlimited and Reward is Limited.

Look at the image below to understand the risk reward of Ratio Call Write trade better:

Now let me do a real paper trade to help you understand better how you will make profits and how you may incur losses.

Date: March 10, 2015
India VIX: 15.53
Nifty Spot: 8700.00

Buy 1 Lot Nifty Future: NIFTY 26Mar2015 Future: 8772.00
Sell 2 Lots of 8700 March Call Option: NIFTY 26Mar2015 CE 8700.00: 160

Credit Received = 160 * 2* 25 = Rs. 8000.00

Note: None of the other websites which teaches the Ratio Call Write Strategy will tell you the hidden price of Futures while explaining this trade. As you can see even though Nifty Spot is 8700.00, a trader has to pay a premium while trading Futures.

Though Nifty is at 8700, the Future is traded at 8772. A difference of 72 points. Mind it, this is a significant issue and cannot be ignored. This can significantly impact the profit and loss of the trade.

Therefore its highly recommended that this trade should be done in cash holding of a stock. Yes you may need a lot of money to trade this with real stocks in your Demat account, but it will be less riskier than doing it with Futures.

If you are thinking why you need to pay a premium to buy/sell futures than the answer is Volatility, Time and prevailing Interest Rate. By trading in Futures you are getting a leverage. 8700*25 = 217500. You need this much cash to buy Nifty 1 lot if Nifty was a stock. But by buying a Future you are getting the same benefit if the Nifty appreciates. And how much cash is blocked? Approx 14,000. Which means you are saving more than Rs. 2 lakh per trade. Who will pay for the interest earned on that money? The Future trader, in the way of premium.

Also, it is not justified if someone buys a stock by paying the full in cash, and someone buys a Future by paying just 10% of it – and make the same profit in the same movement. There should be some justification. Therefore the Future trader pays a premium. Of course on the expiry day both the Future and the stock will show the same price.

Well do you know the above situation can be traded as an arbitrage? For example if Future of a stock is trading at a huge premium, you can sell Future and buy the stock at the same time. Now this is a guaranteed profit for you. For example if Future is trading at 105, and the stock at 100. You can sell Future and buy stock and on the expiry day if the stock is at 100 – you can make 5 points from Future. If the stock is at 105, you make 5 points from the stock. 🙂

Excited? Well don’t get too excited because markets are priced in such a way that arbitrage opportunities are rare now a days. But if you search seriously you may get a couple of trades every month. One day I will write on arbitrage trades, but for now lets leave it.

Coming back to the trade.

Now imagine a situation where Nifty did not move much and stayed at around 8700. See how the Futures will eat into the profits.

Both the lots of 8700 March Call Option will expire worthless. The trader gets to keep Rs. 8000.00.
BUT Future will also be at 8700. Loss from Futures 72 points. 72*25 = 1800.

Total profits: 8000 – 1800 = 6200.

Imagine Nifty to be a stock and also imagine the trader buying Nifty shares at 8700. Now he is at zero loss from the shares, but full Rs. 8000 profit from the call options sold. With futures the premium he paid has gone. Imagine losing this money trade after trade plus the times he made a loss. Future premium will only add to his agony every time he trades this.

Hope its clear that if the stock does not move, the trader will make profit in the Ratio Call Write strategy. Do you really think for a period of 30 days Nifty will not move? No that is not going to happen.

Now coming to the difficult situations. The trade break even is option premium received from selling the calls on the lower end and profits coming from the Future covering the loss till break even is reached, on the upper end.

In the lower end it is: 160 * 2 = 320.
Lower end break even: 8772 – 320 = 8452

Why we are considering the Futures price, why not Nifty spot? Because your profit and loss will be calculated on the Future price NOT the Nifty spot when you initiated the trade.

Calculations when Nifty falling down and on expiry day is at 8452:

Loss from the Futures: 8452 – 8772 = -320 * 25 = -8000.
Both the sold call options expire worthless: Profit = +8000.
Total profit or loss: 8000-8000 = 0.

Which means break even on the downside is 8452. If Nifty keeps falling even after reaching 8452, the trader is at unlimited loss.

Lets calculate break even on the upside:
Calculating this is a bit tricky as we have two sold options, not one. Remember the max loss that can be covered is 320 points but there are 2 options so break even on the upper side is: 320/2 = 160 + 8772 = 8932.

Calculations when Nifty is at 8932 on expiry day:

Profit from the Futures: 8932 – 8772 = 160 * 25 = 4000.
Loss from the sold call options: 8700 March Call Option will be at: 8932-8700 = 232.

((160-232) * 25) * 2 = -3600

Total profit or loss: 4000-3600 = 400. (Note that on the upper end it is very difficult to get a zero profit or loss because there are two options sold, so the loss multiplies by 50 but the profit multiplies by 25.) Still consider this as break even.

Which means break even on the upside is around 8932. If Nifty keeps going up, the trader is at unlimited loss.

Which Calls to Write?

Best is to write ATM calls expiring in next 30 days because they have little time value. If stock does not move much even for a few days the erosion of premium of the sold options will be significant as they are ATM and the trader can exit in profits.

When to Book Profits?

It depends on the comfort level of the trader, but as a conservative trader for me 2-3% per trade is good enough. Whatever, never wait till expiry, any day you see a good profit just exit.

Why Ratio Call Write strategy is better than buying/selling naked futures?

Many Reasons:

1. There is a big room for profit: In the above trade the room is from 8944 to 8464. If Nifty is anywhere between this on expiry day the trader can be in profit.
2. Whether Nifty goes down or up the trader will feel safe at least until 8944 or 8464 gets breached.
3. If some time passes and Nifty has fallen only a few points the trader can still exit in profits, because the time will eat some premium from the options sold.
4. This is not trading in a panic state of mind. Though not conservative, this trade is still better in terms of keeping stress under control.
5. Still this trade is a unlimited loss strategy so at least I do not recommend it. However if you own real stocks (not Futures) this trade can be traded. Because if the stock falls or does not move the trader makes great money. However if stock keeps rising, the trader can exit one of the call option at a small loss and convert this trade into a covered call.

Conclusion:

• Ratio Call Write is a strategy where traders owns stock or futures and sells double the lots of call option against the no of lots of Futures.
• The idea is to take profits from the sold high premium ATM options.
• If stock rises, the trader needs to take stop loss in the calls sold or exit the trade altogether.
• If stock falls the trader can book profits in the sold options and can again sell the options of next month.
• There is a big room for profit in this trade.
• Unlimited risk, so be careful. Calculate your break even points both sides and get out if breached.

Have you ever sold 2 call options against Future buy? If yes please tell us your experience.