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With some confidence I have entered my first Stock Futures trade.
Nervous - not scared, which is a slight improvement, but nervous largely because my previous trade on Index future sucked. Also profits from delivery trade of 250 Qty will not be able to offset the potential loss of a futures trade.
The trade is a short position on Adani Ports and SEZ listed in the premier Index. After entering short this morning the price seems to have moved against my position. None the less the stop is not yet triggered.
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Last edited by 4Play; March 4th, 2016 at 03:39 AM.
The attachment shared looks good, however my trades are discretionary in which I use a website for TA and have not yet paid for any software or data feeds.
I am too new to trading and have problems trying to define things objectively enough for me at the moment - but from what I have seen on this website I would definitely like to have a look at Ninja trader sometime - may be after I complete about 10,000 screening hours. So far I have approximately completed 720-750 screening hours so automation is a while from now (Assuming I survive the approximate 4 year timeline I have in mind).
I use the website - in.investing - with live intra day charts and fortunately for me it is the only site that is not blocked so I can have a look at my trades in between. I am sure there might be better trading sites and software - but accessing them is practically not possible for me.
The entry and SLs in the screenshots shown are manually entered by me.
6 work days (office) in a week does not help so the Market close on Monday gives me sufficient time to review some trades and analyse set ups.
I have completed my analysis on all the stocks listed in the Nifty 50 and have come up with a plan to enter just 1 lot future per position and trail. The idea is not so much to profit as to be able to participate at minimum loss.
Will get some exercise in the evening and re-evaluate the short listed stocks for trade in the March cycle.
The following user says Thank You to 4Play for this post:
Before stumbling on this site - I maintained my trading journal on a blog with the same idea - that is to have a digital record of what and why I am doing some things, and to save a screen shot of the chart set ups that I am trading for future learning and reference.
With a free day today I thought of picking up some articles from my blog I had posted earlier with the intention of helping other traders.
I am just copy - pasting the text as is in subsequent posts which will help the fellow traders and friends here understand my weaknesses and strengths and counsel me in the future if they feel I am stuck in something.
The 2 posts are on Option Trading and the 3rd post is my trading background.
Derivatives are securities whose prices are derived by the value of the underlying. The underlying could be a Index, Commodity, Currency, Bond or Equity. This implies that if the price of the underlying rises then ideally the price of the derivative should also rise and vice versa. Broadly the derivative segment is further sub-divided into the Futures and Options segment.
The scope of this post is restricted to the application of Options for Index Trading.
Q. What are Options?
A. The text book definition of Options is that it gives the buyer a right but not the obligation to exercise the title.
Q. Ok - What does the above definition mean?
A. This means that options allow you to temporarily take title (ownership) of the underlying. To understand this better let us consider the following scenario :
Somebody decides to sell a house for Rs.10 Million (let us replace seller by a fancier word "Underwriter"). You believe that the house is more appropriately valued @ Rs.12 Million. Therefore you buy the house and assuming your hypothesis is correct you will successfully sell the house at your target price thereby gaining Rs.2 Million i.e. 20% profit.
Realisation of profit in the above case is a function of your understanding of the housing market and the availability of capital required to make the purchase.
But what if despite this belief of a potential price rise you either do not have or do not want to invest the full capital needed to make this purchase? In that case you could possibly pay the Underwriter some token money (let us call this token money "Premium") which is a small % (say 1% = 100K) of the actual price of the house (which is the "Underlying") assuring the underwriter a purchase within some stipulated period - say 1 month (let us call this period as "Expiry").
Now lets reexamine the above trade set up.
1. You temporarily take title of the underlying by paying a premium
2. Favourable Circumstance : You then sell the underlying at your target price (Rs 12 Million)
3. With the realised capital you pay the underwriter the assured sum (Rs 10 Million)
4. Your net gain here is the difference (Rs 2 Million minus the premium paid)
5. Therefore the potential risk here is quantified as equal to premium paid.
Q. But what is this potential risk?
A. The potential risk here is that if the price of the underlying depreciates instead of rising.
Once again let us reexamine the above case
1. You temporarily take title of the underlying by paying a premium of Rs 100 K for a house which is priced @ Rs. 10 Million for a target of Rs. 12 Million
2. Unfavourable Circumstance : Instead of rising 20%, as you hypothesised, the price instead depreciates say 20%. Now in this case you are left with 2 alternatives (Options :P ) :
a. Return Capital : Pay the underwriter Rs. 10 Million as promised and take permanent title of a house which is priced @ Rs 8 Million thereby losing Rs 2 Million OR
b. Return Title : You do nothing and let your option lapse through the expiry. In this case you choose to return title and do not post any other transaction thereby losing the Rs. 100 K paid as premium while the Underwriter pockets that premium paid by you
Q. But what if my initial hypothesis was that the price of the underlying will depreciate - will options work even then?
A. Yes! Remember that options allow you to temporarily take title - which implies that you can do what you want :P -
Here in this case after taking title of the underlying you immediately sell the underlying to someone else for Rs. 10 Million - after sale if the price depreciates as expected then soon enough the house will be valued @ Rs. 8 Million - you then buy the house back from the market @ this price and return the house back to the underwriter.
In this case on sale of house you received Rs. 10 Million, but you paid Rs. 8 Million to buy back the house. You then return the house to the underwriter and therefore once again you pocket the difference minus the premium paid.
Note : Remember you must either pay the Underwriter the capital assured or return title of the underlying. In case of shorting you will benefit on returning title of a security that is losing market value
Q. Wait - I am confused - Why should I have to pay the Underwriter premium at all for a underlying that is going to lose value?
A. You have to pay that premium simply because you cannot sell what you fundamentally don't own. You pay a premium for temporary title of the underlying. Remember that the Underwriter writes the Option for 2 reasons :
1. He is assured of the price @ which he/she wishes to make the sale
2. He always pockets the premium - in other words, in the above case discussed, assuming the underwriter purchased the house @ any value less than Rs. 10 Million he profits by sale @ Rs. 10 Million + Premium you paid for temporary ownership. While you paid the premium because you anticipated that the absolute gains after either selling or buying the security is going to be greater than the Premium paid
Application of Options in Business :
Because of the above 2 reasons Options are used a hedging tool by the underwriters - while those buying the Options are speculators - i.e. those who buy and sell a security without owning it.
------------------------- End of Part 1 ------------------------------
From the previous post we have understood the meaning of the following :
We understood the above with a hypothetical scenario of selling a house in the open market. In case y`all haven`t read the previous post I strongly recommend reading part 1 before reading further.
Option Pricing :
In the house transaction discussed in Part 1 - we assumed the price of the option as a certain small % of the underlying (1%). In practice option price is a function of 3 factors :
1. Implied Volatility
2. Rate of Change
These are commonly represented as Gamma, Delta and Rho.
Note : The 2nd order derivatives are likely used by spread traders and I have rarely ever felt the need of trying to understand them for my trades. Not too sure if this is important for my style.
Option Price is = Intrinsic Value + Time Value where ;
Intrinsic Value = Diff Strike and Spot Price and Time Value is greater if more time to expiry and vice versa.
Understanding Implied Volatility :
Imagine a market in which not only where there buyers of the underlying but also those interested in buying and selling the option. In this case greater the demand greater the price of the option.
One of the best measures of greater demand for derivatives is to check the VIX or the Volatility Index. Greater volatility equals more hedging equals greater premiums.
The vice versa of the scenario is also true - i.e. in the event volatility decreases options lose premium.
Understanding Expiry :
Understanding ROC :
The whole point of options is to be relevant at the time of expiry that is your option is only worth money if it is In The Money @ expiry. The further the market moves in the direction of your position the greater the ROC. This concept is important so lets try understand it a bit -
Q. How does ROC impact price?
A. Suppose Nifty is trading @ 7500 then CE 7200 will have a ROC of 0.8, CE 7400 will have a ROC of 0.65 while CE 7600 will have a ROC of 0.4
Q. Ok - What does that mean?
A. This means that deeper In The Money option the greater the ROC. The vice versa is true - i.e. more Out of Money the Option the lower the ROC.
Q. So how can we use this pricing mechanism to our advantage?
A. Unlike Futures, options give you the flexibility to express your position more clearly. Given that you know that ROC is greater for ITM option consider the following scenarios :
1. You are strongly bullish from the current level of 7563 & believe that Nifty will move up strongly in a short period - What will you do?
A. In that case you will buy deep ITM CE say CE 7400/7300 vice versa for strongly bearish you buy 7600/7700 PE.
2. You are weakly bullish or weakly bearish
A. You could buy OTM CE say 7600/7700 - here you will gain if the price starts moving in your favour and gain the most once your option gets ITM. But in the off chance the market reverses then the ROC comes to play - i.e. you will not loose money so quickly. This is because as Nifty falls the OTM call options go further OTM and therefore have a low ROC.
Q. How is buy CE different from Selling PE and vice versa?
A. This is where the formulas listed above come into play. I will try to attempt to answer this question by my current position.
On Thursday I shorted Nifty by selling 7400 CE @ 170 and listed a SL @ 7580
What this position means is that on the last day of Expiry when Time Value will be assumed 0 and the option will only be valued @ Intrinsic Value which is the difference between the spot and strike price - I believed at the time of this transaction that Nifty will not close the month above 7570.
Let me explain this :
The 7400 CE was valued @ 170 when Nifty was trading @ 7460. The intrinsic value in this case is 60 points (diff (Spot Price 7460 - Strike Price 7400)). The remaining 110 points is for time.
Now on the last day of expiry assuming time value is 0 and if Nifty closes at the 7460 then theoretically the option will be priced only 60 points. I will then cover the option here gaining 110 points. Similarly if Nifty closes @ 7570 the intrinsic value = 170 and theoretically I end up in a no profit no loss position.
Now why did I not buy PE instead?
Simply because Nifty was showing short term up move on a long term bearish trend. Which I interpreted that even if up move then the move will be slow and slow moves mean low volatility which means options losing demand = losing value = me profiting.
Further slower the move and closer to expiry we get the more time depreciates the more money I make. Therefore it is important for the position that Nifty stay below 7570.
In other words, when you sell an option you say not only is the market going to move in my direction, but it is likely that the movement is going to be slow. But when you buy a option you say that the market is going to move in my direction and move fast.
In other words sellers have time and IV in their favour therefore statistically are in a better position to earn money as compared to buyers of options.
Q. OK - Then why doesnt every one just sell options?
A. Selling an option skews probability in your favour but at much greater risk.
Once again consider my current position for eg. Short CE 7400 which meant that I am bearish. But instead if Nifty makes a bull move then my option gets deeper ITM. Once again deeper ITM the greater the ROC which implies that if the market keeps moving against my position, not only do I lose money but I lose it fast!
To put things in perspective my colleague who follows my calls went 7500 PE @ 7460 @ 140 at the same time I went short on 7500 CE @ 170. Both options were ITM.
The next day - the market blasted through in the long direction hurting both our positions. EOD he is on notional loses of 45 points while I am on notional loses of 65 points!
Summary and Key Points :
1. Sell option if you believe a slow move lies ahead
2. Buy if you believe a fast move lies ahead
3. Options are not a buy and hold instrument, you must get rid of any buy position CE or PE in case the market flattens
4. Selling requires greater trading capital
Hopefully the post helps you all plan your positions accordingly.
I entered the stock market on April-May 2015 with a corpus of Rs 1,00,000 with the objective of buying equities in the stock market. Sectors of interest included Pharma, IT, Banking, Engineering and Consumer Goods.
Market Lunch Money:
At the time of my entry Nifty was trading @ 8500-8600 level and the broker from my DP - Angel Broking talked me into buying Nifty Options.
His point was that options are the same as stocks difference being they give money if the market moves in your direction and you can choose either direction or a combination of both. When he began explaining it took me about 10 minutes to learn that Call means long and that Bank Nifty is also a index - Lol.
The whole conversation was so ridiculous with all the fancy acronyms that I began to feel stupid on Day 1 of the market. Soon enough I just gave up trying to understand what he was trying to say and I asked him what does he want me to do ("MISTAKE").
(I have posted 2 articles on Options Basics in January)
He pitched the position of his brokerage house and I gave him the permission to go ahead and trade.
Within 15 minutes he called back to say "Profit Rs 2000 Booked"
Awesome - Beast - Monster - I was loving the market :-D with 2% returns in a day of trade!!
In my head I was doing the simple Math and thought to myself that this way I can almost double my capital each Month. I was feeling successful and accomplished and though what I earned that day was lesser than my day salary the feeling of identifying a good broker, entering into a good partnership with some company which knows the index was highly gratifying.
Day 2 - Booked loses Rs 12,000
Day 3 - Booked loses Rs 24,000
Break from trading.
Next week - Booked loses Rs 44,000
Pain and Suffering:
Left with nothing more than Rs 20,000 I felt horrible and cheated. On asking what happened he gave the standard OOPS reply saying that the market took a sudden turn! which led me to believe that if a brokerage house with 30+ years of experience can bleed money like the PIIGS Nations (Read Euro Crisis) then I do not stand a chance.
Everyone around talked me into not trading Derivatives and believed I got cheated because I am gullible. I remember feeling confused and lost. I was just stunned by my stupidity and I have never lost so much money in anything and may be everything put together. This money was more than my college fees on scholarship and now I began calculating all the awesome things I could have done with the money.
Age old advice of buying gold or real estate started making sense. I began appreciating a defensive approach to investing and began feeling that everything I knew and perceived about investing (actually may be about everything in life) was wrong. My confidence was owned by the market and its participants. I felt weak. I cancelled my visit back home (Jammu) because I was too embarrased to face family.
Out of no where I found a person from my office who traded the markets in 2007-2008 and understood everything I said and things I did not say. He spoke about charts and said that may be I could use my experience as a Math teacher to get a better understanding of charts.
(Surprisingly he is the only person I have met in person who trades derivatives all other networks have been through emails and calls)
Study and Research:
I poured myself into studying charts.
Work at office full day - go home and study charts - read books, research articles, encyclopedias actually anything about trading through charts under the sun I read. I started reading and absorbing a book every 3-4 days.
After all of that reading - there are about 5 books/authors that I have read may be thrice over till date and still feel that I learn something new every time I read them. I believe these books are a must have for any aspiring technical analysts.
Dr. Alexander Elder - All books (Read them after you have some experience)
Thomas Bulkowsky - Encyclopedia of Chart Patterns
Steve Nison - Candle Sticks!
Trading Tactics - Trend Trading and Francis Hunt - Hunt Volatility Funnel.
Stock charts - Baby Pips and Futures.io are websites with amazing amount of free study material.
There are crazy amount of blogs on Elliot Waves and Gann Charts and Fib Retracements. This information is hardly used in these books but is present in brief @ babypips.com
I recommend while you could go through books of your choice, to first understand the broader concepts of technical trading and of course you could choose to specialize in something soon enough and focus your learnings there. But the above in my opinion are almost the bare essentials to get started.
Armed with these learnings I began charting stocks - Low on confidence meant I picked up blue chip stocks with high trading volume to maximize statistical probability in my favour.
LnT head shoulders Pattern target - 1050 (trading @ 1750 at the time)
SBI - Trend Line target 161 (trading @ 270 at the time)
Kotak Ok - Axis Ok - HDFC Bank Ok etc and soon enough when I checklisted the OK stocks I invested whatever of the remaining was left.
August 2015 - All stocks break trend line! all stops hit. I contacted the broker asking him about Bank Nifty options. This time I knew what Put meant and if 3 major banks are breaking a TL and the 3-5% SL value I decided on shorting BNF with everything I had in a all or nothing hope
(Never ever do this - This is poor money management - but in my defence I believed that what I was left with was not worth much - I maintain even 1000 Rs in your account gives you a chance to come back slowly).
Good Fortune, Luck and Forgiveness:
BNF fell over a 1000 points within a few days! I booked massive profits and transferred all of those gains (Minus Rs 10K) to my savings and stayed out of trade for sometime. I felt something was up and this fall sparked my interest in the Index rather than stocks.
October 2015 - I hypothesized Nifty correcting below 7000 levels with a target period of Feburary. I then followed Nifty, analysed its behaviour, paper traded Nifty Futures for a month and decided to trade Nifty soon after Diwali.
November 2015 - I started this blog and started trading Nifty with a capital of Rs 10K. While most readers of the blog will be aware of the day to day positions I have listed below a summary of my trade earnings (table not displayed).
December 2015 - My confidence is High - High enough to post my research without the fear of being ridiculed in a story form "Nifty Speaks and We Listen - A Technical Story" soon after Christmas.
A few days later I posted this in forums where traders are active. I wanted to showcase my analytical skills and also be the smart money that invests at the bottom of a bullish pennant forming on monthly charts. I also wanted to help - but nothing was selfless all had a clear selfish reason.
At the time of writing the blog I was carrying long positions for Nifty target of 7950 while the index was trading @ approx 7900 levels. I was very close to the moment I had been waiting for a long time - Nifty was showing the long anticipated sign of weakness and my blog post accurately predicted a fall of over 1000 points (over 13% index fall) with a clear Feb target.
Not just that - the prediction is for a range bound market for the next 3 months - and the begining of a UNREAL BULL RUN in the coming 3-4 months period where investors buying now should book partial profits @ 9100 levels after approx 15 months from today and the remaining @ 10-11500 levels.
Of course once I made the post some traders liked my analysis while some made snide comments like " Attention Grabber", "Wannabe","Speculator/Bookie", "1000 points fall in 30 sessions - wonder why he is holding long" etc
Some people even took the time out to send me a mail to make fun of my analysis every day Nifty moved up - which was not very long :- P and when the week of Jan 4 happened and they shut up for good.
I was in complete position with some earnings from the market to Maximize this trend. I made mistakes on the day transactions from time to time but the general idea was always reasonably clear with a sound understanding of what is in play.
I was in better control and more confident yet scared. Scared because this time if I lost I would not just loose money but loose all the hard work done analysing and waiting - Oh! the wait is the toughest I still get impatient sometime.
For me while writing this blog - staying back after work - reading till 3-4-5 am - dreaming about charts - completing patterns before they happened - became an obsession and still is.
The broker who talked me into options now at times asks me for what to advice his clients. He gives me company names, slanders the advisory of his firm and trusts me more than his senior analysts and some of the people who write to me are directed from his network.
Sum and Substance:
Invest in Indian Equities on every dip. Go heavily long on mutual funds. Continue Investing till Nifty is in the range 6700-7400. On dip below 6700 wait - stop investing - observe - something is not right as this will be a little below the 68.1% Fib Retracement which is unhealthy. If a fall to 6200 exit with loses and shift to Bond Market.
On a move above 7450 stop your investments - enjoy the bull run and if you do make money which in my opinion should atleast triple if you are doing this seriously - do let me know 15-20 months later. I will wait for your email :-)
At the end of all this learning and this amazing journey I have finally invested the 100K I planned to invest - the only difference being that instead of buying stocks @ 8500 Nifty Level I bought them @ 6900 Nifty Level with a massive upside target and comparatively a very small Stop Loss.
Today I bought the remaining 15 K making my investments worth 100K in 10 different stocks trading in a strongly bullish uptrend on weekly charts but are in a tight pattern. A pattern break can be on either directions but I believe that minimum 6 of these stocks are going to triple their valuations in the coming year - at least 2 will lose over half their value while the remaining will be booked at 20-30% profit.
In the process of losing and earning and investing this money I have done more than any one else - I traded Index Options and Futures, Traded Stock Options and Futures, I have margin called and sold stocks as a day trader. I have lived many lives and learned more than any formal education. I believe that it is a shame if you let someone else trade for you simply because you do not know what you can learn.
The stock market is magical. I will always trade and trade more and trade different things. I have realized the importance of letting your winners Run - which you have seen in action during the trading of Jan and Feb.
I have also learnt the power of Stop Losses and let me give you the example of a failed trade for this:
NF SL 7219-7225.
Nifty has a ATR(14) i.e. average 14 day trading range of over 120 points per day. Yet Nifty took 1.5 days to hit my SL which was half the ATR. There was a mistake made in this position - the futures chart gave a clear sell signal - however the spot chart just skipped my analysis else there was no sell signal on Nifty. A mistake from which I have only learnt and will become a little better.
You will never be able to learn, comprehend or understand the market - but you could live your life in absolute awe and amazement of the consistency of human behaviour. The stock market is beautiful and magical and technical analysis is only the starting point of a trading journey.
Today - for the first time in what seems like forever I close the week with No Open Positions.
Today despite losing money I have never felt so much at ease - this could mean that may be I have become a trader. I carry no regrets and the objective of investing Rs 100K in the market is met.