I had done a nifty credit spread a few days back so I will be discussing a live example with you. BTW credit spreads is my favorite strategy. I mostly do them every month and occasionally naked selling only if the markets gives me a great opportunity. If you do not know what a credit spread is here is an explanation.

An option credit spared is a position when the nearer strike option is sold and the further out of the money (OTM) option is bought for protection. Ideally they both should be of the same stock or index and of the same lot size and of the same months (some people create credit spreads with different months but that is entirely different subject. This article deals with same month credit spreads). Since the nearer option is sold – the difference of the amount between the sold and the bought option is “credited” to your account. Therefore the name – Credit Spreads.

Confusing? Ok let me give an example to help you understand.

Lets suppose nifty is at 5800. It has already fallen 200 points recently and you think a re-bounce may happen anytime soon. Even if it falls a bit further you do not think that it will go below 5600 this month. What do you do? You sell (short) one lot (or more) of the PUT at 5600. Now as you know shorting options can be very risky, to protect yourself from a great downfall you buy the same number of lots you sold at the strike price of 5500 or 5400 as per your risk. Now if nifty goes for a free fall you will realize some profit from the options you bought limiting your losses to a certain extend in the short options.

But then, how do you profit?

If both the options expire worthless you keep the premium. That is your maximum profit. Do not worry about losing the premium you paid for buying the options – you will profit anyway because the sold options will also expire worthless. Remember they were costlier than the ones you bought so the premium you received should be more than what you paid to buy the options.

Lets take a real example – a trade I did. As on June 12, 2013 Nifty closed at 5760. In the last 30 days Nifty made a high of almost 6200 and since May 30, 2013 Nifty is continuously falling from a high of 6133.75. This is a fall of almost 6% in 12 days. Yes Nifty can fall a bit further – but certainly from some point it will rebound. I don’t know from where, but eventually it should. (Even if it doesn’t I don’t have much to lose – I will explain why).

The VIX (volatility index) was also on the higher end. Note that option prices are directly proportional to volatility. If VIX is high option prices will also be priced higher. Tomorrow if volatility drops the same options will lose their value. (In that case I can actually profit tomorrow itself and close my positions. However I am not in a hurry.) For those who want some more info on volatility here is a para taken from http://www.moneycontrol.com/indian-indices/india-vix-36.html:

Volatility Index is a measure of market’s expectation of volatility over the near term. Volatility is often described as the “rate and magnitude of changes in prices” and in finance often referred to as risk. Volatility Index is a measure, of the amount by which an underlying Index is expected to fluctuate, in the near term, (calculated as annualized volatility, denoted in percentage e.g. 20%) based on the order book of the underlying index options.

India VIX is a volatility index based on the NIFTY Index Option prices. From the best bid-ask prices of NIFTY Options contracts, a volatility figure (%) is calculated which indicates the expected market volatility over the next 30 calendar days.

Since the volatility was high I was getting a good price on July 5500 PE (put option). I got it at 45. Now you tell me what are the chances that after falling 6% in 12 days Nifty will fall another 5% and more? Slim. But one can’t predict markets, so protection is important – very very important. Here is what I did:

1. Short (sold) to open Nifty July 5500 PE at 45*400 (8 lots) = Rs. 18000.00 (credit in my account)
2. Long (bought) to open Nifty July 5300 PE at 20*400 (8 lots) = Rs. 8000.00 (debit from my account)

Total credit = 18000 – 8000 = Rs. 10,000.00.

ROI: 45 days are left for expiry. Total money invested is 1,30,000.00. Absolute return is 7.69%. it comes to almost 5% return in a month. Of course, I need to get out in a profit.

Here is the profit and loss graph of Credit Spreads:

By seeing the image I hope you can understand that profit and loss in a credit spread is always limited.

Now coming to my trade. As you can see I got a credit, the trade is called “Credit Spread”. This can be done either in calls or in puts. You just have to sell the option with the higher value and buy the option with the lower value to get a credit in your account.

Credit spread usually have a success rate of 80%. But here is a cliche – one losing trade can eat profits of many months. Therefore its important to adjust your credit spreads if your short leg is in trouble – and it does happens believe me – more often than you can think of.

Why I did a trade in July month and not June month. Only 15 days are left for expiry of this month so I would have not got a good credit at 5500 puts. (June 5500 PE is at 13.05) plus if Nifty starts moving down fast I will have no time to adjust my credit spread. It made sense to play the next month options.

Profits are limited, what about the losses?

Good question. You see losses are limited too since I have bought 5300 puts for protection. The difference between the prices of the options will be my maximum loss. Lets take an example. What happens if Nifty closed at 5200 in July expiry:

1. 5500 PE = 300 (5500-5200 = 300) I had received 45 so ((45-300)*400) = -102000.00

2. 5300 PE = 100 (5300-5200 = 100) I had paid 20 so ((100-20)*400) = 32000

32,000 -1,02,000.00 = -70,000.00 this is my maximum loss. However my profits are only 10,000.00. As you can see even if I make profit for 7 months – just one month loss will offset my profits. Therefore I should adjust my spread if Nifty gets closer to my shorted puts i.e… 5500. and I have to do it much before I enter a huge loss.

Lets see how we adjust our credit spread if it really comes to that. Luckily I did not have to adjust my spreads as Nifty never came close to my short puts. 🙂 (BTW if I had to, I would have taken a small loss in my credit spread and rolled it down 200 points if Nifty had fallen sharply near 5500 very fast as soon as I opened my spreads. If nifty closed above my new position I will have no profit or no loss or some profit / loss depending on the trade. But I would have certainly avoided a huge loss as explained earlier. And further I keep a record of my trades so if anytime I adjust my spreads I will update this post with a real adjustment of credit spreads.)

Here is a update: On July 04, 2013 I closed my credit spread.

I bought July 5500 PE (remember I had sold it earlier) at 16.00, and
I sold July 5500 PE (remember I had bought it earlier for protection) at 4.50.

Lets calculate my profit or loss:

Sold July 5500 PE (8 lots): (45 -16) * 400 = 11,600.00 (profit)
Bought July 5300 PE (8 lots): (4.50 – 20) * 400 = -6200.00 (loss)
Total Profit: 11,600.00 – 6200.00 = 5,400.00

Some people might be thinking why I bought the protection. My profit would have been great. Yes you are right, but falls are steeper, even before you know you can incur huge losses. With this small price for insurance at least I can sleep better in night. You don’t want to make money without sleeping, do you?

Lets calculate return on investment.

Total cost of opening the spread: 1,30,000.00

Absolute returns: (5400/130000.00) * 100 = 4.15% in 20 days.

Note that I could have close my spread a few days back when Nifty went near 5900 and got even better profits in less days – but these things keep happening in trading. You never get the best price. Ultimately its the profits that matters. 🙂

Also I did not wait for the expiry. Why? Because I am already getting a good profit and a full month is left for expiry. A winning trade can become a losing trade some day, who knows. So its better to close the spread when you have realised a good profit from it and release your locked for margin cash for opening another spread or doing any other trade.

Hope this article has helped you to understand credit spreads. If you want to know anything please ask in the comments section below.

There is no best nifty option trading strategy; however you need to keep certain points in mind before putting a trade to make it work. Please understand any strategy is the best if it is profitable. Unfortunately you will know if that trade was profitable only when you close it.

Important: Whatever you trade you should strictly limit your losses. While trading limiting your losses should be given more importance than taking the profits. One big loss can take away years of profits. To limit your losses you should do any one of the following:

1. Keep Stop Loss in your system: I said stop loss in your system not in your mind. You know if you put a frog in a tub of hot water, it will immediately jump out to save its life. But if you put it in a tub of cold water, and boil it slowly the frog will not jump out, and hurt himself. This only means that if you don’t put a stop loss in the system, you will never take the stop loss and you may lose too much money before you even realize.

I do not know which broker you trade with, but I am sure every broker offers a stop loss in their system. If you call and trade, you can ask the operator to keep a stop loss in the system as soon as you place the order to trade and it is complete. This way you will make sure your losses are limited. Of course when time comes to take the profits you can cancel the stop loss order and book your profits. In some systems it is done automatically.

2. Or you can hedge your position: I always prefer hedging over the stop loss. Why? Because hedging will keep the trade alive while limiting the losses. In case the markets turn in your favor, you can still book profits. But if the stop loss is hit, you cannot do anything about it. Yes, hedging involves extra transaction, but over a long period of time its more profitable than stop loss.

Did you get what I am trying to say here? All I am saying is that limiting your losses is MORE important than taking the profits. If you can limit your losses I assure you will become a better trader.

NOTE: If you are willing to learn how to trade options profitably I offer a course to help you learn the best option strategies that are almost always profitable in any situation. You will learn five great conservative strategies to trade options profitably month after month while limiting your losses. Contact me for more info.

Depending on the condition of Nifty and of course your view, sometimes it is better to buy options, sometimes it is better to sell options. But how do you decide what exactly to do – Buy or Sell? Here are some of the best option strategies to help you succeed:

1) When the volatility is low, you should buy options. Remember anything less than 15 is considered as less, and anything above 20 is considered high volatility. When the volatility is low, the options are priced low. You can buy and sell them when the volatility increases thus increasing the prices of the options. To know volatility you can visit: http://www.moneycontrol.com/indian-indices/india-vix-36.html.

Note: Since the last 1 year or so (May 2013), volatility is on the higher side. It went up to 39.30 on 12-May-2014 when election results were to be declared in a few days. Buying options and selling them at a higher price is now getting very difficult.

2) Exactly the opposite – when the volatility is high, you should sell options and buy them back when the volatility drops thus reducing the price of the options. Selling naked options by the way is a simple way to suicide in your trading career. In other words please do not sell naked options. It is a very dangerous strategy.

Note: The problem with the two above written strategies is that it is very difficult to time volatility. Today it might be 16 – and you may want to wait for sometime more so that it falls, but the next day it might be 20 and you may miss the bus. Some experienced traders however trade only volatility and win too. Recently Volatility trading was also introduced by Nifty in the Futures segment. But for average retail traders like you and me, it is very difficult to time the volatility. So what do you do? Ok, let’s look at some more good strategies.

Also note that no volatility can supersede Delta and Gamma if you view was right. A 50-60 point swift upwards move in Nifty will increase the price of calls and decrease the price of puts even if volatility decreases or increases up to a certain level and enough time is left for expiry but again you should get your timing right.

3) Buy call options – When you think markets will go up for some time. Let’s assume a stock is at 5600 and is on a breakout on the upside. You can buy ITM calls. Why ITM calls? Because ITM calls move fast with the underlying. If you buy out of the money calls, the underlying has to move significantly for you to gain some points. Remember it’s all about points and nothing else. For the same 100 points move in a stock, the In The Money (ITM) calls will go up more than the Out of The Money (OTM) calls. So your profits will be more. Yes the losses can be more too. But with OTM options you are more likely to lose even if your prediction of the movement was right.

Here is an important point to limit your losses. If your view is that a stock will go up 200 points only then why you should play a move that you think may never happen? In that case you should sell the 5800 calls (you have bought the 5600 calls). If Nifty expires below 5800, than you keep the premium paid to you as well as the profits you made on the 5600 calls.

Great. Hmm!! So what is the problem with this strategy? The problem is that if your view was right and you do not want to wait till expiry, the profit you make will be less than what you could have made had you bought a naked I(not-hedged) 5600 call. Selling 5800 call will limit your profits beyond 5800. However if your view was wrong you will make a limited income on the calls you sold, and make losses in the calls you bought. Therefore your losses will also be limited. It depends on the loss you are willing to take. You should do this if you feel markets will move in a certain direction for sure. Even if you are right 50% of your time, with this strategy you should make money, because the sold calls will limit your losses.

If you did not understand, selling the 5800 call is NOT unlimited loss as you have bought another call of 5600. This is a limited profit strategy as any profits above 5800 will be a loss for the 5800 call that you sold. So your max profit will be capped till the stock reaches 5800. After that there is no point in staying in the market. You should close your position and take your profits even if the expiry is far away. Why? Because you cannot predict what will happen during the expiry. The profitable trade today may be a loss making one when expiry arrives. So do not wait till expiry. If you are thinking how will you make profit because one call will be in profit and another in a loss? The 5800 call will make less loss since it was OTM and the 5600 call will be more profitable since it was ITM/ATM. In the money options move faster than out of the money options. The difference is your profit. And if the market starts to go down, the 5800 call sold will start to generate profits; however your losses will be more in the 5600 call bought. The difference is your loss. Someone who bought a naked (not-hedged) 5600 call would in this case lose more money than you. However his profits also will be more.

4) Similarly if you think the markets will tank, you should buy ITM puts and sell OTM puts. BTW in any strategy you should clearly know your stop-losses and profits that you want to take. If you don’t know in advance it may be that you will lose more than you want, but it’s strange that you will take much less profits than your losses since you will be hurry to take the profits, but wait for very long when your trade is making a loss. Therefore your strategy should be clear on when to take a profit and when to book a loss even before you put the trade.

5) Selling Iron Condors: One of the most popular strategies worldwide – this is a market neutral strategy where you just need to have an idea of where the markets may be trading near expiry or in the near future. If you feel markets are not going to move much in either direction for the next few days – Iron condors are the best strategy during these times. If the markets actually do not go anywhere and stays at around the same level you will make money. Iron condors are nothing but a combination of credit spreads of calls and puts. The call credit spread acts as a hedge for the put credit spreads.

For example if you think the current series of Nifty will not go beyond 5900 and will not end below 5600, you can sell 5600 put and 5900 call. However since this is a very risky strategy as you can suffer unlimited losses on either the call or the put if Nifty starts moving beyond those levels you will have to hedge your position.

You can buy 6000 call and buy 5500 puts. This way you are insured even if Nifty goes anywhere above 5900 and below 5600. As you can see now you have done a call and a put credit spread. But this strategy will limit your income and the risk-reward ratio is also not good. If you win 3 times and lose 1 time you will barely break even. If you continue doing this for a life time you achieve nothing. Strangely this is the most popular way of trading by most traders all over the world. However this strategy can be very profitable over a long period of time. In short I can only say that you need to adjust if one of your positions gets threatened and have a strict stop loss. The success rate of this strategy is 80%.

Condors works best when nifty is stable. If you think for the next few days nifty will be range bound, you can sell a condor. Some people just sell condor and do nothing. These people are looking for less income but more chances of winning. For example if Nifty is at 5800, what about selling 6200 calls and 5400 puts. What are the chances that Nifty will cross 6200 or go below 5400 at the end of the series? So you can see the wider the condor, the greater the chances of winning. But the wider you go the lesser you make. 🙂 Everything has a trade-off ;).

Some people sell condors without hedging it (means without buying the calls and puts as protection or insurance. For some strange reason its mostly called insurance in the western countries like the US. In India traders call it protection. I do not know why. It does not matter what people call it – you should buy them – Period.

Technically they are insurance as they cannot protect the losses – they can only limit it. 🙂 Unfortunately this is greed and nothing else. Greedy traders rarely make money. They will make very good money for 3-4 months and one bad month will wipe away all their profits. And technically it’s not even a condor. They are actually trading short strangle or short straddle. Both are dangerous strategies.

6) I do trade Futures (Nifty or Stock) but only when I have a strong view. Mostly after a major news is out. As a risk management strategy I consider Futures a very risky derivative. So even if I trade in Futures, I combine them with options.

If you trade Futures too here is a piece of advice: If you buy a Future do buy an ATM put and if you short Future do buy ATM call. Yes this will limit your profits, but a sudden whipsaw (when a stock’s price takes a sudden turn in the opposite direction of the trade sometimes as soon as a trader puts a trade), this will severely limit your losses. If an ATM (At The Money) Option is priced at 100 – your maximum loss is 100 points.

Note: If you like to trade Nifty Futures, my course also has 2 very conservative directional trades – a beautiful combination of Futures and Options. In that you make money if you are right, but you lose less if you are wrong. If you are badly wrong – a gap opening against your Future – you still make money.

Note: Option is a game of math and Option Greeks. It’s the points you make or lose. Whatever strategy you are following you should have a strict target and stop loss. You should do virtual trading for a while before putting your hard earned money on the line. If you have a target in mind, keep it to the number of points and not money. For example if you want to make Rs. 5000.00 and you have bought 10 lots of Nifty. You need only 10 points to meet your target (500*10 = 5000). Exit your position if your target is met. Do not be greedy. Greed, fear and hope are the three emotions that are your worst enemies while trading. If you can get rid of them and get some knowledge you will be a winning trader.

Whenever I write an option strategy I update this page with a link to it: http://www.theoptioncourse.com/free-nifty-option-trading-strategies/. If you think you gain anything by reading the strategies here please do bookmark that page or at least subscribe to my newsletter. Whenever I write a new post you will get an email with link to that article. You can subscribe your email at the bottom of this page.

I will be happy to answer any questions that you may have on options trading. Please ask in the comments section below or contact me.

Thanks & Happy Trading 🙂

Long call is a bullish strategy. This is a very simple and straight forward strategy. This strategy is followed by most option traders all over the world even in India.

In fact this is the first strategy option traders start with. As soon as a trader learns options the first thing they do is buy an option in lure of making unlimited profits.

This sentence – Option Buy Is Limited Loss & Unlimited Profit – is the biggest reason for financial losses caused to option traders ALL OVER THE WORLD

How many option traders will read that and NOT become greedy? Almost all will and try their hands in option buying.

Long call (or long put) are both highly favored by traders because it can produce jackpot profits. Limited loss is involved – that is limited to money paid to buy the option, but the trader if right can make unlimited profits. Here is the graph of the long call:

Note: This does not mean a trader always make unlimited profits buying options. In fact most option buyers lose money. The reason is the lure of hitting the jackpot one day. Unfortunately that unlimited profits never comes and in the dream of getting those profits traders keep losing money for years but they still believe that one day one option will recover all their losses. This NEVER happens. Here is an example of a trader losing 40 lakhs buying options.

Ok, coming back to the topic. Let me discuss in a simple way. Suppose you feel a stock ABC Ltd will go up in next 2-3 months, what do you do? You simply advice your broker to buy that stock. If it goes up as you guessed, you sell it and make money. However if the stock doesn’t go up, you wait until it goes up to sell.

If your view in Nifty is the same – that it will go up, what can you do? There are no shares of Nifty floating in the stock markets. So you have two options. Either buy futures of Nifty or buy calls. Well both have their pros and cons.

If you buy futures you are taking unlimited risk. For example if you buy a stock futures when the stock is at 100 and if your view goes wrong and the stock starts going down, you will panic and sell the future at a loss only to see that your view was right and the stock started climbing up again. This happens to most future traders. After taking a stop loss they see the stock moving in their favor. What is the solution? Solution is hedging futures with options which is well explained in my course.

What I want to say is this, buying/selling futures will not give you the confidence to stay in the game for long. With futures you need extra-ordinary timing. The stock should go up from the point you bought the future else you may panic. How many times can you time the markets? You will lose 8 times out of 10 for sure.

However what if you buy a call option instead of a future? Lets suppose a current month ATM call is at 100 and its lot size is 50, which means you only pay 100*50 = Rs.5000/- to buy a call. So your maximum risk is Rs.5000. Does that give you some confidence? Of course it does. Now even if the stock is going down, you can wait as you know the maximum you will lose is Rs.5000/- only. In fact if you have decided that you will take a max loss of 2000 in this strategy – this will give you even more confidence. For you to lose Rs.2000/-, the call should reach 60 – a 40% decline. For that the stock lets assume has to go down 80 points for you to take a stop loss. If your view was right, it actually may not go down till there, from some point it will start the upwards journey.

In the above example had you taken a future you would have taken a loss of Rs.4000/- (80*50) – double compared to call option. But still many traders prefer futures. You must be thinking why? Its just because if the risk is less in options, even the rewards are less.

Lets take the above example. Lets suppose you bought one lot of futures and one lot of call option at Rs.100 when the stock was at 5500. Lets also suppose you were right and within 2-3 trading sessions stock went up 100 points. In futures you profit stands at: 5600-5500 = 100*50 = Rs.5000/-. And your profit in the Call Option? The call would have grown by only 50 points or slightly more/less. Why? This is due to Delta. Delta is value that decides how much an option will gain in value if the stock gains 1 point. Delta works differently with different strike prices. Lets not get into further details of delta except that it effects the way option prices increases or decreases with the underlying.

So your gain would have been 50*50 = 2500.00. Not fair? No it is, if your risk is less, why should you gain more than your risk?

I would advise, buy options if you feel markets will go up. Be ready to take a stop loss at a point where you are comfortable. Most traders keep a 20-10 strict rule of profit vs stop loss. That is a 20% profit and 10% stop loss. However you can have your own rules. With this rule if you are right even 50% of the times, you will be in profit.

Another important thing that I want to mention is that do not take your options to the expiry. Its very risky. If your are taking a profit, just sell the option and be happy. You will not go broke booking profits. You can take the option to expiry only if you have already lost most of your premium and you are certain that markets will eventually take a turn that too before expiry. But you should never let yourself be in that situation in any case, you should take a stop loss. Markets behaves in their own ways, we need to respect that behavior and take our loss or profits whenever we are comfortable.

Now the next question is which option to buy. As I have mentioned before there is something called Delta that effects the option prices. ITM (In The Money) options have higher delta, which means they move smartly with the markets. Deep in the money options will almost move 1-1 with every increase in nifty prices. But the only problem is that they are very costly.

In that above example when the stock is at 5500, a 5400 near month call will be priced at approx 140-160 depending on the time to expiry. To buy this call you may need anywhere from 7000-8000 rupees. But the benefit is that if nifty moves even 20-25 points you can realize a good profit.

However deep OTM (Out Of The Money) calls will be cheaper. For example when the stock is at 5500, a near month 5700 call will be around 35-42 approx. You can buy more lots with the same amount of money, but a small move in the stock will have no effect on a OTM call, and if the stock does not move beyond 5700 until expiry, you may lose your entire investment.

Therefore if there is no apparent reason and you want to buy not-hedged calls, just buy at least at the money calls, but never out of the money calls. You should always look for percentage when trading, buying more options with less money will not be of any help. Buy ATM calls and work on percentage. ITM calls will be very costly so its better to avoid them.

If you have less cash, then buy less lots of ATM calls or puts. At least if the markets moves in the direction you predicted you will make some profit and get out. As far as OTM calls are concerned, sometimes even if your view was correct you may start to see your options lose value with time and you may sell at a loss – this even if your view was right. Therefore I highly recommend buy ATM or ITM calls only.

Learn Option Trading with perfect hedging to make a monthly income without stress, which will be kind of side business. Once your account grows big enough you can do it full time. See testimonials here. You can enroll for the course here.

What is NAKED Trading?

Naked trading either in options and futures means NOT hedging the Futures and Options Trades. Naked trading is VERY RISKY and MUST be avoided to save huge losses from trading options or futures.

(Updated on: October 31, 2017) Let me take an example. On October 25, 2017 shares of State Bank of India (SBI) were up nearly 20% at around 10 AM, posting their highest one-day gain since their listing in 1994 after the government announced a Rs 2.11 lakh crore recapitalization plan for state-owned banks. Look at this graph:

SBI 20% Jump on 25-Oct-2017

Now imagine loss of a trader who must have Sold Naked Call Option / Naked Future on Oct 24, 2017 or before. 🙁 Therefore selling naked options or buying/selling naked futures must be avoided.

One day loss can take away years of profit if you do naked selling of options or do naked future trading.

When traders start selling named options?

When they start losing money buying options.

Buying naked options results are something like this:

LOSE – LOSE – LOSE – LOSE – WIN – WIN – LOSE – LOSE – LOSE – LOSE ….

Selling naked options results are something like this:

WIN – WIN – WIN – BIG LOSE – WIN – WIN – BIG LOSE – BIG LOSE – WIN – WIN – BIG LOSE…

But there is a catch – BIG LOSE – sometimes the seller is caught in a storm from where they find it difficult to get out and lose heavily.

I don’t usually sell naked options anymore. I used to do it long back, when I used to think I am very smart. A beginners luck may have done it. I did made a decent profit in the first two trades, but then next four were big losses and I have almost stopped selling naked options.

Yes I still sell naked options – but on principles and strict stop loss and only when markets give me an opportunity. This is mostly done when the expiry is very near and there is a decent chance for that option to expire worthless. Frankly even then I do not wait till expiry. I close the position early and am happy taking a small profit or loss as the case may be. Waiting to eat the last few nickels and dime of a soon to be worthless option may give a great kick when that actually happens – but I am better off taking the risk. If something goes wrong even in that last few hours – an option that was profitable a few hours ago may become very costly to buy back.

Update on 16-Oct-2014: I don’t do this anymore as I feel the risk is not worth the reward.

When does one becomes option seller?

Well most of the option traders start by buying options. Well when they learn that buying options is not making money for them they start selling. 🙂

Unfortunately whether buy or sell, 95% of traders lose money.

For those who do not know, selling naked options means you take unlimited losses for limited profits. (Though frankly I hate the words “unlimited loss”. Unlimited loss is only on paper. Do you think an option seller is a fool to take unlimited loss? Then why would they sell options in the first place? There are ways to limit losses when a position goes against a seller. Unlimited losses only unnecessarily glorifies the cons of selling options. Furthermore I would say that option buyers face more losses than option sellers. Frankly selling or buying does not matter as long as you are hedging your position.)

Ok enough of talking, lets take an example of naked selling. If you think XYZ stock will close above 100 this month you can sell the 100 put options for the current month or even the next month to collect more premium. If the stock actually closes above 100 you keep the premium else you pay for the losses.

Can you predict the markets? No one can. So why do people sell naked options? They sell when they are absolutely sure that the option they sell will expire worthless. But it ain’t that easy, if it were everybody would have sold options and be rich!!!

Moreover its true that you cannot predict where the markets will go, but you can to some extent predict where the markets will NOT go!!! Sell your naked options there.

Here is the profit and loss graph of naked option selling:

Note: Technically naked put option selling in NOT unlimited loss. Why? Because the stock can fall up to zero. It cannot fall further. You can easily calculate your maximum loss when selling naked or not-hedged puts. However selling uncovered or naked call options involves real unlimited loss. Because the stock can rise to an unlimited level which you can never figure out. Therefore in the US most retail traders sell put options more than the call option. That does not mean you should start selling uncovered or naked puts because you can still face huge loses.

Here are some things you should keep in mind when you sell naked options:

Disclaimer: Naked option selling is very risky. These are some ideas I have developed while actually trading naked options or by doing some research. If you want to sell it naked please keep the following in mind and do virtual trading for at least 3 months before putting your money on the line.

So lets go:

1. When selling naked sell only deep out of the money (OTM) options possibly with options that have deltas =< .1. For example if a stock is around 100 – sell 130 call option or 70 put option, or both. This will give you a good chance of winning. After all what are the chances that the stock will rise or fall by 30% in the same series. Yes you make less profit but the chances of making a profit are more.

2. If in doubt take more time. That is sell the next-month options not the near month as if anything goes wrong – the stock opens gap up or gap down heavily, you will have enough time to give stock come back to a comfortable level to buy back your options at a profit. Highly risky as the stock may not reverse.

3. Or if there is very less time expiry is near and you are getting good premium (this happens when the volatility is very high), you can sell the options to make a quick buck in very less time. Say 2-3% in a few trading sessions.

4. You must have a strategy whenever you are trading options. Whether you are buying or selling. You must have calculated your profit and loss. That is if a position is going against you, what exactly you need to do? Keep a stop loss. When that stop loss is reached you must exit the position.

The choice is yours to keep a stop loss or not, but you have to limit your losses. If you are able to limit losses you will survive in your trading business. The problem will be when an underlying opens gap up or down with a huge percentage. If your prediction was right you can buy back your options at a profit, however you can lose a lot when it is against your view. Therefore hedging is important.

Buying insurance when needed may be very costly, but at least it will limit your losses from that point. However if the movement continues in the same direction for sometime, the losses will be severely restricted. Unfortunately a whipsaw or market reversal will become costly as the insurance options you bought may start to lose money. It could be that out of frustration you close both your original trade and the insurance trade for a loss. Worst situation to be in.

Therefore even if you are 100% sure the option will expire worthless – do buy some protection using the cash you got when you sold it. Maybe 25% of it. Spend it on buying cheaper calls or puts. At least you will be wearing your underwear. 🙂

5. Also you must be having strict stop loss in your system. If your target was to make 100 points you should exit when you are making a loss of 50 or less points. Losses can escalate very fast, so you should be ready to quit if the market goes against you badly.

6. During the life of the options you sold, you should watch them like an owl. Never let go your OTM option in-the-money. Take action quick.

7. Don’t get emotional when the market makes a move against you. Emotion is your biggest enemy. I have done it several times and almost always have lost. If you are emotional, you will keep delaying taking a stop-loss and markets will not work in your favor. You will only suffer more losses. You should make sure you don’t lose too much capital, else just 2 big losses will take you out of the game forever. Hoping that the markets will reverse in your favor is not a good strategy.

Important Note: Even though you may think you are smart and can make huge returns with selling naked options, I highly recommend you don’t do it. Think about this – your profits are limited and losses unlimited. If you make profits 10 times, one huge loss can take away all that profits plus some more and you do not want to be in that situation, do you?

Let me take an example of myself. In 30-days time once markets tanked 10%. I sold two lots of puts thinking markets usually change trends after a 10% move and my puts will expire worthless. As you can easily guess I got good premium for the puts as the markets were down. Well I was not wrong. However the next day Nifty went down another 2.5%. My stop-loss got violated. Exactly almost from that point Nifty reversed – and that too 10%. 🙁 My puts expired worthless but not before making losses for me. What do you learn from this? That even if you are right in your judgment, sometimes we do not have that patience to wait and watch while accumulating losses. Stop-loss can sometimes be your friend or be your enemy – the problem is you don’t know.

Therefore if there is something you don’t know, then its better to hedge that position. In my trading course you will know how to hedge your positions and trade peacefully. Most of the times you win, but when you lose you will see that the great hedge will save you.

Had I bought some OTM puts of lower strikes with half of the money I received as premium, I would have had the courage to let it go few points down and eventually made a profit or at least made less loss. Had I left because of the hedge, though small – I would have made a profit. This tells you – no matter what you must not sell naked options. You must always hedge your position.

I know a lot of you sell naked options on Nifty and Stocks. What you do when the stock starts moving against the option sold? Do you take a stop-loss? Do you panic and leave everything to the almighty?

Praying to Gods for help when the markets are going against your sold option is entirely different topic which cannot be discussed here. What if God comes from heavens and asks why you did not take stop loss when the position was manageable? You know what your answer will be – GREED!!! 🙂 Why should Gods help you if you are greedy – almost all traders are. How can he help everyone?

What exactly do you do when your naked shorted options goes in the money? If someone is facing this situation right now write in the comments section.

Stop selling naked options. Learn conservative trading and NEVER face huge losses.

Traders often get confused between Nifty options and futures trading. I keep getting calls like Sir I only trade options buy, or I only trade futures, or I only sell options. So why do traders stick to only one way to trade in spite of losing money in most trades?

This is because they have formed a habit and they are confused to trade any other derivative. Yes I agree that risk is involved, but there is no need to fear if you have hedged your position.

What is a Hedge?

Hedge is buying insurance against the risk involved in your trading. Future buy or sell is at unlimited risk but if you hedge it then it becomes a trade with unlimited profits but limited risk.

Hedging is essential for survival of derivative traders, else even 3 cores can go down the drain.

I am sure at this point of time you are thinking even I have lost a huge amount. Well the reason is pretty simple – trading without hedge, trading by tips, trading because you think so (speculative trading), trading because your broker said, trading because your friend or relate took a trade etc.

Any trade done without hedge or without research will more likely result in a loss.

You can do my course and get well researched strategies, learn hedging and get my support to trade these strategies. Once you learn them to trade, you will make a monthly income for the rest of your life without depending on anyone ever.

Traders get confused between Futures and Options, they do not know which one to trade. Here I have listed the basic difference between the two. This will help you to take a decision.

1. Whether you choose to trade in Nifty options or futures, your profits/loss will depend on your view. If your strategy was right, you will make money else you will lose money. However if you are absolutely certain about a direction, trading future will bring more profits.

2. As of now the lot size in Nifty futures and options is 75 (updated as on 09-Mar-2018). Note: This lot size can change depending on the valuation of one lot of Nifty. However this does not happen very often. If lot size changes, it will change for both futures and options – and will always remain same for both.

3. Futures move very fast. In fact they move 1 point to 1 point with Nifty. Their DELTA is 1. Options movement is slow and it depends on the strike price of the option. Every strike of option has a different DELTA.

TIP: For those who trade futures I suggest instead of futures which has an unlimited loss on the wrong side, you can buy deep ITM (In The Money) options. When you buy in the money options it will have a limited loss on the wrong side thus making an inbuilt hedge in the trade. 

OTM (Out of The Money) options move slower than ITM (In The Money) option. You need to learn Option Greeks (Delta, Gamma, Theta, Vega) to understand why their movement varies. In simple terms since options are cheaper to buy why should someone holding an option benefit the same as that of a person holding a share? When a share goes down in value, option prices also goes down in value but not 1 to 1. Therefore options are very valuable tool if you know the risk you are willing to take and play the game.

But as written above, since futures move 1:1 with the underlying, when your view is correct they will bring more profits. However if your view was wrong (which happens more) futures will incur losses in the same scale. Therefore if you are not very sure of the direction of the movement you should trade in options.

4. Buying or selling futures involves unlimited risk as if the underlying moves in the opposite direction, you can suffer unlimited losses. Buying options is a limited risk. The premium you pay is the risk you have taken in option. However selling (shorting) options involve unlimited risk. To take an example if you had sold a 10500 call option when Nifty was hovering around 10400 for Rs.50 per lot and if Nifty closed the series at 10600 you will lose 10600-10500 = 100-50 = 50*75 = Rs.3750.00 per lot. If you sell an option and it is losing more than the margin usually blocked for selling an option you may get a margin call from your broker. Note that selling a future at the same level could have been even worse as you do not get any premium when you sell a future. So the loss selling future in the same trade as above is: 10400-10600 = -200 * 75 = Rs.15,000/- per lot. Imagine the losses had you sold 5 lots or more.

5. If your trading strategies are right (means if you have the capability of managing risks), I would suggest you should trade in options. They give you more leverage and many strike prices to choose from depending on your capital and risk taking capabilities. You can start trading in Nifty options with as little as Rs.500.00 in your account. Yes it will be very difficult to make it profitable with so little cash, but its technically possible. With futures you at-least need 60,000 cash in your trading account. However with 500 you may be only able to buy option, not sell it.

6. If you are absolutely sure about a move up or down (very rare case), then futures are a better option as they move 1:1 and you will realize more profits in less time. But in the stock markets, anything can happen. Remember if you start predicting the markets, it will punish you sooner than later. So, even if you are 100% sure about a move you must hedge your futures with options. One strategy in my course teaches proper hedging of futures with options. You must also have an exit strategy in place if your losses come to a level where you are uncomfortable.

For example if Nifty is at 10300 and you are bullish, you can buy 1 future and keep a strict stop loss and profit taking points. Your profit points should be DOUBLE than the loss points so that if you are right even 50% of the times you will end up making money.

But overnight gap up and down will be a problem so you must hedge the future trade properly.

Sometimes when you take a stop loss you will see that the future trade reversed after you took the stop loss. How many times it has happened to you? This is a BIG problem for future traders. In my course you will learn how to hedge futures in such a way that even if you make a loss in future trade, you may end up in profits.

Exact opposite should be done if your view is bearish on Nifty. Means if you think Nifty/stock will go down you can sell future of Nifty/stock.

7. As far as liquidity is concerned, both are highly liquid in Nifty. But in stocks there are liquidity problems in some strikes in options. Futures are slightly more liquid in both Nifty and India stocks. Near month are the most liquid in both futures and options. Mid month and far month are also liquid enough to trade in Nifty but in stocks next month liquidity is a problem. Near month is the current month say if May, mid month is next month – June, and far month is next-to-next month – July.

Delta Neutral Trade Selling Options Is a BAD HEDGE

Some traders who have lost money buying options turn into selling options then get over smart and keep selling options both calls and puts and keep shifting them as per the Delta change in the options due to movement in Nifty or stock. They call it Delta Neutral Trade.

This is a very bad trade and makes your broker rich. Shifting positions is nether a hedge nor will make any money for the trader.

Delta Neutral Trade Selling Options is algorithmic and automated in the developed nations, still it does not fetch great returns for the traders. Read how algorithms trading on financial markets are too often poorly designed and monitored, leaving traders and markets open to mistakes, disruptive trading and market abuse.

Delta neutral is a very complicated topic which is out of scope of this article. However the above is mostly done by Indian trades also though manually.

Conclusion: Experience traders trade in both future and options depending on the situation and their viewpoint. They also use these derivatives to hedge their positions. Futures and Options offer great tools to hedge risk. These are all complex strategies. You can learn a lot of these strategies in my course.

There are many different options to invest in India. You need to first decide how much you want to invest, how much you need (your goal), at what time and how to go about it.

Also if possible you should invest at least 30% of your total take home income in the different options written below. Lets suppose your after tax income is Rs. 100,000.00 per year, you should invest at least Rs. 30,000.00 per year in various investment vehicles.

As you know some of the investments are risky like the stock markets and some are less like a fixed deposit. Unfortunately investments that are risky give better returns than the non-riskier ones. How much percentage to invest in the risky investments compared to the less risky ones?

Lets first solve this question. Lets assume you do not want to take any risk with your money after retirement. Whats the retirement age in India? 60 years. Great. Now reduce the number of your age with 60 and you get the percent you should invest in riskier assets.

Example: You just got a job with a take home salary of Rs. 30,000.00 after paying taxes and your age is 25. 60-25 = 35. It means you should invest 35% of 30% of Rs. 30,000.00 in riskier investments like the stock markets. Lets do some math. 30% of 30,000.00 = 9000. 35% of 9000 = Rs. 3150. 3150 * 12 = Rs. 37,800.00. Your total investments in stock markets should not exceed Rs. 37,800.00 in the first year if you earn 30,000.00 per month and your age is 25. You must be thinking that this number will reduce every year. No, your salary will increase many folds in the next few years but the percentage will decrease by only one every year. After a few years you will see that you have saved enough in both the riskier and non-riskier assets. Roads to riches!!!

I offer a course on How To Invest Well And Retire Rich With Crores. It covers a lot more than what is written in this post like how to chose stocks for long term investments, how to chose mutual funds for long term investments and many other investment ideas not written in this article.

Note: Some financial advisers suggest 100-age rule of investing in stocks. In that case if you are 60. 100-60 = 40%. Do you think you will be comfortable investing 40% of your income in equities when you retire? If you do it right the above formula will make you enough cash to live a comfortable retired life. Even if the riskier investments doesn’t, the rest of the investments in debt will make you enough money. The idea is you should invest in equities with cash that you can take 100% risk with. If you cannot tolerate risk, its better you stay away from the stock markets.

Saving 30% of your income seems quite simple, unfortunately people just don’t save 30% of what they earn. And sometimes even if they save something – they get greedy and put the money in risky schemes only to lose it. Remember the Saradha Group chit fund scam and Citibank fraud?

Even before I start telling you about different investments schemes in India, you should promise yourself for the sake of your own benefit that you will never fall for any unjustified lucrative financial scheme that is not approved by any bank or the RBI (reserve bank of India). If you do so, do it at your own risk. The easiest way to know about these bogus schemes is when they give you a guaranteed return of 15% or more per year. Anything above 15 and you should get cautious.

Now lets come back to the topic of this article – Investment Options in India!!!

Once you decide how much to invest you have the following options to invest. I have also discussed the risk associated with these investments. Its also in increasing order of the risk involved.

1. Bank Fixed Deposits (FD) a.k.a. Term Deposit: The least risky investment of all. As of writing (May, 2013) most Indian banks are giving a return of 9% per year. Not bad considering average inflation of 6% over a long period of time. Right now its hovering around 5%. The returns from FD vary from 7%-11% per year. It depends on inflation and is directly proportional to it.

   Pros: Almost always beats inflation. Guaranteed return so you get peace of mind. Re-investment option for the magic of compounding.

   Cons: Even though it beats inflation, the returns are not good enough. Tax implications – the interest gained is your income and taxed accordingly. Cannot be withdrawn in between the term with the same interest. If you break you may not get the assured interest. Banks will lure you to get a credit card against it and you may be unknowingly paying them more than you make with your late payments and interests etc. (Therefore you must avoid taking a credit card against your FD even if the bank is offering it for free.)

   Where to invest: Walk to any bank recognized by the RBI. Here is a list of banks in India approved by the RBI: http://www.rbi.org.in/scripts/banklinks.aspx

   Tip: Talk to least 3 banks. One government bank and two private banks as rate of return and terms differ. Chose the best as per your convenience. You may need to submit some documents like address proof etc.

2. PPF (Public Provident Fund): PPF gives a return of around 8-9%. The government declares the rates at the start of every financial year. This is also at zero risk. Everyone should have a PPF account. PPF are better than Fixed deposits because they help you to save tax. Annual contributions qualify for tax rebate under Section 80C of Income tax Act. The minimum investment that one can make in PPF is Rs 500 and the maximum is Rs 100,000 in one year. The tenure is 15 years which can be extended in unlimited blocks of 5 years. You can withdraw some money at the end of 6^th financial year from the date the PPF account was opened. This money is limited to 50% of the balance outstanding in the account in the first 4 years.

   Pros: Very safe investment. Magic of compounding if you do not withdraw. For example if someone deposits the maximum Rs. 100,000.00 every year for 15 years and does not withdraw will get Rs. 3,063,201.00 (30 lakhs, 63 thousand, 201) at end of 15 years at 8.5% compounded annually. Loan is possible against PPF. Saves taxes.

   Cons: Cannot withdraw cash before 7 years. Cash withdrawal limited. Long maturity period of 15 years.

   Where to invest: You can open a PPF account in any post office or nationalized banks like SBI. ICICI bank also allow PPF accounts.

3. Debt Mutual Funds: Some people are confused and think all mutual funds invest in the stock market. Well this is not the case. 100% debt mutual funds do not invest anything in the stock market. They invest in bank CDs (certificate of deposits), buy debentures, loan to the governments, and offer commercial papers etc. Most of them are not risky, but still debt mutual funds are slightly riskier than bank fixed deposits. However their returns are also more.

   There are various type of debt funds like income funds, short-term debt funds, long term debt funds, government securities fund, dynamic bond funds etc. Debt funds return anywhere from 3-15% annually. Since the returns are not fixed the average returns may be around 10% over a long period of time.

   I have experienced best returns from dynamic bond funds because of their ability to change the investment style depending on the returns of the debt market.

   Therefore you must have a dynamic bond in your portfolio and count them in the non-riskier investments.

   Pros: Easy to invest. You can invest online. Very liquid – you can withdraw anytime you wish. However some debt funds do have withdrawal charges up to 3 years. But you can always withdraw partial amount and the fee will not have a great effect. Creates a balance in your portfolio if you also have invested in equity mutual funds. If you keep it for 3 years, the withdrawals have very limited tax liability. Since tax laws keep changing every year, please refer your taxman for recent developments.

   Cons: No guarantee of returns. Some year the fund may make 15% returns and in some it may make only 5%. Sometimes the returns may be less than bank fixed deposits.

   Still you should have at least 20% of your saved money in debt funds.

   Where to invest: If you have a demat account, you can invest directly through your account. You can also go to the mutual fund broking houses and invest. Your financial adviser may also help you. You may need to fill the KYC forms. You can download it here: http://www.cvlindia.com/downloads01.html

4. Gold: Frankly gold should be used as gold, that is to wear. Gold should not be used as an investment. However if you think gold is important as it’s a hedge against inflation then you should keep it to 5% of your portfolio, not more. Gold may not be very risky, but over a long period of time gold may not be able to beat the returns you get from a good equity mutual fund. So why its getting a mention here if the writer thinks its not worth an investment?

   Well gold has other values in our society. You may be married, or you may get married soon. Then you will have kids, and the there will be time when you will have to get them married. On an average this will take about 25-30 years from your marriage. We all know how important role gold plays in an Indian marriage. Can you tell with precision what rate gold will be 25 years from now? Nobody can. So how do you save money for buying gold at that time? Why not buy that gold right now and preserve it for next 25 years? Sounds good?

   Ok, here is the gold saving plan for you. Lets suppose you have 2 kids. Both around 3 years and you plan to marry them off 25 years from now. For the time being just forget they are 3 and think that within 3-4 months they are getting married. Ask yourself this question, how much worth of gold do you wish to give them as gift? Is it 2 lakhs, 3 lakhs? Lets suppose you decide its going to be Rs. 4 lakhs – 2 lakh worth of gold to each one of them.

   Now start a SIP in any Gold mutual fund (Gold ETF presently do not allow SIPs) with an amount you are comfortable with. Make sure its not more than 5-10% of what you can afford to save. Lets suppose you have decided to invest Rs. 3000.00 per month in a gold fund. Continue this SIP until Rs. 4 lakh is invested in the gold fund. It will be about 134 months or 11.1 years. Stop your gold SIP after Rs. 4 lakh is invested. Now you do not have to worry about the price of gold when your kids will get married. Also since you have done a SIP, you will probably buy more units when the price of gold will fall, and less when it increases. Remember do not redeem the funds until the time of their marriage, as gold prices may increase in this period.

   Do not buy physical gold ever for investment purpose.

   Security will be a huge issue. You may not find time to buy gold every month unlike SIP which does this automatically. Therefore you may be tempted to buy when the price is on the rise. Some hidden charges like making charges etc are also involved when you buy physical gold. When you sell you may not get back making charges.

   Pros: Just like mutual funds, investing in a Gold fund is easy. Fills you with pride that you have invested in Gold – emotional satisfaction. There is less risk, but returns may also be less.

   Cons: Gold value cannot be predicted. Sometimes gold value does not increase at a good rate for years, so people get frustrated and sell it at a loss. Gold has zero value in industries. Gold like shares can drop huge in one day creating panic selling. Recently it dropped almost 9% in one day. You can read more about it here and here.

   Where to invest: Just like a mutual fund you can buy any fund that invests in gold. Since these funds NAV will correspond with gold prices, all funds will return similar returns over a time period. Its not recommended to buy physical gold as an investment.

5. Real Estate: Real estate had a great run till 2010. However after that the returns are not that stellar. Risk is very high and returns may be just about 10%. This may not sound true to some of you and I agree. You see most of us buy one home to live. And that is a good decision. But some buy a second home as an investment. Since this is a highly non-regularized sector there is no exact figure of the exact returns one makes. Some might get lucky and some might not. The question is – will you get lucky?

   If you have enough cash to buy a home as an investment – that still makes sense. But if you are taking a loan then you got to do a lot of maths before deciding do you really want to invest in real estate. Remember most of us will have to take a home loan to buy a home.

   Let me do some math for you. Home loan rate currently is around 10-12%. Lets assume you got a Rs. 20 lakh home loan at 11% interest rate. Your total expenditure of buying a home was Rs. 25 lakhs.

   Your aim is to sell your home after the loan tenure is over. For a 20 lakh loan at 11% interest you will have to pay almost Rs. 18,500.00 per month. (18,500.00 * 12) * 20 = Rs. 44,40,000 + 33,63,000 (this is the money you might have got had you kept the 5 lakh initial down-payment with a debt mutual fund at 10% compounded annually for 20 years) = Rs. 78,03,000.00. To make a decent profit you will have to sell this home at double this price 78,03,000 * 2 = Rs. 1,56,06,000 (one crore 56 lakhs and 6000). Do you think someone will buy your home at this price after 20 years. You got to take the decision as your investment will be huge.

   This is not the end. Now lets assume one of your friends decided that he wont buy a home but instead start a SIP in a decent equity mutual fund for 20 years. Lets assume his fund returns 12% per year. What does he get at the end of 20 years? Here is the math: Initial deposit: Rs. 500,000.00, Annual addition: 18,500.00 * 12 = Rs. 2,22,000.00. Compounded at 12% the returns after 20 years = 22,738,265.00 (2 crores, 27 lakhs, 38 thousand, 265). Compare this with your returns.

   You know what even if you get a buyer who is ready to buy your home at Rs. 1,56,06,000.00, you are still way short of the returns a good mutual fund has got for your friend. Add to this the hassles involved in investing in real estate and the maintenance cost. God forbid, but what if there is a earth-quake or major fire after you have paid your loan in full and the house gets destroyed? If you forgot to get an insurance against quake or fire your entire investment of a life time will go to drains. Even if there was an insurance you will be paid only the principal amount. The interests that you paid will go forever.

   But that said, this is also true that some people have made millions through real estate investments. However they may have been plain lucky or their timing was good, you don’t know. Mostly these people are businessmen involved in real estate. As in any other business they take care of their real estate business and that could be the reason they make lots of money. The point is real estate investment is a huge risk and for middle class people like us, its better that we stay away.

   Some people might argue that rental income is not included in the above math. Yes you may recover some money from renting, but no one is going to pay more or even equal to the EMI you pay for the loan. In our case it was Rs. 18,500.00 per month for a 25 lakh flat. In a good city that is a 2BHK flat. Who will pay that much as monthly rent for a 2BHK in any city in India? And on top of that you will have to get a good tenant who takes care of your home. Moreover you will not get good tenants for months once a tenant leaves. Add to this the cost of advertisements. You friend however is making money every month without any hassles by being invested in a mutual fund.

   Pros: Pride of ownership. Low risk. You get respected in society if you buy real estate.

   Cons: Though low risk, the investment is huge and if you count inflation, risk is involved. If you do not find a buyer you may even sell it in a loss if you need cash. Illiquid – no partial withdrawal facility. Repairs cost and maintenance cost is huge that can offset the returns. No guarantee of returns.

   Where to invest: Look for advertisement in newspapers for upcoming housing complexes in good areas in your city. Usually when builders need cash they will keep the rates low. Try to pay the maximum down-payment. If you are not taking a loan, one way to save money is to have an agreement with your builder and lock in the rates by paying him a good percentage of the home and do not register the home. When the building is complete you can find a buyer and sell him at a profit. He pays for the registration cost etc. You can take profits in a short span of time. However your terms with the builder should be clear. Its preferable that the terms are clearly written in legal paper. You should also take the receipt of payments made from the builder and lock your home. It is also important to invest in homes that are in or near to the city, else you may find hard to get a buyer who is willing to pay a good price.

6. Equity Mutual Funds: One of the best ways to invest and make good money over a long period of time. You should have 2-4 good equity mutual funds in your portfolio. And yes do not buy at one go. Many people have that habit of buying at one go, it is a mistake. You should invest via the SIP (systemic investment plan) method. A small amount invested every month will get huge in years and will generate good income when you retire. Remember to carry-on the SIPs even when the markets are down. This is very important as the whole idea of making money in the stock markets is buy low and sell high. If you don’t buy when the stock market is down, how will you make money?

   Note: It is very important to choose good equity funds for investments. Do not invest your money in new fund offers (NFOs). Your financial adviser may pursue you to invest, but never do it. You don’t have any knowledge of the fund so why invest in the first place? There is a great way to chose the best funds to invest, you can read this article on How To Invest Well And Retire Rich With Crores for more information.

   Start investing with a good balanced fund. When you understand how these funds work you can start investing in more funds. Ideally you should invest in one balanced fund, one large cap fund, one mid and small cap fund and one dynamic bond fund with equal amounts in each of these funds. If you are young and willing to take risk you can invest slightly more in the large cap and mid and small cap fund.

   You should also keep tracking your funds performance. If anyone of them is not performing well, you can stop your sip in that fund and start investing in another good fund in the same category. If you want to redeem your money from the fund that was not performing then you can redeem in full, park that cash in a liquid fund and do a systematic withdrawal every month into the new fund. That way you will not buy lump sum and the cash withdrawn will get invested in the new fund over a 6-month or 1-year period. And the best part is the liquid fund will also give a good return over this period and you make some extra cash to invest.

   If you do not need cash, do not withdraw money from your funds. Think like they are your piggy-bank and you will break it only when you need cash. You must also withdraw what you need and no more. If you can do this, rest assured you will have a lot of money when you retire. Don’t believe? Ok its time for some math:

   Lets assume you decide to invest Rs. 20,000.00 every month in mutual funds for 20 years. For simplicity we are fixing the amount to 20k and 20 years. After 20 years at 12% your kitty will grow to a whopping Rs. 19,367,696.53 (1 crore, 93 lakhs, 67 thousand and 696) and at 15% your returns will be: Rs. 28,274,428.80 (2 crore, 82 lakhs, 74 thousand and 428). How is that as an investment?

   Average starting salary now-a-days is almost 30k per month and if one is determined investing 20k per month is possible.

   Pros: Returns are great. You sleep while your fund manager does all the hard work for you. Partial withdrawal possible. Withdrawal may come with tax implications. Please refer your taxman. If you do it right you will be a very rich man long before you retire.

   Cons: Its hard to find a fund that will give consistent return over a period of 10 years. You have to monitor your returns every six months. One bad fund can destroy the returns.

   Where to invest: If you have a demat account you can invest directly through your account. Your financial adviser may help. You can walk directly to the fund houses and invest. KYC needs to be filled.

7. Stock Markets: Interestingly everyone is lured to the stock markets for its stellar returns forgetting the risks. They invest huge sums thinking they will make a lot of money, only to lose and and they never ever return. This is mostly with the retail investors. Why don’t they understand that anything that gives abnormal returns comes with huge risk. The problem is everyone thinks they are different – but that’s not the case.

   Yes its true that stocks can give great returns, but the risk is also huge. A stock can move more than 10% in a day and can also fall 20% in a day. Today itself Opto Circuits plunged 38%.

   If someone would have invested in this stock yesterday, they would be down by 38% in one day and I am damn sure there will be many people.

   So how do you make money in the stock markets? First of all never depend on any tips. Even I did and lost. Pay them to lose money – how bad is that?

   One of the best ways is to pin-point two three companies with good business model. Like ITC, RIL, Yes Bank etc. and buy one or two shares every week without looking at the markets. Just like mutual funds keep a certain amount fixed and buy. For example if you fix Rs. 1000.00 for Yes Bank and if its below 500, buy 2 shares else buy 1 share. You should also book your profits every time you make 10-15% and start again from there. Do not buy at one go and only invest with the money that you don’t require for years.

   Derivatives like options and futures can give even more returns but they are riskier than buying a stock. If you have knowledge only then start playing with derivatives but hedge your position properly. Anything more is out of scope of this article.

   Pros: Amazing returns possible – more than 30% per year. Easy to invest. Partial withdrawal possible.

   Cons: Very risky. If you are not careful, you may lose it all in one year.

   Where to invest: You need a demat account. Banks and many financial institutions offer. Look at the lowest brokerage house before opening an account.

   Note: There are a lot of options to invest in India other than what is written above. However these are sufficient for most people. The best way to invest is to buy a term insurance for the head of the family and invest the rest in mutual funds.

   I offer a course on How To Invest Well And Retire Rich With Crores. It covers a lot more than what is written in this post like how to chose stocks for long term investments, how to chose mutual funds for long term investments and many other investment ideas not written in this article.

   Disclaimer: Thorough research was done before writing this article. However you must do your own research before investing. Investment decisions should not be taken in a hurry. This article is meant to help you to understand different investment options in India. The actual investment decision will be ultimately be yours.

If you are looking to trade in options I would suggest you should trade in Nifty or any other index option only like the Bank Nifty.

Here Are Some Reasons Why:

1. Nifty Options Are Highly Liquid:

   Highly liquid means you will find people to buy or sell at the price you want. If there are no people willing to buy what you sell, or sell what you want to buy, you will never be able to trade at the price you want. What happens in a less-liquid stock is that you rarely get people who want to buy at a price that you want to sell and vice-versa. For example if you want to sell an option for 100, there might be some one willing to buy at 95 only. So if you have opened a market order to sell, even though the price of the option you might be seeing at 100, will actually sell at 95. Remember that the exchange house doesn’t pay you for the option that you want to sell, its some person willing to buy that option will pay you. If you want to sell it at 100 only, they may not be willing to buy at that price. You will have only two options then, either sell it at 95 or wait till someone is willing to buy it at 100. This problem would never have occurred if the stock, or the exchange were with full of people who want to trade. Even then you may not get the exact rate but it will be very close and if you are willing to wait a little you should get the exact rate that you want.

Lets take an example:

Suppose Nifty ATM (At The Money) Call is currently at 72.15 and you want to buy it at the market price. You will get it at 72.15 or at most 72.30. However in a less-liquid stock you may not get the option at the price you want. I have seen huge difference. Once in a mid-cap stock I was willing to buy a call at 1.00 when the price of that option was at 1.20, however there was only one seller who was willing to sell at 2.00. If I would have hit market (and not limit) while buying the option by mistake I would have got that highly priced option for 2.00. Unfortunately I would have then sold it for a loss.

It also means that sometimes even if you are making a profit, you may not be able to realize it at that price if there are no one willing to buy at the price you want to sell. Your assumption was right, the stock moved in that direction, but still you will not be able to make a good profit out of it – because there are no buyers. But in Nifty you will never have to bother about liquidity. You will always get the buy or sell price you want even for the next month series.

2. Margin Required Is Less In Nifty Options:

   Compared to stock options, margin required to short on lot options in Nifty or Bank Nifty is almost 40% less. For some stocks margin required to short an option or trade futures exceeds Rs.1 Lakh. This is a big amount to trade for many retail traders.

   There is a formula to calculate margins but I will not get into the details of it as I just want to say that in Nifty futures or option selling your margin blocked will be much less. Since margin blocked is much less you can trade in more lots if you are absolutely sure about the direction of Nifty – and make more money too.

3. Nifty Does Not Swing Too Much:

   Unlike stocks nifty will not swing too much in a day or even the next day. Which means you will get enough time to exit the position if its going against you without loosing too much cash. Ideally you should put a stop-loss in the system, but what if it opens gap up/down against your position? For that you must learn hedging.

   On Apr 12, 2013 Infosys fell almost 21%, but on that day Nifty fell just 1.17%. Imagine someone who bought Infosys futures or sold an ATM put without any hedging – he would have lost his entire margin. Lets do some calculations. On Apr 11, 2013 Infosys closed at 2917. On the next day it closed at 2295. One lot of Infosys was 125 shares in Apr 2013. If somebody would have bought one lot of Infy at 2917 and sold at 2295 his losses = (2295-2917) * 125 = -2,33,250. A loss of more than 2 lacs in one lot. He would have got a margin call from his broker. Most retailers would have bought thinking that Infy will rise after the results. Yes some were lucky to have sold it and made a windfall of cash. But how many times does that happens to us? Therefore we must hedge our position. It may cost something but it will ensure you stay in the market and do not lose your home. Yes some people have lost so much – that money can buy a 2 BHK flat in many cities in India even in 2018.

   Are Doing Speculative Trading or Trading On Tips Without Hedging? If Yes Something Like The Above Might Happen Someday And You may Lose So Much That You Will NEVER Be Able To Recover Your Money EVER – STOP Speculative Trading Today

   Had someone bought Nifty Future his losses would have been small and bearable. Therefore I strongly suggest one should trade options/futures in Nifty/Bank Nifty but with proper hedging.

4. Nifty Moves 80% of the Time Range-Bound

   See Feb-2016 to Feb-2018, two years graph of Nifty 50, though is was volatile still the volatility was not sharp. It was manageable. There is not a huge drop or rise:

   

   2 years graph of Nifty

   These are some of the reasons why I think retailers should trade in Nifty only.

What You Can Do If You Are Losing Money Trading Speculative Options or Taking Tips and Losing Money?

You can do my conservative option course. You will learn proper hedging methods, risk management, adjustments and 5 strategies and a bonus trade to make 2-3% per month easily without any speculations or worrying about the direction of Nifty. You need not leave your job for that. Your options will make money for you while you work in your office. Contact me to know more.

I hope you have the basic knowledge of options. If not you can download this PDF written by me to know the Basics of Options and Option Greeks.

Nifty stands for National Stock Exchange Fifty and is the equity benchmark index of the National Stock Exchange (NSE). It was introduced by NSE in 1996, and its other aliases are Nifty 50 and CNX Nifty. Nifty 50 includes stocks from the top 50 of nearly 1600 companies actively traded in NSE across 24 sectors.

Nifty Option is a derivative trading tool to trade Nifty also known as Nifty 50/ National Stock Exchange Fifty (a very popular Stock Market Index in India). Index methodology to find the 50 stocks to qualify for NIFT 50 is here:
https://www1.nseindia.com/content/indices/Method_Nifty_50.pdf

NSE Website:
https://www.nseindia.com/

NSE Logo:

Nifty 50 Website:
https://www.niftyindices.com/indices/equity/broad-based-indices/NIFTY-50

List of Nifty 50 Stocks:
https://www1.nseindia.com/live_market/dynaContent/live_watch/equities_stock_watch.htm

Nifty 50 Logo:

According to Wikipedia:

The NIFTY 50 is a benchmark Indian stock market index that represents the weighted average of 50 of the largest Indian companies listed on the National Stock Exchange. It is one of the two main stock indices used in India, the other being the BSE SENSEX.

Nifty 50 is owned and managed by NSE Indices (previously known as India Index Services & Products Limited), which is a wholly owned subsidiary of the NSE Strategic Investment Corporation Limited. NSE Indices had a marketing and licensing agreement with Standard & Poor’s for co-branding equity indices until 2013. The Nifty 50 index was launched on 22 April 1996, and is one of the many stock indices of Nifty.

The NIFTY 50 index has shaped up to be the largest single financial product in India, with an ecosystem consisting of exchange-traded funds (onshore and offshore), exchange-traded options at NSE, and futures and options abroad at the SGX. NIFTY 50 is the world’s most actively traded contract. WFE, IOM and FIA surveys endorse NSE’s leadership position.

The NIFTY 50 index covers 13 sectors (as on 30 April 2021) of the Indian economy and offers investment managers exposure to the Indian market in one portfolio. Between 2008 & 2012, the NIFTY 50 index’s share of NSE’s market capitalisation fell from 65% to 29% due to the rise of sectorial indices like NIFTY Bank, NIFTY IT, NIFTY Pharma, NIFTY SERV SECTOR, NIFTY Next 50, etc. The NIFTY 50 Index gives a weightage of 39.47% to financial services, 15.31% to Energy, 13.01% to IT, 12.38% to consumer goods, 6.11% to Automobiles and 0% to the agricultural sector. (Data as per 2021)

The NIFTY 50 index is a free float market capitalisation weighted index. The index was initially calculated on a full market capitalisation methodology. On 26 June 2009, the computation was changed to a free-float methodology. The base period for the NIFTY 50 index is 3 November 1995, which marked the completion of one year of operations of the National Stock Exchange Equity Market Segment. The base value of the index has been set at 1000 and a base capital of ₹ 2.06 trillion.

Nifty option behaves just like any stock option. Nifty option also has a lot size and other factors like call and put options, different strikes to trade and of course time limit to expiry.

What is the Current Lot Size of Nifty Option?

Till October 30, 2014 the lot size was 50. This was the expiry day of the October 2014 series. From the very next trading day, that is October 31, 2014, the lot size was reduced to 25.

Then in the year 2015 Nifty increased its lot size to 75. The lot size of CNX Nifty in the futures & options (F&O) segment was revised to 75 from 25. The lot size of CNX Bank index (Bank Nifty) was hiked to 40. The changes in the lot size took effect from 28 August 2015. Contracts with maturity of September 2015 and October 2015, which were already traded in old lot size continued to have the same market lots until the expiry of F&O contracts for those two months.

Any change in lot sizes are posted in NSE circular here.

Then the National Stock Exchange of India (NSE) on March 31 decided to reduce the lot size for the Nifty50’s futures & options (F&O) contracts to 50 from 75 from July 2021 expiry. All monthly expiry contracts starting from the July 21 expiry contract will have a lot size of 50.

Here is historical Nifty lot size till July 2021:

YEAR LOT:

|2000-05|200|
|2005-07|100|
|2007-15|25|
|2015-18|75|
July 21 – till the time of writing this update: 50

Please note that you must check in the NSE website for the current lot size of Nifty whenever you start trading. You can also Google: https://www.google.com/search?q=current+lot+size+of+Nifty+50

Why Nifty Lot Size was Reduced from 50 to 25?

This is because Nifty had a spectacular rally from 5500 odd levels to 8000 levels. National Stock Exchange (NSE) wanted to keep most F&O values to around 2 lakhs. If you multiply 50*8000 you get 4,00,000.00 (4 lakhs). Since there are a lot of retail traders in India who trade Nifty options, NSE reduced the lot size to 25 to keep the value of one lot of Nifty option to approx. 2 lakhs. (25*8000 = 2,00,000.00)

Update Aug 2021: Now the scenario has changed. SEBI wants retail traders to be out of Options trading (my view I may be wrong). Reason. As in Aug 24, 2021 at the time of writing NSE was trading at 16,571.00. The current lot size is 50. Multiply 16,571 with 50.

16,571 * 50 = 8,28,550.00 (Above 8 Lakh)

What happens when lot size increases?

The SPAN and EXPOSURE margins to short an option increases. Right now to short an option above 1 Lakh is required. It’s obvious that small retail traders who cannot afford to bring this much money will not be able to sell Nifty options.

Note that unlike stocks, Nifty does not have any shares in the stock market. If you want to own Nifty shares you can buy Nifty BeES. Just like shares of a company you can hold them and sell whenever you want. Nifty BeES does not expire, and is a great product for someone who wants to accumulate Nifty shares and not shares of a particular stock.

Nifty BeES, technically is not a share, it’s the first ETF (Electronic Trading Fund) in India. So you own a part of a fund, not shares of Nifty. Of course Nifty BeES mimics Nifty. So if you buy Nifty BeES when Nifty was at 6000 and sold it when Nifty reached 8000. Your total profit would be 33.33%.

Similarly you do not own any share when you buy/sell an Option or Future, you are just leveraging cash to take a business risk. Everything is cash settled on or before expiry. For example, when you buy one lot of Nifty future – it means you have bought an equivalent of current lot size of shares of Nifty. Same is the case with one lot of Nifty Option.

If you bought Nifty Future at 8000 and sell it at 8300 – you make 8300-8000 = 300* lot size profit.

However if you bought a Call Option of Nifty when Nifty was at 8000, and Nifty increases by 300 points you may not make the same profit as in the case of Future buy. Why? Because options have a premium – the profit of the trader/buyer will be above the premium paid. So it will be less then futures depending on the premium of the option you bought.

Why is this difference?

This is because the person who bought Future is at unlimited risk if Nifty falls down, however a person who bought Nifty option is at limited risk of the premium he paid to buy the option. So why should they make the same profit for the same movement? If the losses are more, the profits should also be more.

Can you see the benefit of trading in options? Though in my experience option buyers usually lose money. Here are some more benefits of trading Nifty options.

First just like any other stock you have choice of two options – Call option and Put option.

If you think Nifty may go up you should buy Call option, and if you think Nifty will fall you should buy Put option. Why? Because the value of the call option will rise if Nifty goes up, and similarly value of the put option will rise if Nifty goes down.

You can also sell these options. You should sell a call option if you think Nifty may go down, and you should sell a put option if you think Nifty may go up. In technical terms – the buyer of the call option is long call and the seller of the call option is short call. Similarly the buyer of a put option is long put, and the seller is short put.

When you sell a call option and Nifty goes down, the option premium will get reduced, then you can buy back your option at a profit. However what happens when you are wrong and Nifty keeps going up after you have sold a call option? You are at unlimited risk, because you don’t know where the Nifty Bull Run will end. In that case you must take a stop loss or hedge your position. In my paid course hedging a sold option is thought.

Similarly if you have sold a put option and Nifty continuous its slide downwards, you are again at unlimited risk as the put option will keep rising. Here too you must buy back your options to limit your losses.

No it does not mean that you will not make a loss if you buy an option – you will make a loss if your view goes wrong whether you buy or sell an option. The only thing is whatever you do you should be ready to take a stop loss if your views have gone wrong.

So here is what you can do according to your view:

Whatever you do, you will be required to pay a margin. When you sell an option depending on which option you are selling and the current volatility – your margin may differ. The more risky the option, the more margin you pay. When you buy an option you only pay the premium and that’s your only risk.

For example if Nifty is at 8000, the 8000 Call Option will be around 150 if one month is left for expiry. So to buy one lot you need to pay 150 * 50 = Rs. 7,500.00. Now if Nifty goes up to 8100, the call option will be up by almost 40 points so you can realize a profit of 40*50 = Rs. 2000.00. Please note that if the lot size changes you will have to multiply with the current lot size to get the correct margin blocked and the profit made.

Interestingly you would have realized almost the same profit had you sold one lot of put option at 8000 and bought it back at 8100 – but (very important) if enough time passes away then the call option buyer may realize a small profit, but the put seller may gain a lot of points. In fact if on expiry day Nifty is at 8100, the call buyer will lose money because the value of the 8000 call option will be 100. The trader bought it for 150, and now he has to sell it for 100 for a loss of 50 points. However the put will expire worthless and the put seller can keep all the premium he got for selling the put. This is the main reason why option buyers find it hard to make money.

BUT if Nifty falls, the call buyer will only lose the money he paid to buy the 8000 call, however the put seller will be at unlimited loss.

Now after reading all this you must be thinking that selling an option is unlimited risk and buying an option is limited risk so one must buy an option. Well unlimited risk is only on paper. If you have a stop-loss in system it will take care of itself. And it’s the same with buying options.

One thing I forgot to mention is that when you sell an option, you get a premium the very next day in your account – but it’s blocked until the trade is over. If your observation was right you can keep the entire premium and that’s your profit. Yes profit in selling an option is limited to the premium received and losses are unlimited. When you buy an option the risk is the premium you paid and profits are unlimited. However you make money only if Nifty moves in the direction you predicted, else you lose money.

It is therefore very hard to say if buying an option is better or selling is better. In both the cases to win, your viewpoint must be right or else you may lose money.

There is a myth going in the markets that institutional investors always sell and retailers always buy. This is not the case. No studies have been done on this so no one for sure can tell who actually sells or who buys. But this is true that institutional investors have money and when they sell options, they do it huge. They mostly hedge their positions. For example if they buy some stock, they may sell Nifty Call Options to hedge their position, in case the stock falls, it’s almost certain that Nifty will fall and call option will give them some profit. (This is just an example please do not try this as institutional investors have lots of data to take action, you may not have such data and you may suffer losses. They have software that indicates them to take a certain action. Most retailers just speculate and suffer losses.)

Nifty options can be bought for the near month and for the next month. From the next-to-next month onward, the liquidity starts to fall. And that is a problem because you may not get a call or a put at the rate that you desired because there may not be enough sellers or buyers. Therefore it’s advisable that you play in current and/or next month options only. However you will still see some options very liquid which will expire in 6 months’ time. If you are a new comer I suggest stay away from such options. In USA these are LEAP options. (LEAPS) are publicly traded options contracts with expiration dates that are longer than one year. In India there is no liquidity in LEAP options.

Remember that time value effects most in the near month (current month) options. Therefore some people buy next month options to beat time value. It all depends on what you want to do with options. If your view is only for the day (intraday) it’s better to buy near month options as their value changes fast and you should get the value you were looking for.

However if you have taken a risk with two months in mind you should buy/sell the next month options as you will have enough time to realize a profit.

So what you do? Do you sell options or buy options? Whatever you do, if you are losing money trading options you can do my conservative option course to make 2-3% average return on the money you used to trade per month trading options with very high success rate and very low risk.

Please paper-trade any idea you got from the above article before starting real trading.

All the Best.

Written by:
Dilip Shaw
Founder: TheOptionCourse.com

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