Monthly expiry week is a special week. Basically what happens is that people take positions in monthly stock options at the start of the month. Theta decay happens for the whole month and these contracts become near worthless in the last week and hence very cheap. This is the perfect time to turn from option writer to option buyer and play for large contra reversal gains with very small investment. So let's say a stock is technically weak, so you write CE options for the stock. The stock falls for 3 weeks, CE options becomes worthless. Now stock is oversold and it is perfect time to play for reversal by buying low value CE options.
These games make the stocks and markets very volatile in the last week of the month. Look at what happened in the last week of May expiry. BankNifty was weall and falling for most of the month. However in the last week SBI result date was announced which was expected to be good. This triggered a massive rally in BankNifty from oversold levels sending it up 4% in a single day.
Most stocks hit strong resistance levels in a single day all at once. SBI hit 400, HDFC Bank 1500, Axis Bank 740, ICICI Bank 650. These were the strikes where maximum CE was written and had huge OI built up. These positions got trapped. SBI results were better than expected from NPA point of view and couple of other news hit the exchanges like SUUTI stake sale in Axis and trasfer of reserve from RBI to government easing the fiscal pressure on the government. This triggered followup run up in banking stocks further trapping CE writers.
CE writers were forced to run for short covering, but they did not just exit in loss. Considering expiry was near these CE writers kept rolling their CE positions to next strikes hoping for some reversal. So they moved highest CE OI in SBI from 400 to 420 when SBI moved to 410 and in HDFC Bank to 1520 when it moved to 1505. Next day BankNifty opened slightly positive and these rolled up positions again got trapped and they were again forced to cover leading to massive spikes in BankNifty due to another round of short covering.
Understanding this is very important on how option writers get trapped and how it leads to ripple effect moves. If expiry was far most likely option writers would have just booked their losses and gotten out of the game or moved to a much farther strike CE. However this was not possible in expiry week because only near ATM options will have high premium value. Far strikes will be worthless and hence won't compensate for the losses in current strike. This forced the option writers to keep writing near ATM options which acted as more fuel for already trapped positions. Very small move of 10-20 points in these bank stocks would trigger short covering. Since this was happening in all the four major BankNifty components HDFC, ICICI, Axis Bank, SBI this lead to very volatile moves in BankNifty also.
An expiry week to remember!
Lessons learned
- In the last week, preferably take positions only Tuesday onward
- Avoid Monday/Tuesday
- Study individual stock option chains before taking positions
- Make sure CE and PE sides are balanced both at Index and stock level before taking positions
- If stock option chain indicates possible large moves in heavy underlyings like HDFC bank, don't deploy full cash and keep sufficient buffer from ATM
RIL Results Trading
Results Trade in RIL
First of all Reliance Ind has been rangebound for several months now bouncing between -1900 to 2000+. Somewhere sometime back I had read a news that Reliance getting good margins on its petro product porfolio due to increase in crude prices. I had this news in the back of my mind as quarterly results were round the corner. When Reliance came closer to the lower end of the range, I started accumulating it in the 1900-1950 range hoping for a bounce around results declaration
This worked for me, as soon as the result date was announced, Reliance spiked from 1900 to 2000. I was sitting on good profit on my position. One day before the results I wanted to check market positioning, because I was sitting on good profits and wanted to retain it.
Analysing option chain data for Reliance, I observed that lot of unwinding was going on in ITM calls and lot of OI build up was happening in ITM puts. This clearly signalled me that RIL is likely to go down post results. I exited my position at 2000
Next day there was again an announcement in RIL about the Aramco deal in progress and RIL went upto 2024-2032 range which was used for a sell off and sure enough, post results RIL saw a sell off although results were good and petrochem division indeed did good this time, overall profit was below expectations and RIL went back down close to 1920. Turned out to be a very good trade for me combining all aspects news, fundamentals, options data and technicals.
Aramco deal news trap
Note that I strongly believe that periodic Aramco deal news is being used by large institutions and news media to trap retail into buying RIL at higher prices. So be careful! Notice how these news items were flooded just before the results with a spike in price, RIL was then dumped just before results and all the news on Aramco deal also disapperaed with no further updates.
Next time you start seeing lot of updates and news on RIL Aramco deal, it is actually time to sell and not to buy. However one excellent news pending in RIL is the launch of affordable smartphone in collaboration with Google Pixel. Most likely the announcement will come in the next AGM which usually takes place around July. It would be an excellent strategy to accumulate RIL before AGM and then sell on any spike around AGM. I will use next two months to accumulate RIL and will exit on final announcement of the launch of affordable smartphone.
First of all Reliance Ind has been rangebound for several months now bouncing between -1900 to 2000+. Somewhere sometime back I had read a news that Reliance getting good margins on its petro product porfolio due to increase in crude prices. I had this news in the back of my mind as quarterly results were round the corner. When Reliance came closer to the lower end of the range, I started accumulating it in the 1900-1950 range hoping for a bounce around results declaration
This worked for me, as soon as the result date was announced, Reliance spiked from 1900 to 2000. I was sitting on good profit on my position. One day before the results I wanted to check market positioning, because I was sitting on good profits and wanted to retain it.
Analysing option chain data for Reliance, I observed that lot of unwinding was going on in ITM calls and lot of OI build up was happening in ITM puts. This clearly signalled me that RIL is likely to go down post results. I exited my position at 2000
Next day there was again an announcement in RIL about the Aramco deal in progress and RIL went upto 2024-2032 range which was used for a sell off and sure enough, post results RIL saw a sell off although results were good and petrochem division indeed did good this time, overall profit was below expectations and RIL went back down close to 1920. Turned out to be a very good trade for me combining all aspects news, fundamentals, options data and technicals.
Aramco deal news trap
Note that I strongly believe that periodic Aramco deal news is being used by large institutions and news media to trap retail into buying RIL at higher prices. So be careful! Notice how these news items were flooded just before the results with a spike in price, RIL was then dumped just before results and all the news on Aramco deal also disapperaed with no further updates.
Next time you start seeing lot of updates and news on RIL Aramco deal, it is actually time to sell and not to buy. However one excellent news pending in RIL is the launch of affordable smartphone in collaboration with Google Pixel. Most likely the announcement will come in the next AGM which usually takes place around July. It would be an excellent strategy to accumulate RIL before AGM and then sell on any spike around AGM. I will use next two months to accumulate RIL and will exit on final announcement of the launch of affordable smartphone.
Mein Kampf with Bharti Airtel
The Arvind Fashions Disaster
Before going into Bharti Airtel, let me first tell you about another investment quickly so that we can compare the two. How one ended in a disaster and how we managed to succeed in a similar situation. Around March 2019, Arvind Fashions the demerged entity of Arvind Ltd listed on stock market. Shareholders got 1 share of Arvind Fashions for every 5 in parent company Arvind Ltd. The listing price settled at 600 Rs/sh much lower than expected fair value of 1050-1200 Rs/sh as propagated by news, media, operator and promoter network. The company was being compared to Aditya Birla Fashions and was being marketed as the only second player in premium, international fashion wear brand in the country. The reason for lower value of listing was a technical issue. Supposedly the exchange had set the base price on listing day same as that of the parent company Arvind Ltd from which it demerged without taking into account the demerger ratio of 1:5 and the fact that it is a completely different business of branded apparel vs raw textile commodity business of the parent company Arvind Ltd and hence commanded a much higher PE ratio. I was totally sold on the idea of the technical listing issue and hence the flawed valuation of the company. The company started hitting upper circuits all the way upto 1000 and finally the shares started trading after that. I started accumulating large chunks considering 1000 was the lower band of the 1050-1200 band marketed as the fair value of the company. My idea was to go big and earn a quick 5-10% in a short time. I had pumped in almost 30-40% of my portfolio into Arvind Fashions hoping to make a big gain in quick time. The stock continued to hover around the 950-1050 range for sometime. After that came the quarterly results time. Time to publish numbers instead of stories. The results were so shockingly bad that the stock straightaway hit 10% lower circuit on that day. With the lower circuit it took away 5% of my networth and no opportunity to exit. Next day there was a press conference on the results where the promoters who were until now talking about stars and moons immediately switched tone to saying that they expect the next quarter also to be challenging and then gradual improvement as they exit their low margin low profit business which actually was a large chunk of their total business. Next day the stock opened again at another 10% lower circuit and 10% of my networth was also gone with it in two days. After that the stock kept on sliding with a bearish bias. After suffering total despair for months I finally exited at around 600 Rs/sh compared to average cost price of 850-900 Rs/sh losing a total of approximately 30% of my networth (majority of it just in 2 days).
Now I had done many things wrong in this trade. Position sizing, loss averaging, hope based trades but primarily it was a case of deliberate and planned misguidance by a nexus of news, media, operator and promoter network. Have no doubt about it, if the law was fair and equal to everyone then the promoters of this company should be jailed for fraud and cheating. I followed the stock developments very closely for the entire period I held it because I had a large stake in it. Watched, read every interview, news and media coverage, attended every results/press conference and analyst calls. The promoters clearly misguided about the current state of the company and set false expectations before they had to declare facts and numbers in the quarterly results. After that also they kept on misguiding about recovery in the company. Everytime they kept on saying that things will get better and back to normal or high growth trajectory in a quarter or two and they kept on shutting, selling the business part by part, brand by brand leaving the shareholders high and dry.
The only saving grace for me in this story is that I still managed to escape the carnage around 600 Rs/sh. After that also the stock kept crashing as the fraud became clearer to the market with time and finally settled in the 100-150 range, 85% lower from the high of 1050 it made post listing. So I suffered the disaster but somehow escaped just alive out of the carnage that followed in the counter.
History repeats with Bharti Airtel
After the bitter experience with Arvind Fashions, I had decided not to take such large bets on a single counter. But stock market is a place of constant temptations. Inspite of having followed the rule religiously for around a year another opportunity caught my eye in Feb'2020. This time it was Bharti Airtel. This is the time when post corona pandemic India was experiencing huge global inflows from FTSE/MSCI as central banks around the world pumped the markets with infinite supply of free money running into trillions of dollars. Huge inflow was also expected in Bharti Airtel but it got cancelled couple of times due to foreign limit quota issues. Finally after few iterations of this dramma lasting over 3-4 months, the foriegn holding quota issues was resolved and it was announced that in the next MSCI rebalance cycle Airtel will get around $500-600 million inflow, approx3x avg daily volume.
To me this looked like a tempting opportunity because the stock was beaten down due to constant back and forth on the foreign inflows and finally we had a solid cnfirmation that this time the inflow is happening for sure with 100% guarantee. Although I was planning to play big on this news confirmation, I had kept my expectations low. I was targetting max 2-3% gains and I was going to build my positions slowly all the way upto the MSCI inflow day and I was not planning to hold my position even a day longer than the MSCI inflow day. My expectation was that with $600 million inflow we will get atleast one spike in the stock. Also Bharti Airtel was a much more higher quality, stable, low volatility stock compared to Arvind Fashions. Bharti Airtel was one of the stocks that was actually a beneficiary in the times of pandemic as work from home culture was picking up and more and more people were staying connected by phone and internet. Bharti Airtel was a leading service provider in both areas. Add to that while usually Airtely is a silent counter, it started churning out several positive news almost on a daily basis which added to my conviction that I will easily get a good upmove in this counter. From highest subscriber addition, 5G trials, stake sale in African subsidiary, PAT positive results after several quarter of losses, merger of DTH arm with parent company, induction of Warnberg Pincus as investor in parent company at a valuation of 600 rs/sh, several developments in Airtel Digital, multiple interviews with Sunil Mittal on TV and in media, targets from large fund houses ranging from 650-700 rs/sh, there was a flood of positive news flow in this counter that gave more and more confidence everyday in the trade. What happened on the MSCI inflow day was one of the biggest mindboggling shock of my life.
Bharti Airtel went nose diving on MSCI Inflow day crashing 4% on that day from 580 to 550. How and why? Looks like there were many players much larger than me who had accumulated positions in Bharti Airtel wanting to sell into the MSCI inflow. So on the day of MSCI inflow, Airtel instead of seeing 3x buy inflow saw 10x sell outflow.
In my defence the probability of something like this happening is very very low.It was a crazy day. It was an accident day. In 99.9% of the cases we should have seen a spike in Airtel and I should have easily made 2-3%. Instead I lost 4% on my large investment. Again. Many people must have gotten stuck in Airtel just like me. So the aftershocks came the next day and Airtel crashed another 6%.
Fighting back
This time I was not going to go down that easily. To me the moment the stock crashed at the MSCI inflow candle, one thing was absolutely clear. If the stock is crashing with $600 million of inflow then this stock is not going up anytime soon. It might fall more, it might recover, it might flatten out but it is not going up.
Immediately the same day I started shorting higher strike calls CE options in Airtel. I was so sure that Airtel is gone in the dumps that for 74 Lakhs worth of accumulated investment in Airtel, I shorted 70 lots of CEs, that is approx 7 crore of underlying collecting lakhs in premium. All the CE options expired worthless and I was able to compensate for the entire loss in the cash position in the same month.
After this Airtel flattened out, but did not recover from the severe fall. I kept on selling CE options every month to make some money out of the cash stuck in the position. This time I was less aggressive because I had compensated for my losses and Airtel had also stopped falling further, so I was writing only 1:1 ratio CE options against my cash holding as a fully covered call strategy. But after a month because of weak price performance of Airtel stock, the call option premiums dropped to very low values. This was not good enough for 74 Lakhs of cash stuck in the investment and another 10-20 Lakhs of margin required to short Call options. The ROI I was getting from call writing was not satisfactory anymore for the kind of investment that was stuck in Airtel.
I pledge not to be a victim
I was determined that this time I won't allow myself to be a victim of these stock market scams and manipulations. This time I will take what is my due from the market. So I pledged my entire holding in Airtel, that released 80% of the investment as cash to me. This I deployed into FnO trading which gave 4x leverage. I used this as margin to trade weekly options in Nifty and BankNifty which was anyways going good for me. I was earning 3-4% on this every month. So not only did I compensate for the entire loss within the same month, I got my cash released by pledging the shares and put it back to work without booking loss in the investment.
Compare this to the Arvind Fashion experience a year back where I was a helpless victim. My money was looted by this nexus of scamsters in news, media, operator and promoter and there was nothing I could do about it. I just had to accept my losses and live with the memory of how I was fooled and looted.
This is what investing and trading is all about. It is a game, it is a war and you win or you die in it and you have to fight to get your share in it. You cannot put your money in the market and hope that someday it will give you good returns. Market is full of scamsters forming a powerful nexus constantly scheming to loot that money from you through the market. So get up, don't look for safety in the market. Look for where the biggest fight is going on and jump into it! That's the way to play it.
BTW Bharti Airtel has made a decent recovery in the last month. From below 500 to near 570 and is very close to my average price of 580. If and when it crosses that I am sitting on a big pay day in Airtel on top of all the profits already collected from trading options and deploying the money from the pledged securities into index trading. This definitely could have turned into another major disaster for me but I fought back this time and now this qualifies for an awesome trading experience with a happy ending!
Before going into Bharti Airtel, let me first tell you about another investment quickly so that we can compare the two. How one ended in a disaster and how we managed to succeed in a similar situation. Around March 2019, Arvind Fashions the demerged entity of Arvind Ltd listed on stock market. Shareholders got 1 share of Arvind Fashions for every 5 in parent company Arvind Ltd. The listing price settled at 600 Rs/sh much lower than expected fair value of 1050-1200 Rs/sh as propagated by news, media, operator and promoter network. The company was being compared to Aditya Birla Fashions and was being marketed as the only second player in premium, international fashion wear brand in the country. The reason for lower value of listing was a technical issue. Supposedly the exchange had set the base price on listing day same as that of the parent company Arvind Ltd from which it demerged without taking into account the demerger ratio of 1:5 and the fact that it is a completely different business of branded apparel vs raw textile commodity business of the parent company Arvind Ltd and hence commanded a much higher PE ratio. I was totally sold on the idea of the technical listing issue and hence the flawed valuation of the company. The company started hitting upper circuits all the way upto 1000 and finally the shares started trading after that. I started accumulating large chunks considering 1000 was the lower band of the 1050-1200 band marketed as the fair value of the company. My idea was to go big and earn a quick 5-10% in a short time. I had pumped in almost 30-40% of my portfolio into Arvind Fashions hoping to make a big gain in quick time. The stock continued to hover around the 950-1050 range for sometime. After that came the quarterly results time. Time to publish numbers instead of stories. The results were so shockingly bad that the stock straightaway hit 10% lower circuit on that day. With the lower circuit it took away 5% of my networth and no opportunity to exit. Next day there was a press conference on the results where the promoters who were until now talking about stars and moons immediately switched tone to saying that they expect the next quarter also to be challenging and then gradual improvement as they exit their low margin low profit business which actually was a large chunk of their total business. Next day the stock opened again at another 10% lower circuit and 10% of my networth was also gone with it in two days. After that the stock kept on sliding with a bearish bias. After suffering total despair for months I finally exited at around 600 Rs/sh compared to average cost price of 850-900 Rs/sh losing a total of approximately 30% of my networth (majority of it just in 2 days).
History repeats with Bharti Airtel
After the bitter experience with Arvind Fashions, I had decided not to take such large bets on a single counter. But stock market is a place of constant temptations. Inspite of having followed the rule religiously for around a year another opportunity caught my eye in Feb'2020. This time it was Bharti Airtel. This is the time when post corona pandemic India was experiencing huge global inflows from FTSE/MSCI as central banks around the world pumped the markets with infinite supply of free money running into trillions of dollars. Huge inflow was also expected in Bharti Airtel but it got cancelled couple of times due to foreign limit quota issues. Finally after few iterations of this dramma lasting over 3-4 months, the foriegn holding quota issues was resolved and it was announced that in the next MSCI rebalance cycle Airtel will get around $500-600 million inflow, approx3x avg daily volume.
To me this looked like a tempting opportunity because the stock was beaten down due to constant back and forth on the foreign inflows and finally we had a solid cnfirmation that this time the inflow is happening for sure with 100% guarantee. Although I was planning to play big on this news confirmation, I had kept my expectations low. I was targetting max 2-3% gains and I was going to build my positions slowly all the way upto the MSCI inflow day and I was not planning to hold my position even a day longer than the MSCI inflow day. My expectation was that with $600 million inflow we will get atleast one spike in the stock. Also Bharti Airtel was a much more higher quality, stable, low volatility stock compared to Arvind Fashions. Bharti Airtel was one of the stocks that was actually a beneficiary in the times of pandemic as work from home culture was picking up and more and more people were staying connected by phone and internet. Bharti Airtel was a leading service provider in both areas. Add to that while usually Airtely is a silent counter, it started churning out several positive news almost on a daily basis which added to my conviction that I will easily get a good upmove in this counter. From highest subscriber addition, 5G trials, stake sale in African subsidiary, PAT positive results after several quarter of losses, merger of DTH arm with parent company, induction of Warnberg Pincus as investor in parent company at a valuation of 600 rs/sh, several developments in Airtel Digital, multiple interviews with Sunil Mittal on TV and in media, targets from large fund houses ranging from 650-700 rs/sh, there was a flood of positive news flow in this counter that gave more and more confidence everyday in the trade. What happened on the MSCI inflow day was one of the biggest mindboggling shock of my life.
Bharti Airtel went nose diving on MSCI Inflow day crashing 4% on that day from 580 to 550. How and why? Looks like there were many players much larger than me who had accumulated positions in Bharti Airtel wanting to sell into the MSCI inflow. So on the day of MSCI inflow, Airtel instead of seeing 3x buy inflow saw 10x sell outflow.
In my defence the probability of something like this happening is very very low.It was a crazy day. It was an accident day. In 99.9% of the cases we should have seen a spike in Airtel and I should have easily made 2-3%. Instead I lost 4% on my large investment. Again. Many people must have gotten stuck in Airtel just like me. So the aftershocks came the next day and Airtel crashed another 6%.
Fighting back
This time I was not going to go down that easily. To me the moment the stock crashed at the MSCI inflow candle, one thing was absolutely clear. If the stock is crashing with $600 million of inflow then this stock is not going up anytime soon. It might fall more, it might recover, it might flatten out but it is not going up.
Immediately the same day I started shorting higher strike calls CE options in Airtel. I was so sure that Airtel is gone in the dumps that for 74 Lakhs worth of accumulated investment in Airtel, I shorted 70 lots of CEs, that is approx 7 crore of underlying collecting lakhs in premium. All the CE options expired worthless and I was able to compensate for the entire loss in the cash position in the same month.
After this Airtel flattened out, but did not recover from the severe fall. I kept on selling CE options every month to make some money out of the cash stuck in the position. This time I was less aggressive because I had compensated for my losses and Airtel had also stopped falling further, so I was writing only 1:1 ratio CE options against my cash holding as a fully covered call strategy. But after a month because of weak price performance of Airtel stock, the call option premiums dropped to very low values. This was not good enough for 74 Lakhs of cash stuck in the investment and another 10-20 Lakhs of margin required to short Call options. The ROI I was getting from call writing was not satisfactory anymore for the kind of investment that was stuck in Airtel.
I pledge not to be a victim
I was determined that this time I won't allow myself to be a victim of these stock market scams and manipulations. This time I will take what is my due from the market. So I pledged my entire holding in Airtel, that released 80% of the investment as cash to me. This I deployed into FnO trading which gave 4x leverage. I used this as margin to trade weekly options in Nifty and BankNifty which was anyways going good for me. I was earning 3-4% on this every month. So not only did I compensate for the entire loss within the same month, I got my cash released by pledging the shares and put it back to work without booking loss in the investment.
Compare this to the Arvind Fashion experience a year back where I was a helpless victim. My money was looted by this nexus of scamsters in news, media, operator and promoter and there was nothing I could do about it. I just had to accept my losses and live with the memory of how I was fooled and looted.
This is what investing and trading is all about. It is a game, it is a war and you win or you die in it and you have to fight to get your share in it. You cannot put your money in the market and hope that someday it will give you good returns. Market is full of scamsters forming a powerful nexus constantly scheming to loot that money from you through the market. So get up, don't look for safety in the market. Look for where the biggest fight is going on and jump into it! That's the way to play it.
BTW Bharti Airtel has made a decent recovery in the last month. From below 500 to near 570 and is very close to my average price of 580. If and when it crosses that I am sitting on a big pay day in Airtel on top of all the profits already collected from trading options and deploying the money from the pledged securities into index trading. This definitely could have turned into another major disaster for me but I fought back this time and now this qualifies for an awesome trading experience with a happy ending!
Derivatives Risk Management
While FnO offers higher probability of success, profits from trading options are also low as earning is mostly from low OTM option premium writing and not the primary price moves of the underlying. This is compensated by using leverage. FnO allows margin trading which gives around 4x leverage. High probability of success combined with leverage helps in making good gains from low value option instruments. But if caught on the wrong side these can be very dangerous. Option prices are extremely volatile. 50% moves is a normal daily affair in option instruments. On high VIX days option prices can move anywhere between 300% to 1000% to even more within miutes. Stop Loss may/may not protect traders as large moves happen mostly at market open with Gap Up and Gap Downs and many times option can become illiquid and freeze not giving an opportunity to exit in time. In such cases leveraged positions act as a curse and can lead to huge losses. There are many stories of large funds going bust in days losing billions of dollars due to derivatives positions going wrong.
Risk management is the most critical aspect for success in FnO trading. There are many techniques to manage risks and we will discuss them here one by one
Selecting Instruments for derivatives trading
The first and obvious choice is between stock options vs index options. Always prefer index options over stock options. Main reason is stock options are vulnerable to stock specific news and event risks. Index is a combination of 50-100 stocks, so any news in one specific stock will not have much impact on the index as a whole. Index is much less likely to hit upper or lower circuits compared to individual stocks. Index options are very liquid and have low bid ask spreads. Stock options can be illiquid and just the bid ask spread could lead to huge losses. Within stocks liquid large stocks like RIL, SBI, Infosys is less risky but illiquid stocks like Page Ind, Eicher motors, MRF are a definite no no. Playing with such options is a sure way to burn your account. Stock options work best when fully hedged with covered calls and cash secured put kind of strategies.
Position Sizing and cash buffer management
One simple rule, Never go all in at once. Build your positions slowly as the trend for expiry becomes clearer closer to expiry. Friday, Monday most certainly will look balanced on both sides. Tuesday-Thursday the actual trend is likely to shape up with much more clarity. However by the time trend becomes clear, premiums would also have decayed considerably. So initially you will have take some chance with smaller positions for higher premiums and then build larger positions as things become clearer. Buffer cash is a life saver if you get stuck on the wrong side. It will help you manage margin calls and compensate for losses on your positions by taking new adjustment positions re-aligned to current market situation.
Day wise trading strategies to avoid traps
Some days are prone to traps for option writers and some days are favourable for option writers. Friday, Monday and Tuesday first half can be very trappy for option writers and option writers must either keep positions light or trade only intraday on these days. Tuesday second half to thursday EOD is favourable for option writers and traders can trade aggressively on these days with full leverage and also carry positional trades keeping in mind other risk management factors. Logic is simple, large players have a much better sense of what range the index is going to expire and an ability to withstand much larger MTM losses. Option prices can go from 20 to 200 and then expire at 0. Problem is will a normal retail trader be able to hold on to his position with 10x MTM losses. In most cases no. More time to expiry, gives more time for large players to trap small players. Less time to expiry, lesser chances of any games being played with you.
Trading strategies for rangebound and trending markets
Same trading strategy will not work for both trending and range bound markets. For rangebound market you may want to write both CE/PE side. For trending market you must be writing only one side either PE or CE. Even a small position against the market trend can lead to huge losses, take away all the profits from the positions on the right side of the market. Sometimes markets can trend ferociously and take out far OTM strikes all the way upto the last active strike in the option chain. Such situations can lead to massive losses. There is no limit 100%-300%-1000%-5000%-10000% don't rule out anything. Market can run in one direction way way beyond your wildest imagination under certain conditions. Hope based trades that are not squared off in such situations will kill you.
Intraday vs positional trading
With positional trading biggest risk is overnight news and event risks and market open gap ups and gap downs. With intraday biggest problem is that the biggest option price moves happen at market open which cannot be captured in Intraday trading. So to make decent money intraday, you need to trade high premium near ATM contracts in large quantites and track the market tick by tick for the whole 6 hours of market run time. Intraday is very stressful during market run time. Positional is very stressful post market close.
Short vs long duration expiry options
Some traders prefer weekly options. Some prefer monthly options. Some trade far in the future options like 6 months, 1 year far expiry options. Far expiry options allow you to write far OTM contracts at high premiums and are less volatile but the premiums decay slowly. Near expiry options decay fast but can be very volatile.
Near ATM vs far OTM
Near ATM is high premium, high risk, highly volatile but good risk to reward ratio. Far OTM is low premium, low risk, less volatile, very poor risk to reward ratio. The tradeoff is probability of success vs premium value. I prefer the range in between near ATM and far OTM. Gives you some time to react when things go wrong. Fetches you decent premiums when things go right. Stop losses are hit less frequently and requires fewer trade adjustments so brokerage expense is low and trading in this zome is relatively more relaxed.
Dealing with high VIX/Volatility
High volatility days are tough to handle for option writers because option premiums start going up instead of decaying. Many times on both sides. When prices move fast in one direction option prices spike in that direction. At the same time it increases the possibility of an equally sharp and furious reversal or mean reversion, so option prices start going up in the opposite direction also. In such cases either play quick in quick out momentum trades or let things settle down before taking positions. Option premiums will be high even after things settle down in most cases because of high level of fear in the market, so you don't lose much by waiting in such situations.
Spreads vs naked positions
For long view you write PEs and for short view you write CEs but what if your view goes wrong? To avoid reversal risks, instead of just writing naked contracts, you write a spread i.e write a contract and buy a contract 1 or 2 strike away. This allows you to write high premium near ATM strikes while reducing risks in case of a large reversal in the market. Spreads also reduces margin requirement enabling you to take larger positions, but spread reduces the gain per trade by the premium of the buy leg of the spread.
Hedging
Many option writers go for simple straddle/strangles but this requires continuous monitoring as positions are naked. If you cannot monitor continuously many option traders go for complex exotic hedged strategies like ratio spreads, butterfly, iron fly, iron condor. There are infinite variety of strategies using various combinations that you can deploy. Here no matter which direction the market goes, some legs of your strategies will be in profit, some will go into loss and overall you will make profit. However you will be protected from any large losses no matter which direction or how much the market moves.
Calendar spreads
Sometimes there is a sharp temporary move in the market because of which option premiums on one side can fall to very low premiums. In such cases if you expect the move to be short lived then you can write higher premium options in the next expiry betting on mean reversion in the market while taking positions in line with the current trend for the current expiry. This helps you keep your positions balanced on both sides. It also helps you optimize margin utilization.
Covered Strategies
Covered calls and cash secured puts are one of the safest and most rewarding option trading strategies with least amount of trouble and followup requirements. Only downside is limited gains.
Covered call is basically if you have 1 lot of Reliance shares i.e 250 shares in your account and you don't expect RIL to make a huge move, you sell 1 lot of Call option 5-10% up from ATM and pocket the premiums monthly. If RIL rises more than CE strike you wrote, you will have to sell your RIL share holding.
Cash secured Put: Say you are planning to buy ITC, so instead of buying the shares immediately from the market, you sell 1 lot Put contract 5-10% lower from CMP and pocket the put premiums. If ITC falls below put strike you take delivery of ITC shares at 5-10% lower price than the price at which you were planning to buy earlier.
You can keep repeating this every month. Biggest advantage is that your positions are covered and not naked, so there is no chance of any shocks. If the stock moves in your favor you make profit on your cash position. If not, you make some money from option premiums. If it moves beyond your expected range, you still make gains but limited to the difference between you cash price and the option strike price you write. This strategy is perfect for trading mindset but will not work for investment mindset hoping to generate multibagger returns. This strategy works in the 5-10% trading range. Now you could enhance your income from this strategy by adding a little more risk. For example if you have 1 lot of RIL shares, you write 1 CE option 5-10% up and another naked a bit farther OTM say 12-15% away which will be naked but very low probability of getting hit and provide additional premium income. However remember sometimes stocks go mad based on news and event risks and in those rare cases your losses in naked positions could get considerably amplified.
FnO Data monitoring
Option chain offers wealth of real-time information. Learn to read it, analyse it, interpret it and take decisions based on it. Option chain is not just about OI and price. There is much more to it and it is in itself a very big discussion topic. Will write a blog dedicated to this topic sometime later. But enough resources are available online for the self-motivated ones. Also reading option chain is a bit of an art. More you practice, more you learn from it.
Avoiding black swan events
You cannot do anything about unknown and surprise black swan events. For example in the middle of the trading day or even worse overnight, you get a news break that war broke out between India and China along LAC. In such cases you can only hope to be saved by Stop Loss. But these are rare cases. However you must avoid taking large leveraged positions before known high risk binary events like budget, elections, some Supreme Court cases, some important national address by big and important leaders like PM, FM, RBI governer, etc. Now it is important to define black swan events. A black swan event is an event which is high impact for the market and the outcome is completely unknown to the market. Once an event becomes known to the market, it is quickly discounted and further updates on the event do not have similar impact on the market. For example first announcement on national lockdown due to rising covid cases is a black swan event. But further announcements on extension of lockdown, making lockdown enforcement more strict, etc do not have similar impact on the market.
Here I would like to mention that you must allow sufficient time for the complete impact of the black swan event to play out before jumping back in the market. From my personal experience, I had decided to stay away from the market on budget day. I waited for the budget speech to be over and market was up by 3% on that day. I started building CE writing positions after the budget speech thinking market has already priced in the reaction considering budget speech is over and now it might cool off from 3% up. Market ended 9% up on that day and opened another 3% gap up next day. I had to book the biggest loss in my entire FnO trading career on that and next day because I did not wait long enough for the market to react fully to the budget announcements and jumped in immediately after the speech was over. I should also mention that not only I made the biggest loss on that day, I also missed the opportunity to make the biggest profit of my trading career which could have been possible if only I had waited for 1 day before building my positions. So learn to wait and be patient.
News driven vs data driven approach
Market works on discounting model and like it or not market works a lot on insider information. This is why sometimes stock falls on good results and jumps up on bad results. This is because either market had already anticipated the results beforehand or some large players had insider info on the results and have built positions much before the results were declared to public. Such players book profit on the announcement and people building positions on the announcement get trapped. This happens so frequently in stock markets that it is almost impossible to make money in the market by trading based on news and announcements. This is why you must always try to come up with data driven decisions instead of news driven decisions. Analysing market data gives you early sense of the insider activity and helps you avoid operator and punter traps. Remember the famous incident where a leading news analyst of a leading bussiness channel was caught doing insider trades and then booking profits by announcing breaking news on the channel. One person got caught but that is basically how the entire business news channel ecosystem operates.
Agile position management/shifting/switching
When trading options don't make a stubborn view about the market trend based on current data snapshot. Market trends can last for months. Market can switch trends from completely bullish to completely bearish and vice versa three times a day. You need to be agile to align your position continuously to the market trend. If you go out of alignment with the market, you are exposing yourself to considerable amount of risk. It used to happen to me. I used to analyse market data, take some positions, monitor for sometime. It looked to be going well, I would get totally relaxed and start watching a movie or go for lunch break, etc. When I come back market would have completely reversed and looked totally different and all my positions would be in trouble. Need to be very agile and monitor continuously.
No trading days
Days with binary events, some large pending announcements, etc. Best to exit all open positions and watch a movie. Don't try to play games with the big fishes with big unknowns. The big fish knows everything and very little chance you can compete with them without the information being annouced to the public. No one is immune from information leak, govt, regulators, RBI, corporates, courts, ministers price sensitive information is leaked from everywhere.
Copying trades blindly from star traders
Successful traders are capable of taking much higher risks due to accumulated profits. Many times they disclose their positions on social media and people copy them blindly. If things go wrong, successful/experienced traders are able to manage their positions but won't find time to update on social media as they are firefighting with the market. On the other hand normal traders who blindly copied those trades will end up holding their positions and will eventually have to book heavy losses. Focus on learning how to fish from successful/experienced traders don't look for free fish from them.
Playing against the trend
Never think in terms of how much more can it run or how much more can it fall. Market will surprise you on both sides. If your view is bullish and market is going down wait for the down move to complete and turn up convincingly before taking your bullish bets. Never take positions thinking you are right and market is wrong.
Hope Trades with far OTM options
Sometimes traders take very far OTM positions with the mindset that it is impossible for the market to rise or fall so much. Then they sit on that position even if market is continuously moving against them. Sometimes market makes a much bigger move than expected and these position become near ATM/ATM/ITM from far OTM. This can lead to huge losses. Never sit on hope or pressumptions. Even if you have taken far OTM positions, when the market starts moving against you, you need to exit. Compared to near ATM positions, you can wait slightly longer, but not forever. Remember if market has to make a big move, it will start slowly but it will start accelerating towards the final move as more and more traders start getting trapped. So if you don't act on early signals, later you will have to deal with fairly violent market moves.
Early morning panic trades
Early morning at market open option prices go crazy with gap up/gap downs at market open. Never use market orders at market open. You can try to exploit this time to write some high premiums but if you are trying to square off your positions at market open, most likely you will exit at the worst price of the day. Even if the market goes against your position, wait for 5-10 mins before exiting. If the market continues to go up or down with same ferocity as it opened, you will certainly have to bear much larger losses, but that happens rarely. The first candle usually is the widest range candle of the day and then market settles into a narrower range over the next few candles as trades from pre-market orders and early morning panic orders clear up from the system.
Over leveraging on expiry day
Expiry day offers great trading opportunity as on expiry day all OTM option prices have to go down to 0. Even if you are 1 point away from ATM it will go down to 0. But at the same time expiry day is like a festival for option traders where the best and the brightest are playing with their full strength. So there is lot of competition and lot of volatility on this day. Another point is that on expiry day option prices have lost most of their premiums and are very low value so to make decent profits option writer needs to take larger positions. At the same time option buyers can take huge positions with small investment. This can be a very trappy situation for option writers. One large candle and option writers can suffer huge losses. It is very important that option writers keep strict stop losses on expiry day trading. Also keep positions hedged as hedging cost is very low on expiry day especially for spreads. Option prices farther OTM are almost close to 0, so you can take near ATM positions and hedge it with near 0 cost OTM strikes especially after 2:00 PM.
The theta decay myth
Many traders assume that option premiums have to decay everyday and by consequence if there is a trading holiday they believe that they will get 1 day theta decay free. This is not really true. Especially for volatile indices like Banknifty the concept of theta decay doesn't apply except on the expiry day. Before theta decay kicks in, lot of volatility happens in option prices. Option prices can go up 10x in an instant. So applying a linear time based decay model to option prices is foolishness. Option prices work more in the flat, melt up, melt down kind of patterns. Assuming that trading holidays gives you free theta decay and taking positions based on that is a crime and certain to ruin your capital. These are psychological aspects of inexperienced traders known to the big players and they exploit it heavily by suppressing the option premiums to very low value before the holidays and then triggering a gamma explosion event post holiday trapping retail traders with option premiums spiking multi-fold. Remove the concept of theta decay from your mind completely when trading options. Trade only based on price action and option data. You don't need those fancy greeks.
Flash Crash
What will you do in such a scenario? This is every option writer's nightmare. On such days you can be saved only if you are hedged. Another point is these things can still be handled if it happens intraday, but if you get such a gap down day holding large overnight positions without hedge, then nothing can save you. So try to trade intraday as much as possible in options and overnight positions should be hedged, never naked. Biggest irony here is that leveraged traders would get totally wiped out in these 5 mins of flash crash and rest of the world would be just fine as if nothing happened after the V shaped recovery in another 5-10 mins.
Risk management is the most critical aspect for success in FnO trading. There are many techniques to manage risks and we will discuss them here one by one
Selecting Instruments for derivatives trading
| Instrument | Risk |
|---|---|
| Index Options | Low |
| Liquid Stock Options | Medium |
| illiquid Stock Options | High |
Position Sizing and cash buffer management
| Day | Trading | Risk | Strike | Margin Deployment |
|---|---|---|---|---|
| Friday | Intraday | High | OTM | 10% |
| Monday | Intraday+Positional | High | OTM | 10-20% |
| Tuesday | Intraday+Positional | Medium | OTM | 30-40% |
| Wednesday | Positional | Low | Near ATM | 70-100% |
| Thursday | Positional | High | OTM, ATM, ITM | 100% |
Day wise trading strategies to avoid traps
| Day | Premium | Risk |
|---|---|---|
| Friday | Medium | High |
| Mon to Tue first half | High | Medium |
| Tue second half to Thu | Low | Low |
Trading strategies for rangebound and trending markets
| Market | Trading | Strike |
|---|---|---|
| Rangebound | Sell both PE, CE | OTM |
| Trending | Sell opposite to mkt trend | Near ATM |
Intraday vs positional trading
| Trading | Premium Gain | PositionSize | Risk | Strike |
|---|---|---|---|---|
| Intraday | Low | Large | Low | Near ATM |
| Positional | High | Small | High | OTM |
Short vs long duration expiry options
| Expiry | Volatility | PremiumDecay | Risk | Strike |
|---|---|---|---|---|
| Long duration | Low | Slow | Low | far OTM |
| Short Duration | High | Fast | High | OTM |
Near ATM vs far OTM
| Strike | RiskReward | Risk | Volatility | StopLoss | Gains |
|---|---|---|---|---|---|
| Near ATM | Good | High | High | Frequent hits | High |
| OTM | Poor | Low | Low | Rare hits | Low |
Dealing with high VIX/Volatility
| VIX | Risk | Premiums | Strike | PositionSize |
|---|---|---|---|---|
| High | High | High | Far OTM | Small |
| Low | Low | Low | Near ATM | Big |
Spreads vs naked positions
| Strategy | Risk | Gains | Strike | Margin |
|---|---|---|---|---|
| Naked | High | High | Far OTM | High |
| Spread | Low | Low | Near ATM | Low |
Hedging
| Strategy | Risk | Gains | Strike | Margin | PositionMonitoring | StopLoss |
|---|---|---|---|---|---|---|
| Naked | High | High | OTM | High | Continuous | Critical |
| Multi-leg, hedged | Low | Low | Near ATM | Low | Periodic | Managed with hedging |
Calendar spreads
Sometimes there is a sharp temporary move in the market because of which option premiums on one side can fall to very low premiums. In such cases if you expect the move to be short lived then you can write higher premium options in the next expiry betting on mean reversion in the market while taking positions in line with the current trend for the current expiry. This helps you keep your positions balanced on both sides. It also helps you optimize margin utilization.
Covered Strategies
| Strategy | Trade | Risk | Gain |
|---|---|---|---|
| CoveredCall | Sell Call for stk hldg | Stk runs up farther than written call | Call Premium |
| CashSecuredPut | Sell put with cash reserve | Stk falls lower than written Put | Put Premium |
Covered call is basically if you have 1 lot of Reliance shares i.e 250 shares in your account and you don't expect RIL to make a huge move, you sell 1 lot of Call option 5-10% up from ATM and pocket the premiums monthly. If RIL rises more than CE strike you wrote, you will have to sell your RIL share holding.
Cash secured Put: Say you are planning to buy ITC, so instead of buying the shares immediately from the market, you sell 1 lot Put contract 5-10% lower from CMP and pocket the put premiums. If ITC falls below put strike you take delivery of ITC shares at 5-10% lower price than the price at which you were planning to buy earlier.
You can keep repeating this every month. Biggest advantage is that your positions are covered and not naked, so there is no chance of any shocks. If the stock moves in your favor you make profit on your cash position. If not, you make some money from option premiums. If it moves beyond your expected range, you still make gains but limited to the difference between you cash price and the option strike price you write. This strategy is perfect for trading mindset but will not work for investment mindset hoping to generate multibagger returns. This strategy works in the 5-10% trading range. Now you could enhance your income from this strategy by adding a little more risk. For example if you have 1 lot of RIL shares, you write 1 CE option 5-10% up and another naked a bit farther OTM say 12-15% away which will be naked but very low probability of getting hit and provide additional premium income. However remember sometimes stocks go mad based on news and event risks and in those rare cases your losses in naked positions could get considerably amplified.
FnO Data monitoring
Option chain offers wealth of real-time information. Learn to read it, analyse it, interpret it and take decisions based on it. Option chain is not just about OI and price. There is much more to it and it is in itself a very big discussion topic. Will write a blog dedicated to this topic sometime later. But enough resources are available online for the self-motivated ones. Also reading option chain is a bit of an art. More you practice, more you learn from it.
Avoiding black swan events
You cannot do anything about unknown and surprise black swan events. For example in the middle of the trading day or even worse overnight, you get a news break that war broke out between India and China along LAC. In such cases you can only hope to be saved by Stop Loss. But these are rare cases. However you must avoid taking large leveraged positions before known high risk binary events like budget, elections, some Supreme Court cases, some important national address by big and important leaders like PM, FM, RBI governer, etc. Now it is important to define black swan events. A black swan event is an event which is high impact for the market and the outcome is completely unknown to the market. Once an event becomes known to the market, it is quickly discounted and further updates on the event do not have similar impact on the market. For example first announcement on national lockdown due to rising covid cases is a black swan event. But further announcements on extension of lockdown, making lockdown enforcement more strict, etc do not have similar impact on the market.
Here I would like to mention that you must allow sufficient time for the complete impact of the black swan event to play out before jumping back in the market. From my personal experience, I had decided to stay away from the market on budget day. I waited for the budget speech to be over and market was up by 3% on that day. I started building CE writing positions after the budget speech thinking market has already priced in the reaction considering budget speech is over and now it might cool off from 3% up. Market ended 9% up on that day and opened another 3% gap up next day. I had to book the biggest loss in my entire FnO trading career on that and next day because I did not wait long enough for the market to react fully to the budget announcements and jumped in immediately after the speech was over. I should also mention that not only I made the biggest loss on that day, I also missed the opportunity to make the biggest profit of my trading career which could have been possible if only I had waited for 1 day before building my positions. So learn to wait and be patient.
News driven vs data driven approach
Market works on discounting model and like it or not market works a lot on insider information. This is why sometimes stock falls on good results and jumps up on bad results. This is because either market had already anticipated the results beforehand or some large players had insider info on the results and have built positions much before the results were declared to public. Such players book profit on the announcement and people building positions on the announcement get trapped. This happens so frequently in stock markets that it is almost impossible to make money in the market by trading based on news and announcements. This is why you must always try to come up with data driven decisions instead of news driven decisions. Analysing market data gives you early sense of the insider activity and helps you avoid operator and punter traps. Remember the famous incident where a leading news analyst of a leading bussiness channel was caught doing insider trades and then booking profits by announcing breaking news on the channel. One person got caught but that is basically how the entire business news channel ecosystem operates.
Agile position management/shifting/switching
When trading options don't make a stubborn view about the market trend based on current data snapshot. Market trends can last for months. Market can switch trends from completely bullish to completely bearish and vice versa three times a day. You need to be agile to align your position continuously to the market trend. If you go out of alignment with the market, you are exposing yourself to considerable amount of risk. It used to happen to me. I used to analyse market data, take some positions, monitor for sometime. It looked to be going well, I would get totally relaxed and start watching a movie or go for lunch break, etc. When I come back market would have completely reversed and looked totally different and all my positions would be in trouble. Need to be very agile and monitor continuously.
No trading days
Days with binary events, some large pending announcements, etc. Best to exit all open positions and watch a movie. Don't try to play games with the big fishes with big unknowns. The big fish knows everything and very little chance you can compete with them without the information being annouced to the public. No one is immune from information leak, govt, regulators, RBI, corporates, courts, ministers price sensitive information is leaked from everywhere.
Copying trades blindly from star traders
Successful traders are capable of taking much higher risks due to accumulated profits. Many times they disclose their positions on social media and people copy them blindly. If things go wrong, successful/experienced traders are able to manage their positions but won't find time to update on social media as they are firefighting with the market. On the other hand normal traders who blindly copied those trades will end up holding their positions and will eventually have to book heavy losses. Focus on learning how to fish from successful/experienced traders don't look for free fish from them.
Playing against the trend
Never think in terms of how much more can it run or how much more can it fall. Market will surprise you on both sides. If your view is bullish and market is going down wait for the down move to complete and turn up convincingly before taking your bullish bets. Never take positions thinking you are right and market is wrong.
Hope Trades with far OTM options
Sometimes traders take very far OTM positions with the mindset that it is impossible for the market to rise or fall so much. Then they sit on that position even if market is continuously moving against them. Sometimes market makes a much bigger move than expected and these position become near ATM/ATM/ITM from far OTM. This can lead to huge losses. Never sit on hope or pressumptions. Even if you have taken far OTM positions, when the market starts moving against you, you need to exit. Compared to near ATM positions, you can wait slightly longer, but not forever. Remember if market has to make a big move, it will start slowly but it will start accelerating towards the final move as more and more traders start getting trapped. So if you don't act on early signals, later you will have to deal with fairly violent market moves.
Early morning panic trades
| Time | Risk | Premiums | Trade |
|---|---|---|---|
| 9:15-9:30 | High | High | Option Writing |
| 9:30-3:30 | Low | - | - |
Over leveraging on expiry day
Expiry day offers great trading opportunity as on expiry day all OTM option prices have to go down to 0. Even if you are 1 point away from ATM it will go down to 0. But at the same time expiry day is like a festival for option traders where the best and the brightest are playing with their full strength. So there is lot of competition and lot of volatility on this day. Another point is that on expiry day option prices have lost most of their premiums and are very low value so to make decent profits option writer needs to take larger positions. At the same time option buyers can take huge positions with small investment. This can be a very trappy situation for option writers. One large candle and option writers can suffer huge losses. It is very important that option writers keep strict stop losses on expiry day trading. Also keep positions hedged as hedging cost is very low on expiry day especially for spreads. Option prices farther OTM are almost close to 0, so you can take near ATM positions and hedge it with near 0 cost OTM strikes especially after 2:00 PM.
The theta decay myth
Many traders assume that option premiums have to decay everyday and by consequence if there is a trading holiday they believe that they will get 1 day theta decay free. This is not really true. Especially for volatile indices like Banknifty the concept of theta decay doesn't apply except on the expiry day. Before theta decay kicks in, lot of volatility happens in option prices. Option prices can go up 10x in an instant. So applying a linear time based decay model to option prices is foolishness. Option prices work more in the flat, melt up, melt down kind of patterns. Assuming that trading holidays gives you free theta decay and taking positions based on that is a crime and certain to ruin your capital. These are psychological aspects of inexperienced traders known to the big players and they exploit it heavily by suppressing the option premiums to very low value before the holidays and then triggering a gamma explosion event post holiday trapping retail traders with option premiums spiking multi-fold. Remove the concept of theta decay from your mind completely when trading options. Trade only based on price action and option data. You don't need those fancy greeks.
Flash Crash
FnO vs Equity
The beginning
I started my investing journey in the market with equity investing. Initially I used to invest in penny stocks thinking these low value stocks will give multibagger returns based on operator stories like land bank, turnaround stories, etc
The 2008 mortagage crisis shock
After 2008 learnt the value of quality and fundamentals in investing. Hereafter my main strategy was to track big investors like Rakesh Jhunjhunwala, Ramdeo Agrawal, Vijay Kedia, Ramesh Damani, Porinju, Dolly Khanna, Monish Pabrai and copy their investments on a small scale. I built a large portfolio of high quality midcap stocks like Heritage foods, Piramal Ent, HIL, Tasty Bites kind of stocks. I did my quality checks based on promoter shareholding, quaterly results, dividend history, corporate events, exchange announcements, etc. This helped me make good money for few years. Few stocks also turned multi-baggers and helped me grow my capital substantially
The 2018 tax and corporate default shock
But after 2018 this stopped working. Triggered by unfavourable tax policies like LTCG, dividend tax, super rich surcharge, and ILFS default, foreign investors started dumping Indian market and many many midcaps started crashing irrespective of whether they were earlier considered as high quality or low quality. Many stocks like DHFL, Yes Bank, Indiabulls group, Zee group went totally bust. Situation one level lower quality was even dire. Stocks like Talwalkars, Sintex, Manapasand, Vakrangee defaulted and turned into penny stocks as scams after scams broke out. Collateral damage spilled over to even stocks like Indusind bank. Nothing was spared. Things were crashing right left and center.
The 2019 covid shock
Then came covid crisis and stock markets kept crashing further. Indexes and large stocks started hitting lower circuits on a regular basis. Even the best stocks like HDFC group, Bajaj Finanace, Mahindra crashed 40-70%. Just before covid started, I had quit my job to get into full time trading after having thought about it for years. Lacking a steady source of income I could not hold on to the investments as my portfolio was bleeding everyday in lakhs. I didn't exit at bottom in panic, but I started exiting the market as it started recovering from it's bottom in March. In the next 3 months I completely exited my entire investment portfolio by June.
The 2020 Trillions of dollars market stimulus shock
Now the market fully pumped by trillions of dollars of covid stimulus by US and EU govt kept on rising. I was expecting the market to correct at some point of time since on the ground situation was still bad as waves of covid surge kept hitting the world with different variants and mutants. Several economic fallouts like labor migration, job loss, business downturn was being reported regularly. However US was in the middle of presidential election and was determined to not let the market fall as it could effect the election outcomes. Both democrats and republicans kept on talking about pumping the economy with more and more stimulus. Also just after US elections came the news of covid vaccines and global markets went bezerk. The market was no longer in recovery mode. Market shot up fast and furious into bubble territory and kept going up. Stocks started trading at never seen before crazy valuations for example at one point of time Tesla was trading at 1500 PE ratio. All this while I had exited the market completely at a huge loss and was still sitting out waiting for a correction.
FnO Begining
There was no way I could re-enter the market now. Either I could accept my loss and quit markets completely as a total failure or I would have to come up with a new approach to market. This is when I started looking into Futures and Options. My goal was to make money from trading instead of investing which required me to again put whatever money was left in the market and hope that market keeps going up. But many things could go wrong and investing into a bubble because of FOMO (Fear Of Missing Out) was surely a recipie of disaster immediately after having faced a really big disaster just in the immediate past. There was no scope to go wrong again as recovery would be impossible on any further big loss of capital.
Why FnO?
FnO allowed me a trading style that suited my mindset.
Positional Short trading: FnO is the best way to play positional shorts in the market and make money on both sides rise and fall in the market. Options is the best way to earn from a stagnant, rangebond market in which every other investment strategy will fail.
Index Trading: FnO allows you to trade in indices like Nifty and BankNifty instead of individual stocks. This provides protection from stock specific news based risks.
Leverage: FnO provides margin based leverage which helped me take larger positions considering my trading capital had reduced considerably because of the heavy losses in the previous couple of years.
Systematic Rule based trading: FnO has allowed me to develop systematic data driven trading methodology instead of relying of news and feeling based investments. After the bitter experience of past few years, I had completely lost trust in the market, individual companies, corporates, research reports, news, etc. I wanted a mechanical rule based system and I wanted to completely eleiminate dependency on anyone else for my investment decisions.
Continuous compounding: FnO gives continuous compunding. You can earn daily, weekly, monthly and immediately deploy the profits next day with 4x leverage. This offers infinite scalability of earnings for retail size traders.
The path to success and learning
This is how I started my trading journey in FnO and left behind equity investments completely. Since then there has been a lot of learning in the FnO domain too. It has not been an easy journey but a fairly rewarding one. In about one year time, I am once again back on track and now all the tools are in place to achieve my goals and income expectations from the market. This blog is dedicated to documenting all the learnings from my FnO trading journey. It has been a success for me and if anyone is going through similar struggles with stock market, I am hoping that this blog will shorten their struggle, reduce risk exposure and help folks in achieving success much faster. Let the journey begin !
I started my investing journey in the market with equity investing. Initially I used to invest in penny stocks thinking these low value stocks will give multibagger returns based on operator stories like land bank, turnaround stories, etc
The 2008 mortagage crisis shock
After 2008 learnt the value of quality and fundamentals in investing. Hereafter my main strategy was to track big investors like Rakesh Jhunjhunwala, Ramdeo Agrawal, Vijay Kedia, Ramesh Damani, Porinju, Dolly Khanna, Monish Pabrai and copy their investments on a small scale. I built a large portfolio of high quality midcap stocks like Heritage foods, Piramal Ent, HIL, Tasty Bites kind of stocks. I did my quality checks based on promoter shareholding, quaterly results, dividend history, corporate events, exchange announcements, etc. This helped me make good money for few years. Few stocks also turned multi-baggers and helped me grow my capital substantially
The 2018 tax and corporate default shock
But after 2018 this stopped working. Triggered by unfavourable tax policies like LTCG, dividend tax, super rich surcharge, and ILFS default, foreign investors started dumping Indian market and many many midcaps started crashing irrespective of whether they were earlier considered as high quality or low quality. Many stocks like DHFL, Yes Bank, Indiabulls group, Zee group went totally bust. Situation one level lower quality was even dire. Stocks like Talwalkars, Sintex, Manapasand, Vakrangee defaulted and turned into penny stocks as scams after scams broke out. Collateral damage spilled over to even stocks like Indusind bank. Nothing was spared. Things were crashing right left and center.
The 2019 covid shock
Then came covid crisis and stock markets kept crashing further. Indexes and large stocks started hitting lower circuits on a regular basis. Even the best stocks like HDFC group, Bajaj Finanace, Mahindra crashed 40-70%. Just before covid started, I had quit my job to get into full time trading after having thought about it for years. Lacking a steady source of income I could not hold on to the investments as my portfolio was bleeding everyday in lakhs. I didn't exit at bottom in panic, but I started exiting the market as it started recovering from it's bottom in March. In the next 3 months I completely exited my entire investment portfolio by June.
The 2020 Trillions of dollars market stimulus shock
Now the market fully pumped by trillions of dollars of covid stimulus by US and EU govt kept on rising. I was expecting the market to correct at some point of time since on the ground situation was still bad as waves of covid surge kept hitting the world with different variants and mutants. Several economic fallouts like labor migration, job loss, business downturn was being reported regularly. However US was in the middle of presidential election and was determined to not let the market fall as it could effect the election outcomes. Both democrats and republicans kept on talking about pumping the economy with more and more stimulus. Also just after US elections came the news of covid vaccines and global markets went bezerk. The market was no longer in recovery mode. Market shot up fast and furious into bubble territory and kept going up. Stocks started trading at never seen before crazy valuations for example at one point of time Tesla was trading at 1500 PE ratio. All this while I had exited the market completely at a huge loss and was still sitting out waiting for a correction.
FnO Begining
There was no way I could re-enter the market now. Either I could accept my loss and quit markets completely as a total failure or I would have to come up with a new approach to market. This is when I started looking into Futures and Options. My goal was to make money from trading instead of investing which required me to again put whatever money was left in the market and hope that market keeps going up. But many things could go wrong and investing into a bubble because of FOMO (Fear Of Missing Out) was surely a recipie of disaster immediately after having faced a really big disaster just in the immediate past. There was no scope to go wrong again as recovery would be impossible on any further big loss of capital.
Why FnO?
FnO allowed me a trading style that suited my mindset.
Positional Short trading: FnO is the best way to play positional shorts in the market and make money on both sides rise and fall in the market. Options is the best way to earn from a stagnant, rangebond market in which every other investment strategy will fail.
Index Trading: FnO allows you to trade in indices like Nifty and BankNifty instead of individual stocks. This provides protection from stock specific news based risks.
Leverage: FnO provides margin based leverage which helped me take larger positions considering my trading capital had reduced considerably because of the heavy losses in the previous couple of years.
Systematic Rule based trading: FnO has allowed me to develop systematic data driven trading methodology instead of relying of news and feeling based investments. After the bitter experience of past few years, I had completely lost trust in the market, individual companies, corporates, research reports, news, etc. I wanted a mechanical rule based system and I wanted to completely eleiminate dependency on anyone else for my investment decisions.
Continuous compounding: FnO gives continuous compunding. You can earn daily, weekly, monthly and immediately deploy the profits next day with 4x leverage. This offers infinite scalability of earnings for retail size traders.
The path to success and learning
This is how I started my trading journey in FnO and left behind equity investments completely. Since then there has been a lot of learning in the FnO domain too. It has not been an easy journey but a fairly rewarding one. In about one year time, I am once again back on track and now all the tools are in place to achieve my goals and income expectations from the market. This blog is dedicated to documenting all the learnings from my FnO trading journey. It has been a success for me and if anyone is going through similar struggles with stock market, I am hoping that this blog will shorten their struggle, reduce risk exposure and help folks in achieving success much faster. Let the journey begin !
contra trading
With respect to index trading best gains are made when writing put when market falls just before it turns up and by writing calls when market has run up just before it turns down. Trying to do this we have two situations
1. Rangebound
Here market just keeps going up/down in a range. In such cases you must write CEs on green candles and wait for red candle to book profit and write PEs on red candle and book profit on green candle. Here if you wait for red candle to show up to write puts it will already be too late and premiums will be lost because both red/green candle series hardly last for 2-3 candles.
2. Trending
Here market is making large moves, is not confined to any range and is breaking multiple ranges on the downside. In this case you need to wait for entire series of red candles to play out and write put only after green candle shows up. If you try to write PEs while market is falling, you will get trapped in the next big red candle which will lead to premium spike.
PCP reversal model
How much to wait for the red candle series to be over? because in the series of large number of red candles there can be few false green candles that can be used to trap for reversal traders. For this follow the PCP model (Position banaya/Chu**** banaya/Profit banaya model). Basically wait for 3 waves of red/green candle series before taking a reversal trade on a large trending day.
Risk Reward
While PCP works most of the time, on some days market can give you a PCPP day (Position banaya/Chu**** banaya/Phir Chu**** banaya/Profit banaya model). This can lead to a loss on the PCP trade. Usually if PCP turns out to be a PCPP day the last leg of fall will be even more severe since more people will be trapped in the trade. Now either you take the reversal trade once PCP manifests on the charts or you worry about every PCP becoming a PCPP day and sit watching. So you will avoid a big loss day but you will also miss 10 good profit days. So best approach is to take a trade on PCP, monitor market closely after taking the trade. If it turns into a PCPP day book out with Stop Loss. If it is actually a PCP day, you will make good profits. Enjoy!
Conclusion
Main thing to understand here is that when the series of red, green candles are moving in small range you can take the risk of writing CEs on green candles and PEs on red candles. When the series of red, green candles cover large ranges, you need to wait for the series to be over and price candles to give a reversal signal before taking position. In the first case there is hardly any time to take position on reversal. In the second case you have enough time since reversal will also be large and long after a big fall or rise.
1. Rangebound
Here market just keeps going up/down in a range. In such cases you must write CEs on green candles and wait for red candle to book profit and write PEs on red candle and book profit on green candle. Here if you wait for red candle to show up to write puts it will already be too late and premiums will be lost because both red/green candle series hardly last for 2-3 candles.
Here market is making large moves, is not confined to any range and is breaking multiple ranges on the downside. In this case you need to wait for entire series of red candles to play out and write put only after green candle shows up. If you try to write PEs while market is falling, you will get trapped in the next big red candle which will lead to premium spike.
How much to wait for the red candle series to be over? because in the series of large number of red candles there can be few false green candles that can be used to trap for reversal traders. For this follow the PCP model (Position banaya/Chu**** banaya/Profit banaya model). Basically wait for 3 waves of red/green candle series before taking a reversal trade on a large trending day.
Risk Reward
While PCP works most of the time, on some days market can give you a PCPP day (Position banaya/Chu**** banaya/Phir Chu**** banaya/Profit banaya model). This can lead to a loss on the PCP trade. Usually if PCP turns out to be a PCPP day the last leg of fall will be even more severe since more people will be trapped in the trade. Now either you take the reversal trade once PCP manifests on the charts or you worry about every PCP becoming a PCPP day and sit watching. So you will avoid a big loss day but you will also miss 10 good profit days. So best approach is to take a trade on PCP, monitor market closely after taking the trade. If it turns into a PCPP day book out with Stop Loss. If it is actually a PCP day, you will make good profits. Enjoy!
Conclusion
Main thing to understand here is that when the series of red, green candles are moving in small range you can take the risk of writing CEs on green candles and PEs on red candles. When the series of red, green candles cover large ranges, you need to wait for the series to be over and price candles to give a reversal signal before taking position. In the first case there is hardly any time to take position on reversal. In the second case you have enough time since reversal will also be large and long after a big fall or rise.
gamma explosion
Strange Option Price Behavior Observation
Last week of April it was observed that BNF was going up but option prices even near OTM just 600 points away from ATM were not going up, infact they were falling
gamma explosion
Finally on Wednesday Option prices spiked all the way upto 3000 points away from ATM.
Question is why?
Why CE option prices did not go up in the first two days of market run up and why did they shoot up only on the third day of run up? On digging further and looking through the charts I got the answer
Gap up but no follow up
26-Apr BNF opened with a huge gap up but for the rest of the day kept on sliding downwards slowly. So there was no premium build up after initial jump early morning
Trend up day but no gap up
On 27-Apr market opened flat, so option premiums decayed at market open. Rest of the day market slowly grinded up and option premiums just barely recovered the premium decay that happened at market open.
Gap up + brkouts = gamma explosion
On 28-Apr, market opened with a gap up and then gave a breakout mid-day. This combination lead to huge spike in option premiums. First prices spiked with gap up in the morning. CE writers got into trouble. Then mid-day breakout lead to panic for CE writers. This triggered huge short covering and option prices kept going up whole day. This combination of gap up + breakout contributed to gamma explosion.
Handling gamma explosion
Once gamma explosion triggers, option premiums spike like crazy. This is trouble and panic situation for option writers. Good opportunity for option buyers. Also this can be good opportunity for far OTM option writing with high premiums although continued momentum can be very risky.
Predicting Gamma Explosions
Look at previous gamma explosion on PE and CE side 1000 points away from ATM. Those are key levels below which PE should be exited and above which CE should be exited. As shown in the chart below, high of the red candle that caused PE gamma explosion must be the level to be noted for this, which will give some buffer time to exit before the next gamma explosion
Last week of April it was observed that BNF was going up but option prices even near OTM just 600 points away from ATM were not going up, infact they were falling
Finally on Wednesday Option prices spiked all the way upto 3000 points away from ATM.
Why CE option prices did not go up in the first two days of market run up and why did they shoot up only on the third day of run up? On digging further and looking through the charts I got the answer
Gap up but no follow up
26-Apr BNF opened with a huge gap up but for the rest of the day kept on sliding downwards slowly. So there was no premium build up after initial jump early morning
Trend up day but no gap up
On 27-Apr market opened flat, so option premiums decayed at market open. Rest of the day market slowly grinded up and option premiums just barely recovered the premium decay that happened at market open.
Gap up + brkouts = gamma explosion
On 28-Apr, market opened with a gap up and then gave a breakout mid-day. This combination lead to huge spike in option premiums. First prices spiked with gap up in the morning. CE writers got into trouble. Then mid-day breakout lead to panic for CE writers. This triggered huge short covering and option prices kept going up whole day. This combination of gap up + breakout contributed to gamma explosion.
Handling gamma explosion
Once gamma explosion triggers, option premiums spike like crazy. This is trouble and panic situation for option writers. Good opportunity for option buyers. Also this can be good opportunity for far OTM option writing with high premiums although continued momentum can be very risky.
Predicting Gamma Explosions
Look at previous gamma explosion on PE and CE side 1000 points away from ATM. Those are key levels below which PE should be exited and above which CE should be exited. As shown in the chart below, high of the red candle that caused PE gamma explosion must be the level to be noted for this, which will give some buffer time to exit before the next gamma explosion
