What are Supports and Resistances? And How to identify them cover

What are Supports and Resistances? And How to identify them?

Understand what are Supports and Resistances: One of the most elementary concepts while trading in stocks that every trader should know is, “Supports and Resistances”. If you’re already involved in the market, you might have heard or read terms like “Nifty50 has got a big resistance at 10,800 points” or “Stock XYZ has a support line at Rs 105”. So, what exactly do the traders mean by these terms in their analysis? We are going to discuss that through this article.

In this article, we are going to discuss what are supports and resistance, their characteristics, and how exactly to use them. By the end of this article, you will have a good idea about these concepts and use them in your trading. Let’s get started.

What are Supports and Resistances?

The Synonym for the word support is “Reinforce”.  Basically, support can be said to be a point of reinforcement. In other words, supports are those points which acts as a barrier for the prices, when they start to some down. They can also be said as points, where the downtrend is expected to be paused. And we should see a new surge in buying and demand. In short, supports are those points, where buyers are more forceful than sellers.

support-resistance-basics

On the other hand, Resistances are said to be the point where the supply increases or the longs start getting out of their positions from the market. Therefore, if we were to carefully analyze, supports and resistances can be said as the point of friction or tussle between buyers and sellers. And Resistances, are those points where sellers have higher say than buyers.

Now, once the level of Supports and Resistances (S&R) are identified, they become the point of entry or exit for the trade. The prices either bounce back or correct back, from S&R level or breach these levels and go to next S&R.

Characteristics of Supports

Here are the key characteristics of Supports while looking into the charts:

  • Supports are those points or levels, below which the market finds difficult to fall. They can also be said as point of infliction between buyers and sellers.
  • Supports are also the point of Maximum demand from buyers, and even the sellers exit their selling positions from the market.
  • The buyers have a higher say in deciding the levels of support in the market. These levels can also be said to be mainstay for buyers.
  • Supports, if breached sees a quick sell off in the market, and then the next level of support becomes a point of contention.
  • If the levels of supports holds in the market, then fresh longs can be initiated and generally these trades have good risk to reward ratios.

— Understanding Supports with an Example

The figure below shows the daily chart of HDFC Bank. Through this chart, we get a clear illustration on the concept of supports and the impact on the market, if the supports are respected or breached.

Characteristics of Supports

Figure 1: Daily HDFC Bank chart (Source- Kite Zerodha)

Now, if we carefully look, the market finds a very strong support in the range between Rs. 1030 and 1075. The sellers continuously try to breach this levels, but to no avail. And after forming a base at these levels, the market starts going up.

And, we see continuous buying momentum in the share price of HDFC Bank. A Trend line support is formed in the market by joining three points from where the market is bouncing. In this rally, the share price of HDFC bank moved up from 1030 levels to almost 1250 levels (a near 20 % gain).

And the moment, the price of the shares of HDFC bank breaks the Trend line support, we see an increased selling pressure and the longs unwind from the market. Following which, the share price of reaches the initial support levels near dotted lines (Figure 1). And after finding support at these levels, the market starts to rally back and we see continuous buying in the market and it nearly makes of move of 25% form there.

So, if we were to just use simple supports patters while trading the above chart, we would have got a minimum of three trades with a minimum of 15% returns

Characteristics of Resistances

Here are the key characteristics of Resistances while looking into the charts:

  • Resistances are the levels which are defended by sellers. And the market finds it difficult to go beyond that level. It is a tussle point between buyers and sellers.
  • Maximum selling pressure comes from sellers at this point and even the buyers start to exit their long positions at these levels
  • If the levels of Resistances are breached in the market, we could see a massive short covering in the market, up to next resistance levels.
  • Resistances can also be called as points where fresh short positions can be initiated in the market, with good risk to reward ratio.

— Understanding Resistances with an Example

The figure above is a weekly chart of Airtel Limited. Through this chart, we get a clear illustration on the concept of Resistances, and the impact on the market if the resistances are breached.

Understanding Resistances with an Example

Figure 2: Weekly Airtel chart (Source- Kite Zerodha)

The Share price of Airtel Limited had made a new high in the year 2007 and after that, the market had corrected nearly 50% from its highs. And then again, the market made a move up and went up till near 500 levels and started correcting again. And by joining these two points, of the initial high and the recent high, we could form a trend line.

So, now this trend line forms an important resistance in the market. As and when the market made a move up, this trend line acted as an important barrier and the market started to correct back. And the market was able to breach this resistance in the Mid-2014 and the share price had massive short covering. And the market made a move till the initial swing highs of 570 levels. Therefore, this is the power of Resistances, when an important level is breached.

Now, let us understand the concept of swing trades. If we look at Figure 2, we have marked swing trade. Swing trades are those trades which we hold for a longer duration of time, usually for the completion of one full cycle. These are the trades which have a longer holding period. And we generally don’t have a profit target in place, we just keep trailing the Stop losses and ride the wave.

Also read:

Closing Thoughts

In this article, we tried to simplify the concept of Supports and Resistances while looking into the charts. Let’s quickly conclude what we discussed today.

Supports and Resistances are important points of significance on charts as we get good entry or exit points for our trades. On one hand, Supports are defended by bulls/buyers and on other hand, Resistances are defended by bears/sellers. These levels of Supports and Resistances can be used to identify targets for the trade and also for keeping Stop losses for existing trades. As a thumb rule, for a longer trade, look for the immediate resistance level as target. On contrary, for a short trade, look for the immediate support level as target.

July 10, 2020 Technical Analysis, Trading No comments yet
Bank Nifty and Other Scrips Lot Size Changed (After July 30, 2020 Expiry) cover

Bank Nifty and Other Shares Lot Size Changed (After July 30, 2020 Expiry)!

The lot size of all the Bank Nifty Contracts expiring on or after 30th July 2020 has been changed from 20 contracts to 25 contracts. In other words, this means that the lot of Bank Nifty has increased by 25% after July 2020. (Source: NSE Circular)

Let us understand what it means with an example. Assume, if a particular strike Price of Bank Nifty Option was Price at 50 units of Premium. Here, the margin required under the old format was = 50 * 20 = Rs. 1,000. However, under the new contract size, the margin required will be = 50 * 25 = Rs. 1,250

Along with the change in lot size for Bank Nifty, the lot size for 78 other stock F&O contracts has also been revised. The list is as follows:

SymbolPresent lot sizeRevised lot size
ACC400500
ADANIPOWER1000015000
AMARAJABAT8001000
AMBUJACEM25003000
APOLLOTYRE30005000
ASHOKLEY80009000
AUROPHARMA10001300
BANDHANBNK12001800
BANKBARODA54008200
BEL60007600
BHARATFORG13001500
BHEL1040021000
INFRATEL20002800
BOSCHLTD4050
CANBK26005000
CENTURYTEX6001400
CIPLA11501300
COALINDIA27003700
CUMMINSIND9001200
EICHERMOT3035
EQUITAS49007600
EXIDEIND29003600
GAIL53346100
GLENMARK14002300
GODREJCP8001000
GRASIM750950
HDFCBANK500550
HDFCLIFE9001100
HEROMOTOCO200300
HINDALCO35004300
HINDPETRO21002700
HDFC250300
IDFCFIRSTB1200019000
IBULHSGFIN12003100
IOC40005700
INDUSINDBK400800
NAUKRI200250
INDIGO300500
ITC24003200
JSWSTEEL23002700
L&TFH56006800
LT375550
LICHSGFIN13002000
LUPIN700850
M&MFIN16002100
M&M10001400
MARICO13002000
MOTHERSUMI50007000
NATIONALUM1170017000
NCC900021000
NMDC60006700
NTPC48005700
ONGC41007700
PAGEIND2530
PEL309550
PNB830014000
RBLBANK15002600
SRTRANSFIN600650
SAIL1570019000
SUNPHARMA12501400
SUNTV12001500
TATACHEM9002000
TCS250300
TATAMOTORS43005700
TATAPOWER900013500
TATASTEEL15001700
FEDERALBNK70008500
RAMCOCEM800850
TVSMOTOR13501400
UJJIVAN17002200
UPL9001300
VEDL35006200
IDEA98000140000
ZEEL17003000

Source: NSE Circular dated March 31, 2020 on Revision in Market Lot of Derivative Contracts on Individual Stocks (zip)

Implications of Increased Lot Size:

  1. The trading activity on these scrips might take a little hit as the cost of Trading will increase
  2. The Pricing of these contracts will be fair as the Market manipulation will reduce
  3. The Value of Premiums on Options will also reduce to compensate for increased Lot Size

What do you think about this update in the lot size of Bank Nifty and Other Scrips After July 30, 2020 Expiry?  Share your views in the comment section below.

June 26, 2020 News, Trading 1 comment
INDIA VIX MEANING

What is India VIX? Meaning, Range, Implications & More!

Understanding what is India Vix, meaning & its importance: Ever heard of India Vix? If you’re involved in the market for some time and particularly active in the share market in March-April 2020, then I’m sure that you would definitely have come up with this term “India Vix” at least a couple of times mentioned on different financial websites and channels.

In this post, we are going to discuss, what exactly is India Vix, it’s meaning and how exactly it is important for the traders and investors to understand this term. Let’s get started.

What is India Vix?

India VIX is a short form for India Volatility Index. It is the volatility index that measures the market’s expectation of volatility over the near term. In other words, it explains the annual volatility that the traders expect over the next 30 days in the Nifty50 Index.

The India VIX value is derived by using the Black & Scholes (B&S) Model. The B&S Model uses five important variables like strike price, the market price of the stock, time to expiry, the risk-free rate, and the volatility. India VIX was introduced by NSE in the year 2008, but the concept of VIX is a trademark of CBOE (Chicago Board Options Exchange).

One simple way of understanding India VIX is that it is the expected annual change in the NIFTY50 index over a period of 30 days. For example, if the India VIX is currently at 11, this simply means that the traders expect 11% volatility for the next 30 days. Further, say, if the current index is trading at 9,000 and India VIX trading at 20. So, expected volatility over next year over 30 days will be:

  • Index spot: 9000
  • India Vix: 20
  • The expected downside for the year = 9000 – 20% of 9000 = 7200
  • The expected upside for the year = 9000+ 20% of 9000 = 10,800

Here, the expected range for the year is between 7200 and 10, 800

Anyways, before moving further, let me mention that one should not confuse India VIX with Market Index. Market Index gives information about the direction of the market but on the other hand VIX measures the volatility of the market.

Quick Note: Originally, VIX is a trademark of the Chicago Board Options Trade (CBOE).

Why is India VIX so important?

All the major directional moves in the market are usually preceded by a lot of choppiness or a lot of range play in the market. India VIX plays a very major role in understanding the confidence or fear factor amongst traders.

A lower VIX level usually implies that the market is confident about the movement and is expecting lower volatility and stable range. A higher VIX level usually signals high volatility and lower trader confidence about the current range of the market. A major directional move can be expected in the market and a quick broadening of range can be expected.

For example, during the sub-prime crisis, India VIX was trading at 55-60 (high of 90) levels and the market was in a state of panic and indecisiveness and hence the moves were erratic and hostile. Volatility and India VIX have a positive correlation. High volatility indicated high India VIX and vice-versa.

Similarly before COVID-19. India VIX had stayed below 30 (Since 2014). But since the epidemic disease broke out, the VIX has crossed the 30 level and is trading near 50 levels (trading above 80 for few days) and we have seen Indian equity Index losing nearly 40 percent of its value and is trading near 8000 levels.

So, India VIX plays a major role in understanding the sentiment of the market. But be aware of the fact, India VIX does not give any indication of the directional move in the market, it simply indicates the volatility in the market. So, anyone with a huge investment in Equities should keep a close eye on the movement of India VIX coz a similar movement in the shares of his portfolio cannot be ruled out.

Is there an ideal range for India VIX?

Theoretically speaking, VIX ranges between 15-35. But there have been outliers case of as low as 8(very tight range) and as high as 90 (extreme volatility). If VIX moves close to Zero, then theoretically either the index can double or come to 0. However, usually, VIX has a tendency to revert back to mean.

indiavix chart 2020

The figure above is India Vix chart for the last 10 years. With the current global crisis of COVID-19, the global markets have faced a lot of heat and extreme volatility and all the major global indices have lost nearly 40% from their recent highs and Indian equity market is no exception. With this current level of volatility, India VIX had climbed up to all time high levels of 90 for a couple of days.

And it seemed to be stabilizing near 50 levels about a month ago. The Vix range is still on the higher side, to attain some stability in the market. For stability to return, the global factors will have to improve and the India Vix level should ideally come around 20 levels.

The Current VIX level is 30 (June 2020) and the market seems to be stabilizing for now. But for the long term stability of the market, sub 20 levels of VIX is desired.

What do these extreme Vix levels mean for Options Writers?

India VIX also plays a very major role in the pricing of Options. A higher India Vix levels usually signal more volatile prices for options and a stable range would mean that the options are priced reasonably cheaper.

Simply put, high VIX levels expose option writers to unlimited risk with limited rewards (Premium). A deep in out of money Put/Call option can become at the money or even In the money option in a matter of a couple of trading sessions.

Also read: Options Trading 101: The Big Cat of Trading World

For Example, the stock price of XYZ shares is Rs. 300, and a trader has sold 280 put option contract (2,000 shares) for a premium of Rs. 10 and the contract has still 7 days to expiry. So, with current volatility, the share price can come to Rs. 240 in 2 trading sessions. So the loss for option writer with still 5 days to expiry will be:

  • Strike price: Rs. 280
  • Spot price: Rs. 240
  • Premium Earned: Rs. 10

Here, the loss for option writer: Rs. (240+10-280) i.e., Rs. 30 loss per lot, which is a loss of Rs. 60,000 (2000*30) per lot. Therefore, ideally, the option writer should avoid writing contacts and even if they do, the premium charged should also be higher.

Summary

To summarize, it can be said that India Vix is a silent yet very effective indicator to gauge the range play for Index, which in turn gives us a clear view of the expected movement of the share price.

Historically, large Vix levels have always been followed by a large movement in the indexes and share prices. And even the option pricing, the premiums charged also increase or decrease because of the Vix level changes.

June 19, 2020 Options Trading, Technical Analysis, Trading 3 comments
Trading Psychology - Tensions and Emotions in trading cover

Trading Psychology: Tensions and Emotions While Trading

An overview of Trading Psychology to understand what goes inside the mind of a trader: Trading psychology is the most important aspect of trading even more important than the technical and fundamental aspects of making trades. To be able to control one’s emotion, to be able to think fast on one’s feet and being disciplined, are some of the very key features of this trading psychology that every trader needs to learn eventually.

“I don’t want to be at the mercy of my emotions. I want to use them, to enjoy them, and to dominate them.” ― Oscar Wilde

Taking quick decisions, avoiding panicking, and sticking to one’s informed resolution in times of crisis is what sets a good trader apart from an average one or should I say, the winning one from the losing ones.

Biggest Psychological Tension While Trading

Not maximizing and holding on to a trade for too long, are two sides of the same coin. When I am saying, not maximizing, all I am saying is that when a trade goes in favor, we tend to book our profits too quickly and not maximize the potential. And this is critical because, with the technical and fundamental view remaining the same, there is no reason to book just because something is making money. We should try and squeeze the maximum possible juice out of fruit i.e., the trade.

Similarly holding on too long on to a position and not booking substantial margins even though the market is showing a change in momentum, is another psychological issue with trading. We are always of the viewpoint, what if I book too early. But one should understand that “Profit in hand, is better than profit in books”.

Staying flexible and being open to opportunities around to better the trade price or hedging is an important psychological aspect of trading. As the saying goes in the market, “Bulls Make Money, Bears Make Money, Pigs Get Slaughtered.”

the cycle of market emotions graph

Trading Psychology – Few Important Points to Know

— Avoid Over-Analysis Paralysis

This is the most common psychological trait associated with trading. We tend to over-analyze and over research the trades, before executing them. And which sometimes leads to trade been missed or we don’t take that trade, because some of our technical or fundamental parameters didn’t signal the trade. Too much information sometimes overcomplicates trading.

— The Randomness of Market

We have to accept the fact that markets are random to a large extent. This statement might come as a surprise to many. But we have to understand that our technical and fundamental analysis only works to an extent in the market. And if markets were not random, the technical and fundamental parameters working so far should always be able to predict the market future.

But, that’s never the case. So as long as we are in sync, with the randomness in the market, we should maximize the possibility. Because sooner or later, the randomness will take over and we have to change the parameters.

— Knowing When to Exit

what is factor investing meaning concept more

This skill is as important, as the art of knowing when to enter. Having a firm plan of when to exit is an important ability that every trader should develop. Having the mastery of this skill goes a long way in making the most of the profitable trades and exiting the wrong trades with minimum damage.

The best way to go about this strategy is to exit a part of your position when it makes to a decent profit. Doing this, locks in some profit and it also gives an opportunity to enter again if the markets correct again. And most importantly it gives confidence about one’s trading skills.

— Accepting when you are wrong

To accept when one is wrong is the most difficult art in humans. Similarly, in trading too, if we are able to accept that we have gone wrong in taking a trade, it goes a long way in prolonging one’s trading career. Its a proven fact, accepting a wrong trade, avoids the chain of wrong trades and which goes a long way in preserving one’s trading account.

Also read: 5 Common Behavioral Biases That Every Investor Should Know

— No more FREE internet tips

There are many fraudsters in the market who simply circulate a message (via SMS/email/any other social medium) spreading positive/negative rumors depending on whether they want to sell or buy. One should completely avoid falling for this honey trap, as people might lose a large chunk of their capital by trading this penny or rumor based tips. Traders should always use their informed judgment before entering any potions in the market.

— Have a Winning Attitude

Futures vs Options Trading What is More Profitable

This is an acquired trait over time. The winning attitude develops over time. What we need to understand here is that no trader has a 100% success rate with their trades. It’s our attitude, to do our background research (could be technical or fundamental) on each and every position/trade we take, makes a difference. Lack of discipline while trading, leads to disaster. The positivity with which we enter a trade makes a world of difference in the outcome of the trade.

— No Revenge against the Universe

The Universe here is the universe of trading. An individual trader is like grain of sand on a beach. He/she is simply not big enough to take revenge from the market. Therefore, we should never get into the mentality of taking revenge against the market. One always needs to remember, we are a part of the market and we cannot trade without the market. Moreover, it would not make any difference to the market, if a small trader like you or me is not there in it.

Closing Thoughts

“Every trader has strengths and weakness. Some are good holders of winners, but may hold their losers a little too long. Others may cut their winners a little short, but are quick to take their losses. As long as you stick to your own style, you get the good and bad in your own approach.” – Michael Marcus

Trading psychology is the most important aspect of trading that every trader needs to learn. In conclusion, we can say that the whole psychological warfare of trading, is the sole pillar on which the world of trading runs. Mastery of one emotional quotient goes a long way in having a long and rewarding trading career.

June 9, 2020 Investing Psychology, Trading No comments yet
How Crude Oil Prices Impact Indian Market & Economy cover

How Crude Oil Prices Impact Indian Market & Economy?

Understanding how crude oil prices impact Indian market & Indian economy:  The Liquid Gold, as the name goes, is the most important factor in understanding Global economic health. We have seen a 150% fall in the prices of WTI crude oil over a period of the last four months (Feb-May 2020) and a bounce-back of nearly 75%. Therefore, this year has been a year of massive swings in the prices of crude oil.

The price at the beginning of the year was above $60 per barrel and we saw the price of negative (-) $30 per barrel on around 20th April 2020. Hence, in all practical sense, one was paid to buy a barrel of oil. The current price of WTI crude is $35.46 per barrel (1st June 2020). This has caused a crisis in OPEC nations and other countries like Russia, which are dependent on oil exports.

The current price of WTI crude is $35.46 per barrel (1st June 2020)
(Source: www.Bloomberg.com)

How Crude Oil Prices Impact Indian Market?

Let us now understand how crude oil prices impact Indian market and its effect on different segments of the economy like current account balance, fiscal deficit, stock market, and more.

1. Impact on Current Account Balance

India imports nearly 84% of its domestic demand and it is one of the largest importers of oil in the world. Indian Oil imports account for nearly 27% of its total imports. Therefore, a fall in the prices of oil will reduce the cost of importing oil from other countries. And this in turn has a direct impact on the current account deficit (the amount that India owes in foreign currency).

Therefore, in the current crisis time (COVID-19 pandemic and economic slowdown), reduced crude oil prices have been a blessing in disguise to the Indian economy. In general, a 5 % increase in oil prices will impact the trade deficit by nearly $4 billion.

2. Impact on Fiscal Deficit

The price of the oil is fixed by the government and it is at a subsidized rate. And then the government compensates the companies for selling the oil at lower prices. These losses are also called under-recoveries. Therefore, the losses incurred because of compensating the companies losses, adds to the Fiscal deficit of India. But with the reduced oil prices, the compensation to be paid to these companies also reduces and which in turn helps in narrowing the fiscal deficit.

3. Impact on Stock Market

Now, if research and history are to be believed, then there is an inverse relationship between the oil price and the Indian equity market. This is because the Indian oil industry is majorly an importer of oil. Therefore, industries like tyre, lubricants, logistics, refinery, airlines, paints, etc are directly affected by a change in oil prices.

Further, as we are aware, energy stocks have nearly 12.5% weightage in Nifty 50 and nearly 15% weightage in Sensex. So, strength in crude oil prices adversely affects these oil-dependent industries and weakness in oil prices, usually signals strength in these companies’ stock prices. If we were to take an example of the paint industry, companies like Asian paints, Kansai Nerolac, etc use oil as a major ingredient in their paint. So, any movement in oil prices directly impacts their performance in the stock market.

Crude Oil Prices Impact on energy index

(Fig: Nifty Energy Index – 10 Yrs Chart)

Crude Oil Prices Impact on energy index (Fig: Crude Oil WTI Futures – 10 Yrs Chart)

Now, if we were to look at the two charts above. The one on the top shows the line graph of the Nifty Energy index for the last ten years and the one at the bottom shows the performance of WTI crude over the period of the last ten years.

At first glance, it may be very clear that there is an evident negative correlation between the performance of two. During 2011-12, when oil was trading near its peak of $140 per barrel, the Nifty energy index was trading near its low. And, when the Nifty energy index was nearing its peaking in early 2019, the per-barrel cost of crude oil was hovering around $55.

Now, we all must be wondering, that our equity market should have really outperformed when the oil prices crashed to sub-zero levels. But the global pandemic (COVID-19) has slowed down all global economies and we are no exception to it.

4. Impact on Exchange Rate

Rupee, being a free currency (value of rupee depends on the demand in the currency market), its value depends on the current account deficit. Therefore, if the oil prices are high, then the country will have to sell rupees and buy dollars to pay for oil bills. Similarly, if the price of the oil is low, then the current account deficit is low and the amount of dollars required to pay for oil bills are also low.

5. Impact on Inflation

India, being a vast country, the goods need to be transported from one place to another. And oil is a very important catalyst in the movement of vehicles from one place to another. A rise in oil prices leads to a direct increase in the price of goods and services. And it has a direct bearing on the prices of petrol and diesel. And hence it contributes to the rise in inflation in the country.

Therefore, a reduced price of oil comes as a boon to the economy of India. Reports published by Moneycontrol.com and State Bank of India(SBI) suggest that a $10 change in the oil price, impacts inflation by 0.3%.

Closing Thoughts

In conclusion, we can say that weak or reduced oil prices have a major positive impact on the Indian economy. India being an importer of crude oil, so higher oil prices imply, more payment needs to be made in foreign currency. And oil prices have a major say in the financial markets of our country. A weak oil price usually signals strength in the performance of the stock market. And a strong oil price has a negative impact on the performance of the stock market.

And similarly, if we were to take the example of oil-exporting nations, strong oil prices have a very positive effect on their incomes, balance of payments, and their financial markets.

June 2, 2020 Economics, Investment Basics 4 comments
SGX Nifty meaning what is it

SGX Nifty Explained – How it affects Indian Share Market?

Understanding SXG Nifty meaning & its impact on Indian share market: If you are an active stock market trader in India, I’m sure that you would have definitely have heard of the term ‘SGX Nifty’ terminology. If you open any business news channel before the opening of the Indian market, all you will see is an hour-long discussion on the SGX Nifty and its implications on the opening of the Nifty for that day.

The importance of understanding this terminology can be seen from the fact that it is one of the most popular hashtags followed or searched over different social media like Twitter if one wants to have a better picture of the Indian Equity market. In this post, we are going to discuss what exactly is SGX nifty and how it affects Indian share market.

What is SGX Nifty?

The word SGX is an acronym for the Singapore Stock Exchange. Besides, Nifty is the benchmark index of the National Stock Exchange (NSE) of India and it is comprised of the top 50 companies listed on NSE. So, if we were to add these two constituents, we can say that SGX Nifty is the Indian Nifty trading on the Singapore Stock Exchange. It is an actively traded futures contract on Singapore Exchange.

SGX Nifty Chart

Who is allowed to trade SGX Nifty?

Any investor who is interested in trading Nifty, but is not able to access Indian Markets, finds trading SGX Nifty very good alternative to trade. Even the big hedge funds who have big exposure in the Indian market find SGX Nifty as a good alternative to hedge their positions.

Further, an Indian citizen is not allowed to trade SGX Nifty contracts. For that matter, Indian citizens are not allowed to trade derivatives in any other country.

Difference between Nifty and SGX Nifty?

1. SGX nifty is Nifty futures contract trading in Singapore Stock Exchange and in India, Nifty contract trades on NSE.

2. The contract size of SGX Nifty is different compared to Nifty. In India, we have 75 shares in every Nifty contract Lot whereas the SGX nifty does not have a contract with shares in it. SGX Nifty is denominated in terms of US dollars. Say, if Nifty is trading at 9500, then the contract size of SGX Nifty will be 9500*(2 USD) i.e., 19000 USD.

For example, if the Nifty moves up by 100 points for the day, then make a profit of 100 rupees per share.  So, total profit in case of Nifty will be 100*75 = Rs 7,500. But in the case of SGX Nifty, we will be making a profit of 100*2 = 200 USD per contract.

3. Now, In India, in the case of Nifty, we see Open Interest as the ‘number of shares’ outstanding. But in the case of SGX Nifty the Open Interest shows the ‘number of contracts’ outstanding. Both Nifty and SGX Nifty are highly liquid and a very high volume of trading happens in that.

Also read: What is India VIX? Meaning, Range, Implications & More!

Trading Hours of SGX Nifty

SGX Nifty Futures

(Source: SGX Nifty)

The above figure is the value of SGX Nifty from the website on the Singapore Stock Exchange. It shows the value of SGX Nifty futures traded on SGX. In Singapore Nifty trades in two tranches. One part during the day time and it is denoted by ‘T’ (as seen in the picture above). The other half during the evening time and it is denoted by ‘T+1’. The trades happening in the evening will be considered in the next day settlement prices.

SGX Nifty Trading Timings

(Source: SGX Nifty)

Now, the above picture gives you details about the trading hours of SGX Nifty. The Trading hours mentioned here are Singapore time and the difference between Indian Standard Time and Singapore time is 2 hr 30 minutes. Therefore, we can see that in the Morning (T) session, it trades from 9 am to 6:10 pm Singapore Standard time.

So, in Indian Standard time, the trading happens at SG Nifty from 6:30 AM to 3:40 PM. And the Evening (T+1) session, it trades from 6:40 pm to 5:15 am Singapore Standard Time, which if converted to Indian Standard time will have timings of 4.10 pm to 2:45 am.

Contract Settlements in SGX Nifty

SGX Nifty has two serial monthly contracts and it has Quarterly contracts. The contract expires on the last Thursday of Every expiring month and if the last Thursday is an Indian holiday, then it expires the preceding business day. The SGX Nifty contracts are cash-settled and the final settlement price is derived from the official closing of S&P CNX Nifty.

How SGX Nifty Impacts Indian Equity Market?

Looking at the current global scenario, with the continuous onslaught of COVID-19 pandemic or the rising tensions between US-China over trade deal, we see a continuous inflow of information and news. And these inflow of information has a direct impact on the Global Financial markets.

SGX Nifty still trading way after the closure of the Indian Nifty market, we see an impact of these global news on the SGX Nifty price movement. This further directly impacts the opening pricing of Nifty, the very next day. And that is one of the reasons we see the Indian Nifty market opening at a premium or discount over the previous day’s close.

Note: Most analysts use SGX Nifty as one of the factors to predict whether the market will open higher or lower on a trading session.

Closing Thoughts

The SGX Nifty is a perfect substitute for investors and traders looking to trade in the Indian equity market but are not able to do so. It is a perfect hedging instrument if you are already exposed to the Indian equity market. One unique advantage that SGX Nifty has the longer trading hours compared to the Indian Equity market. And all these points make it a lucrative investment and trading avenue.

May 27, 2020 Options Trading, Trading 6 comments
Option Greeks Basics - The Gods In Option Trading

Option Greeks Basics: The Gods In Option Trading

Introduction to Option Greeks Basics: What are the makings of a great cricket match? Is it just that brilliant hundred by a batsman, or one 5 wicket haul by a bowler or is it that sparkling catch or run-out by the fielder. Or is a combination of all of these along with some crucial moments in the game.

Let us take the example of the inaugural World T20 final 2007. The biggest match of the tournament. The Arch rivals, “India Vs Pakistan”. No bigger setup in the world of cricket. But what made this match memorable was the quality of cricket played. India did eventually win the world cup final by 5 runs.

But what made this match unforgettable? Was it the innings by Gautam Gambhir (75 off 54 deliveries), was it the dash by Rohit Sharma (30 off 16 deliveries) that propelled India to a competitive score, was it the genius of Robin Uthappa to get a direct hit run-out of rampaging Imran Nazir, was it the onslaught by Misbah-ul-Haq or was it the masterstroke by none other, but M S Dhoni, to give last over to Joginder Sharma and seal the deal. I guess it was a mix of everything that made it an event to remember.

What are Greek Options?

Similarly, the Option Greeks are the ingredients of the recipe which eventually helps in pricing the options. Option Greeks are various factors which help option trader in trading options. With the help of these Greeks, one is able to price the options premium, understand volatility, manage risk, etc. These Greeks also have a major impact on each other.

There are majorly four different types of option Greeks – Delta, Gamma, Theta, Vega, and Rho. We will be discussing all of them in this post.

Quick Note: If you’re new to options trading, you can read our series of articles on options here.

Delta of an Option

In simple terms, Delta measures the change in the value of premium with respect to change in the value of underlying. For a call option, the value of Delta varies between 0 and 1 and for a Put option, the value of Delta varies between -1 and 0.greek options basics Delta of an Option

The above Option chain is for Nifty at 09:57 am. Nifty spot is trading at 9320.

delta of an option nifty option greeks

The above Option chain is for Nifty at 10:07 am. Nifty spot is trading at 9316.

Now, form the above two tables, it is clear that with a small change in the value of Nifty, the premium for the option changes. The premium for 9100 CE in the first option chain is 291.65 and in the second option chain is 289.40.

Now, say if I were bullish on the market, so how would I find the premium for all the strike price if I were to expect the Nifty spot to be trading at 9400 by End of Day. So, this is where Delta comes into the picture.

For a call option, assume the delta for a strike price is 0.40. So for every 1 point change in the value of underlying, the value of premium will change by .40 points. Say, if I had bought 9350 CE at a premium of 142.70. The Nifty spot price is 9316 and the Delta for this option is .40. And if by the End of the day, the spot price of Nifty jumps to 9350.

So the change in the Premium will be = (9350-9316)*0.40 = 14.4 points. So the new Premium will be = 157.1. Similarly, if the spot price were to come down to 9250, then the change in the Premium will be = (9250-9316)*0.40 = 26.4 points. So the new premium in this case will be = 142.7-26.4 = 116.3.

Delta value dependency on the Moneyness of an Option

The value of the Delta is derived using the Black & Scholes model. Delta is one of the output form this model. The Moneyness of the contract helps in deciding the value of Delta:

MoneynessDelta Value (Call Option)Delta Value (Put Option)
In the Money0.6 to 1-0.6 to -1
At the Money0.45 to 0.55-0.45 to -0.55
Out of Money0 to 0.450 to -0.45

Delta of a Put Option: The delta of a Put option is always negative. The value ranges between -1 to 0. Let us understand it with the help of a situation. Say the spot price of Nifty 9450. And the strike price in consideration is 9500 PE (Put option). The Delta for this option is (-) 0.6 and the premium is 110.

Now, in Scenario 1, if the spot price of Nifty goes up by 80 points, then

New Spot price = 9530

Change in Premium = 80*(-.6) = -48 points

So the New Premium = 110-48 = 62. In case of Put options if the spot price of underlying asset goes up, then the premium is reduced (the premium and spot price of Put option are negatively co-related)

In Scenario 2, if the Spot price goes down by 90 points, then

New Spot price = 9360

Change in Premium = 90*(-.6) = 54 points

The New premium = 110+54 = 164 points

Risk profiling for choosing Delta

The risk taking ability of a trader has an impact in choosing the right strike price. It is always advisable to avoid trading in Deep out of Money Options as the chances of those options expiring In the money is like their Delta (5% to 10%). For a Risk Taker trader, a slight out of Money or At the Money contracts are the best strategy. A Risk Averse trader should always avoid trading Out of Money contracts. They should always trade At the Money or In the Money contracts as the chances of trade expiring in their favour is significantly higher than Out of Money contracts.

Gamma of an Option

As we have seen, the Delta of an option measures the change in the value of premium with respect to change in the value of underlying. The value of delta also changes with the change in the value of underlying. But how does one measure the change in the value of delta? We introduce you to ‘GAMMA’.

Gamma measures the change in the value of Delta with respect to change in the value of underlying. Gamma calculates the Delta gained or lost for a one-point change in the value of underlying. One important thing to remember here is that Gamma for both Call and Put option is positive. Let’s understand:

Spot price of Nifty: 10000

Strike price: 10100 CE

Call Premium: 25

Delta of option: .30

Gamma of option: .0025.

Now if Nifty goes up by 100 points, then

New Premium = 25 + 100(.3) = 55

Change in Delta will be = Change in Spot price * Gamma = 100*.0025 = .25

New Delta will be = .30+.25 = .55 (Option is now an At the Money contract)

Similarly if Nifty goes down by 70 points, then

New premium = 25 – 70(0.3) = 4

Change in Delta will be = Change in Spot Price * Gamma = 70*.0025 = 0.175

New Delta Will be = .30-.175 = 0.125 (Option is now a Deep Out of Money contract)

Gamma Movement

The movement of the gamma changes and varies with the change in the Moneyness of a contract. Just like Delta, the movement in Gamma is the highest for At the Money contracts and it is least for Out of Money contracts. So, one should ideally avoid selling/writing At the Money contracts. Out of money contracts are the best ones to write as they have a very good chance of expiring worthless for option buyer and the seller can pocket the premium.

Also read: Introduction to Candlesticks – Single Candlestick Patterns

Theta of an Option

Theta is an important factor in deciding option pricing. They uses time as an ingredient in deciding the premium for a particular strike price. Time decay eats into the option Premium as it nears expiry. Theta is the time decay factor i.e., the rate at which option premium loses value with the passage of time as we near expiry.  If we could recall, Premium is simply the summation of Time Premium and Intrinsic value.

Premium = Time premium + Intrinsic value.

Say, The Nifty spot is trading at 9450 and the strike taken into consideration is 9500 CE (call option). So the option is currently out of Money. There are 15 days to expiry and the premium charged for this option is 110. Now, the Intrinsic Value (IV) of this option = 9450-9500 = -50 = 0 (Since IV cannot be negative)

Now, Premium = Time value + IV

=> 110 = Time value + 0, hence the time value for this Out of Money option is 110 i.e., the buyer is willing to pay a premium for an Out of Money option. So, the analogy “TIME IS MONEY” holds true in case of options pricing.

Let’s take another example:

  1. Say, Time to expiry = 15 days, Spot price of share of XYZ company = Rs. 95, Strike price = 100 CE, Premium = 5.5
  2. Now, if the spot price of XYZ = 96.5, time to expiry = 7 days, then for the same strike the Premium reduces to 3
  3. Again if the share price increases to 98.5, for same strike price and with just 2 days to expiry, the premium reduces to 1.75
  4. Therefore, from the above example it is clear that even though the spot price is moving towards the strike price, the premium is reduced as the time remaining to make a substantial move above strike price is reduced. The option has less chances of expiring In the Money. The Greek Theta is a friend to Option writers. It is advisable for option writers to write/sell the option at the starting of contract as they will be able rise the premium erosion with passage of time.

So from the above example, it is clear that the value of Premium is Depreciating with the passage of time.

Vega of an Option

Vega as a Greek is sensitive to the current volatility. It is one of the most important factors in determining the option pricing. Volatility is simple terms is the rate of change. Vega simply signifies the change in the value of an option for 1% change in the price of underlying asset. Higher the volatility of underlying asset, the more expensive it is to buy the option and vice versa for lower volatility.

Say the spot price of XYZ Company is Rs. 250 on 5th May and the 270 call option is trading at a premium of 8.

Let’s assume that the Vega of the option is 0.15. And the volatility of the XYZ Company is 20%.

If the volatility increases from 20 % to 21%, then the price of the option will be 8+0.15 = 8.15

And similarly, if the volatility goes down to 18%, then the price of the option will drop to 8 – 2(0.15) = 7.7

Key Takeaways

If options is a team, then it has various players are Option Greeks like Delta, Gamma, Theta, Vega, volatility, etc. Each and every Greek has its own pivotal role in finding the exact pricing of the option. They play a pivotal role in deciding the Moneyness of the option.

A simple and clear understanding of all the Greeks goes a long way in deciding the right strike price and right option strategy. Risk Management both for option writers can be handled with a better understanding of the Greeks. Option buyers should ideally avoid trading Out of Money options and Option sellers should ideally write/sell Out of Money Options.

May 11, 2020 Options Trading, Trading 1 comment
Right time to invest or is it

The Right time to invest, or is it?

“Imagine, always wanting to own something but not being able to, because that something was too expensive, maybe not worth the price tag or maybe it was the right price but your pockets were not deep enough to buy it”

The above thoughts must be crossing every investor’s or trader’s mind right now. The stocks which were expensive in January 2020 are right now available at a discount rate of 30%-50% in May 2020. So what led to this sudden decline in prices or undervaluation or availability at a sale? Is it just an impact of Global pandemic (COVID-19), or Is it the global uncertainties. Are we heading towards a bigger recession? Or Were these share prices simply too overvalued and had just the right trigger to correct them, which in this case was COVID- 19.

To get a little deeper into the discussion, let’s take an example of a few sectors. The auto sector, the health of which usually defines the ‘luxury health’ of a nation. But over some time we have seen a continuous decline in the Nifty Auto Index, which tells us a lot about the depleting health of the sector.

The Auto index which was trading near all-time highs of 11900 in January 2018 is right now trading near lows of 5000. As we can see that this decline in the sector started long before COVID-19 was born. This also tells us a lot about the consumer’s reluctance to spend less on luxury items and save more for future uncertainties. In the current scenario, most of the Auto sectors company shares are trading at almost half the price compared to early 2019 levels. The image below is the Auto Index for the last three years.

Nifty Auto Bloombergquint (Source: Nifty Auto –BloombergQuint)

So, it is still the right time to buy or are these companies still overvalued, especially knowing that consumer demand for luxury goods will still take quite some time to bounce back. But, seeing the lucrativeness of the prices of various stocks (as they are trading at a discount of 30%-50% from top), one can start investing a portion of his desired investment now. But, it is advised to not to empty the full clip right now, as we could see some more correction in the market. So investing parts of portfolio over time is the best way ahead. And as the saying goes, “it is never a wrong time, to do the right thing”

Similarly, if we were to take the example of the Nifty Pharma index, this index was at peak during March 2015 (13,300 levels) and at its low during March 2020 (6700 levels). The figure below shows the Nifty Pharma Index Now, in this case, one can say that this might be the right time to start investing in this sector as the pharma products will have higher demand during this global pandemic and we can already start seeing pharma companies doing well over last two months.

The index has almost recovered to 9000 levels. So one can start building their portfolio have some portion dedicated to the pharma sector. Again SIP is the best strategy.

nifty pharma bloombergquint

(Source: Nifty Pharma BloombergQuint)

From the above discussion it very difficult to say that the recovery mode for the market has started or we have seen the bottom. One can never be sure. But one thing is for sure, that the market will recover sooner rather than later. One has to be very prudent and use his/her bias-free judgment to pick his or her investment strategy and timing.

One best way to do it by having a systematic Investment plan (SIP) and diversify his/her risk across sectors. It is near impossible for anyone to pick the top or bottom for any indices or sector. So it is advised to invest a portion of total desired investment and keep investing at systematic intervals of time. This way the investor will be able to average his price and a major movement in one sector or indices would not dent his portfolio significantly.

May 6, 2020 Market, News 2 comments
Futures vs Options Trading What is More Profitable

Futures vs Options Trading: Which is More Profitable?

Futures vs Options Trading – before we dwell deeper into this debate, let us first understand what each of these financial instruments implies. However, before that, it is important that you understand what does owning an equity share implies –

“Owning an Equity is like owning an ownership stake in the company. The holders of Equity shares have voting rights and have ownership say in the management and working of the company. Equity shareholders are partners in the growth and tough times of the company. They are entitled to receive dividends”

Now that you know the meaning of owning equity, let me define the basics definition of futures vs options trading:

“Futures are like a forward contract whose value is derived from the value of the underlying asset. In the case of companies, the underlying asset is equity share values and in the case of Index, the spot price of Index. The futures contract owners don’t have an ownership right on the asset they are underlined with”

“Options, as the name suggests, gives an option to the buyer, if wants to buy (Call option) or sell (Put option) on or before the expiry of the contract. He buys this right from the option seller by paying a fee (Premium) and the seller is obligated to honor his promise”

Read more: Options Trading 101: The Big Cat of Trading World

Benefits of Futures Contract

Here are a few key benefits of future contracts:

  1. Since Futures derive its value directly from an underlying asset, so any movement in the underlying price has equally proportionate movement in the value futures contract.
  2. The futures contract can be rolled over to next month contract at the same price as the expired contract expiry price.
  3. Futures contract do not face time decay problems as the value is direct proportional to the value of underlying and expiry does not affect its pricing.
  4. Liquidity is one of the most important factor in futures trading. The standing bids and offers make it easier for interested parties to exit and enter positions.
  5. The margin required for trading via futures haven’t changed much in years. They are changed a little bit when the market becomes volatile. So, a trader is always aware of the margin required before taking positions.
  6. The pricing is easier to understand as the values are based on Cost to carry model i.e., the futures price should be the same as the current spot price plus the cost of carry.

Benefits of Options Contract

Here are a few key benefits of Options contracts:

  1. As the name would suggest, the Options contract gives the right to option buyer to exercise his contract if he wishes to. If the Spot price doesn’t go in favor of the buyer of the contract he does not have to exercise his right, he stands to lose just the premium.
  2. One time premium is the only fee that option buyer has to pay to ride the momentum of underlying price and be a part of a bigger game.
  3. If an option seller is of the opposite view to that of option buyer, he can just sell the option contract and pocket premium income.
  4. The options are less risky than equities. Say for example if a trader wants to buy 1000 shares of Reliance, then at CMP (Rs 1400 per share), one has to shed out Rs 14,00,000 (fourteen lakhs). But one can express the same view by buying 2 Call option contracts (500 shares each). Say if he buys At the Money contract of 1410 CE by paying a premium of 35 per lot. Then, his total cost would be = (500*35*2)= Rs. 35000 only. So, now If option were to expire Out of Money for option buyer, he just stands to lose premium only. But, if the share price of Reliance Industries comes down to Rs. 1300, then total loss of equity shareholders will be Rs. 1,00,000 (1000*100).
  5. Return on investment for an option buyer is very high because the cost paid is just the premium and the potential return is unlimited.

Also read: Options Trading Definitions – Must Know Terms for Beginners

Futures vs Options Trading: Which strategy is better?

There is no right answer as to which instrument is better. It all depends on one’s risk appetite, and view on the market. However, here are a few key points to compare which strategy is better:

  1. Options are optional financial derivatives whereas Futures are compulsory derivatives instruments.
  2. The seller of an option is exposed to unlimited risk but the buyer’s risk is limited to the premium paid. But in the case of Futures, both buyer and seller have equal risk associated with their trades.
  3. The options although they can be rolled but have a different premium for different expiry, but in case of futures, they are rolled over at the same price in the next contract.

For example, if someone has bought the Future contract of XYZ Company at Rs. 110 and if upon expiry the price of XYZ is Rs. 105, he can simply roll over the position to next expiry at Rs. 105 and his entry price is not changed. But in case of Option, if an investor bought 110 call options of XYZ Company by paying a premium of Rs. 5 and it expires worthless, then he again has to buy next expiry contract by paying a fresh premium (Say Rs. 7). So to reach the breakeven, the spot price of XYZ Company has to go above Rs. 122(110+5+7).

From the discussion above it is clear that both financial derivatives instruments, Futures vs Options Trading, have their own advantages and disadvantages. One has to be rational, bias-free, use his/her judgment, and have proper risk management to survive long in the trading World. Happy Investing and Happy Money making.

May 1, 2020 Options Trading, Technical Analysis, Trading 2 comments
Multi Candlesticks Patterns cover

Understanding Candlesticks – Multi Candle Patterns

Multi Candlesticks Patterns: Hi traders! In the previous article, we discussed the various single candlestick patterns and their importance in understanding the pricing patterns. Here, in this article, we will be talking about various multi candlesticks patterns.

These are patterns generated by a series of prior candles. Single candlesticks patterns along with multiple candlestick study goes a long way in understanding and giving better trade signals in the market.

Here is a list of Multi candlesticks patterns we will be having a discussion on in this chapter: The Engulfing Patterns (Bullish Engulfing pattern and Bearish Engulfing patterns), The Piercing pattern, The Dark cloud cover, The Harami Pattern (Bullish Harami & Bearish Harami), The Candles Gaps, The Morning star, The Evening star, Three White soldiers & Three Black crows.

The Engulfing Pattern

The Engulfing pattern is the most basic two candlestick pattern. The first candle is a relatively small one and the second candle is a bigger one as it engulfs the first candle. If this pattern happens at the bottom of a trend, then it’s called bullish engulfing and if this happens at the top of a trend then it’s called bearish engulfing.

— Bullish Engulfing

Here are a few characteristics

  1. The Bullish engulfing pattern shows Long (buy) trade
  2. The prior trend should be bearish.
  3. The prior candle should be Red.
  4. The engulfing candle should be bigger than previous and covering the whole body of a red candle and should be green.

bullish engulfing - Multi Candlesticks Patterns

In the figure above we see bearish trend prior to the engulfing green candle. Once the engulfing pattern took over, we saw a long bullish trend. One important point to observe here is that the engulfing candle attempts to continue bearish pattern but constant buying and rejection at lows brings in more buyers and ultimately the candle closes green.

The trades to be taken here depends on one’s risk appetite. A risk-taker will execute the trade on the day the trend is made but the risk-averse will wait for confirmation and execute his trade the next day. The Stop loss for this trade has to be below the body of the engulfing candle. In the figure above, the trader with both kinds of a risk appetite would have made a substantial profit.

— Bearish Engulfing

bearish engulfings - Multi Candlesticks Patterns

As the name suggests, the bearish engulfing pattern gives an opportunity for short trades. The prior pattern here has to be a bullish one and the engulfing pattern candle should also give an indication of continuing bullish pattern but due to constant selling pressure, the sellers eventually take over and the candle closes red. The engulfing red candle has to bigger than the prior green candle.

The buying pressure gets exhausted by constant selling. It is advisable to exit long trades when this pattern happens and enter fresh short trades. The risk-taking trader enters short trade on the same day while the risk-averse trade waits for the pattern confirmation and enters into trade the next day. The figure shown below is a classic example of Bearish Engulfment with the engulfing body bigger than previous green candle and substantial bearish trend post that.

The Piercing Pattern

The Piercing pattern is very similar to a bullish pattern with a minor difference. In the case of the piercing pattern, the size of the green candle should be between 50-100 % of the red candle. Say if the size of the red candle is of 100 points, then the piercing candle length should be more than 50 points but less than 100 points. This candlestick pattern has a similar characteristics like Bullish engulfing but the confidence level on trades via piercing pattern is little lesser compared to bullish engulfing.

The Dark Cloud Cover

A mini version of the Bearish Engulfing pattern. A bearish pattern indicator and uptrend halter. Here, unlike the bearish engulfing pattern, the red candle size should be between 50-100 % of the previous green candle. Say, if the size of the green candle is 150 points, then the dark cloud candle should be anywhere between 75-150 points.

The Harami Pattern

I know what comes to mind when you hear the word ‘Harami”. But Harami here is a Japanese word meaning Pregnant. This is generally a trend reversal pattern. The first candle is a big one followed by a candle with a small body. And the color of the second candle is generally different from the first candle. If the second candle turns out to be a Doji candle, the chances of reversal increases.

— The Bullish Harami

the bullish harami - Multi Candlesticks Patterns

In the figure above, we see a bullish Harami encircled. It is a two-day pattern. Following are some of its characteristics:

  1. The prior trend of the market is bearish and on the previous day, the market has made a new low.
  2. On the next day, the candle opens in green as against the expected red candle and hence the panic and shorts start to get covered and the day ends with a green or a Doji candle.
  3. The idea here is to go long at the formation of this pattern.
  4. The risk-taking trader can go long near the close of the day and the risk-averse trader can wait for pattern confirmation and go long the next day.
  5.  The Stop Loss for the trade is below the low of blue or Doji candle.
  6. In an ideal scenario, it is always best to keep trailing stop loss and ride the reversal move.

— The Bearish Harami

the bearish harami - Multi Candlesticks Patterns

In the figure above, we can notice that the bearish Harami in a squared box. It is a trend reverser. The strong bullish trend is halted and a new bearish trend starts. Few characteristics of this pattern:

  1. The prior trend is a strong bullish trend.
  2. The prior candle makes a new high and the next candle opens low against an expectation of new high and hence the panic selling.
  3. One should look to exit his existing longs and enter fresh short trades.
  4. The risk-taker will execute the trade close to the end of the day and the risk-averse trader will wait for the confirmation and enter a trade on the next day.
  5. The stop loss for the trade will be the high of the first red candle.
  6. Here also one should keep trailing the stop losses and ride the full move.

The Candle Gaps

The Gaps are formed when the candle for the next day opens significantly opens up or below the previous day closing.

the candle gap - Multi Candlesticks Patterns

If the market gap ups, it shows buyers enthusiasm. They are willing to pay a higher price. The Image above shows Nifty gaps up and buyers are willing to pay a higher price and the momentum continues. This pattern emerges when we see some overnight positive news and the markets react with a gap up. If the share price of some company gap ups, it usually means some positive management news or good quarterly results or firm receiving some substantial orders, etc.

Similarly, in the case of a Bearish Gap down, we see the market opening below the previous day’s close and selling pressure. In the figure above we see a bearish gap down in nifty index and continued negative momentum post that.

One important thing to keep in mind is that candle gaps are more news-driven or event-based but it has a strong bearing on changing the technical set up of the market.

The Morning Star

The Morning star is a bullish candlestick pattern. It’s a three candlestick pattern. This pattern usually indicates a trend reversal. A sustainable bullish trend is on cards.

the morning star - Multi Candlesticks Patterns

Following is the pattern setup:

  1. The market is in a bearish trend and it’s continuously making new lows.
  2. In the image above, we can see the first candle in the circle is a red candle and a new low is formed.
  3. The next candle starts by making new lows and looks set to go down. But with regular buying, the candle closes by making Doji. It starts to set panic amongst the bears.
  4. The next candle starts above the close of the Doji candle (Gap up opening) and shorts start to exit their position and fresh long positions re-initiated in the market.
  5. The best way to trade this pattern is by entering the market near the close of the third day and by then the trend reversal confirmation is also given by the market. The Stop Loss for this trade is the low of the third candle. Trailing Stop losses is the best strategy to ride this move.

The Evening Star

The evening star is the exact opposite of Morning star. It’s a strong bearish reversal pattern. Similar to the morning star, evening star is also a three candlestick pattern.

the evening star - Multi Candlesticks Patterns

  1. The market is in a bullish trend and it’s continuously making new highs.
  2. In the image above, we can see the first candle in the circle is a green candle and a new high is made.
  3. The next candle starts by making new high and looks set to go higher. But with regular selling, the candle closes by making Doji. It starts to set panic amongst the bulls.
  4. The next candle starts below the close of the Doji candle (Gap down opening) and longs start to exit their position and fresh short positions are initiated in the market.
  5. The best way to trade this pattern is by entering the market near the close of the third day and by then the trend reversal confirmation is also given by the market. The Stop Loss for this trade is the high of the third candle. Trailing Stop losses is the best strategy to ride this move.

Three White Soldiers

The three white soldiers is a bullish reversal candle. The trend prior to the formation of this pattern is bearish. This trend has three green candles formed. The opening of every candle is slightly below the previous days close and it closed above the previous day’s high. One can exit their existing short positions and enter fresh longs to initiate a new trade.

A risk-taking trader can execute trade before the close of the third candle and a risk-averse can execute his trade after the confirmation of the trend. The stop loss for this trade is the low of the first candle.

three white solders - Multi Candlesticks Patterns

Three Black Crows

Three black crows is a bearish reversal pattern. The prior trend is a bullish trend with new highs been made every day. The opening of the candle is slightly above the previous day but the closes is lower than the previous day low. Fresh shorts can be initiated with stop loss over the high of the first candle. One should keep trailing his stop losses as the trade starts to move in their favor.

Also read:

Conclusion

From the discussion above, we see various multi candlesticks patterns which can be useful barometers in the trade execution. There are some patterns that are frequent and followed more regularly and other not so frequent but very reliable patterns.

But by no means, these technical indicators to be followed blindly. One should see the technical factors going around and use informed judgment in executing their trade. “Happy Trading and Money Making!”

April 28, 2020 Options Trading, Technical Analysis, Trading No comments yet
Introduction to Candlesticks - Single Candlestick Patterns cover

Introduction to Candlesticks – Single Candlestick Patterns

A Guide to Single Candlestick Patterns: If you want to become a successful stock market trader, it is very important that you learn to read and understand candlesticks or candles. These candlesticks are basically a style of technical chart used to describe price movements of a stock, derivative, or currency. Understanding candlesticks and their patterns can help you to decide the entry and exit points for your trades.

“I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime.” – Jim Rogers

In this article, we are going to discuss what are candlesticks and then look into the popular single candlestick patterns that every trader should know. Let’s get started.

What are Candlesticks or Candles?

Candlesticks are the most common form to gauge the market trends, historical analysis, forecasting future. They are the most potent form of technical indicators. Just like a burning candle throws light to present and future, candlesticks with their patterns throw light on the present and goes a long way in understanding the future trends.

A simple candlestick shows the events which transpired within the selected timeframe. It shows us the open, high, low, close of the day (within the timeframe selected). The length of the candle helps us in understanding the volatility of the day. The longer the length of the candle, the more volatile the day and shorter the candle, the less volatile the day.

candlestick high low open close

The candlestick can be said to be a historical indicator as the candlesticks are formed on the already happened market action. But the candlesticks formed goes a long way in understanding the future trends and price patterns.

Before we start understanding the various candlesticks patters, I would recommend keeping the following factors in mind:

  1. “Trend is your friend.” Avoid going against the trend.
  2. One should be very flexible with his views. Stubbornness generally leads to disasters.
  3. Historical data analysis goes a long way in understanding future price patterns.
  4. Avoid taking directional trades on small size candles. Generally, trends are formed after substantially long sized candles.

Single Candlestick Patterns

In simple words, a single candlestick pattern is formed by just one candle. Here, we do not look into multiple or group of candles and the trading signal is generated based on a single day’s trading action. The following are some of the popular Single candlestick patterns we would be discussing in this article: The Spinning top, The Marubuzo, The Doji, The Hammer, The Hanging Man, The Shooting Star.

— The Spinning Top

The Spinning Top unlike any other candlestick formation does not give any clear direction of the trend but has a lot of price action associated with it. A Spinning candle looks like the candle shown below:

the spinning top candlestick

Following are the initial observation looking at the candle:

  1. The body of the candle is very small compared to upper and lower wicks.
  2. The wicks on both sides are generally of similar size.

The spinning although looks like a plain candle but has a lot of price action associated with it. The small main body would imply that the open and close of the candle are very close to each other. Because the open and close are so close to each other, the colour of the candle usually does not signal any trend.

The upper body shows the high for the day. This simply signifies that the bulls did make an attempt to go up but to no avail.

The lower body has similar characteristics like the upper body. This simply signifies that the bears tried to push the market down but were not successful in doing it.

— The Marubuzo

The Marubuzo is again a single candlestick pattern. It is probably the only candlestick pattern in which the prior trend is not given much importance. Only the last candle is given importance.

the marubuzo candlestick

The green line above explains Bullish Marubuzo and the red line represents Bearish Marubuzo.

— Bullish Marubuzo

In Bullish Marubuzo, the open of the candle is low for the day and the close of the candle is high for the day. There are no wicks in this candlestick pattern. This candlestick can also be said to be a trend changing one. The intensity of the buying is so high that the traders are willing to buy the stock at the high of the day. This candlestick patterns simply implies that the buying will continue for the days to come. The recommended buying price is the closing price of the Marubuzo candle.

Theoretically, the open should be low and the close should be high. But in reality, a little bit of variation is allowed.

Let us understand it with the help of a hypothetical example: The XYZ company share price has formed a Marubuzo candle with: Open = 403, High = 450, Low = 400, Close = 449.

Now the trader’s risk profile defines the time of execution of the trade. A Risk-taker would be taking the trade on the day the Marubuzo is formed. So how does this Risk-taking trader gets confirmation about the formation of Marubuzo? The trader basically does that by taking the trade very close to the end of the day.

On the other hand, a Risk-averse trader would be taking the trade the next day once the trend is confirmed. So, a risk-averse trader entry price might be higher than the risk-taking trader but has a better assurance about the pattern formation.

One very important thing to be kept in mind is that one has to be very mindful of the fact that the trade has to be executed with a stop loss in mind. Stop loss helps the trader to minimize the losses because of the inherent risks associated with the trade.

— Bearish Marubuzo

In a Bearish Marubuzo, the open of the candle is high for the day and the low of the candle is close for the day. A bearish Marubuzo indicates that the selling pressure is so high that the trader is willing to sell the share at the lows of the day expecting more negativity in the price of the share. This candle indicates a change in momentum and this changed momentum is set to last over some time.

One should bear in mind that this kind of trades are generally not meant for scalping purposes, they are to held until the trade reaches its desired price. Trailing stop losses is the best strategy.

— The Doji

The Doji is a candle formation that does not have a real body. It just has wicks on either side. So, the opening and closing price of the candles are one and same.

the doji candlestick - Single Candlestick Patterns

The Doji pattern can sometimes be similar to a spinning top except for the fact that Doji does not have any real body. Dojis are generally momentum changer or momentum halter. These candles clearly show the indecisiveness amongst the traders about the momentum and the direction of the market. Let’s examine it with the help of the following situation.

Say the market is in a bullish momentum and has had green candles over a series of days. So, if a Doji candle is formed, it could simply imply the dwindling momentum in the market or could mean an end in current momentum and signal trend reversal. Therefore, it is advisable in this scenario to be cautious and exit the long position or at least one should have stop losses in place. This is generally a time to wait and watch before entering new trades.

Also read: Options Buying vs Selling: Which Strategy to Use?

— The Hammer

The Hammer pattern is one of the most convincing trading patterns simply because of its formation pattern.

the hammer candlestick

The hammer pattern occurs when the candle opens at high but is not able to sustain there and it falls considerably but with continuous buying interest is able to recover and the candle closes in green and near the opening price. The length of the wick here has to be at least twice the size of the body.

In the diagram above, a bullish hammer has formed at the bottom of the bearish trend and the momentum changes significantly after the hammer formation. One Important thing to be kept in mind is that the hammer can be of any colour (green to red) as long as it meets the body to wick ratio. Few characteristics of hammer trade:

  1. The hammer formation generally gives a bullish or a long trade.
  2. The execution time of trade depends on the risk appetite. A risk-taker would execute the trade on the same day and a risk-averse will wait for the confirmation of the trade.
  3. The Stop loss for this trade is generally below the low of the hammer candle.

— The Hanging Man

According to Investopedia, “A hanging man uptrend and warns that prices may start falling. The candle is composed of a small real body, a long lower shadow, and little or no upper shadow. The hanging man shows that selling pressure is starting to increase”.

One important criterion for a candle to be called as a hanging man is that the market has to be in a bullish trend. Just like Hammer, a Hanging man can be of any colour as long as it meets the body to wick criteria. The Stop Loss for the short trades executed via hanging man pattern is the high of the candle.

the hanging man candlestick - Single Candlestick Patterns

— The Shooting Star

As the saying goes, save the best for the last. Probably the most influencing of the single candlestick pattern. The shooting star just looks like an inverted hammer or hanging man. It gives very strong trend reversal signals.

shooting star candlestick

The basic characteristics of the Shooting star are:

  1. The shooting star candle has a long upper wick. Generally, the size of the wick is twice the size of the candle body. The longer the wick, the stronger the pattern.
  2. The shooting star is a bearish reversal pattern, so the preceding trend is bullish.
  3. In general, the shooting star happens on the day when the existing bullish trend is expected to continue.
  4. Once a shooting star candle is formed, it is advisable to exit the long trades or at least put a stop loss and if possible reverse the long positions.
  5. One has to be bias-free when trading this type of formation.

Closing Thoughts

In conclusion, the above discussion should give us a clear picture of the various single candlestick patterns. All the patterns have their individual strengths. One has to be very aware of the basic mantra in the market: “Trend is your friend, always trade bias-free and always trade with a proper stop loss to be a long survivor in this marathon of trading”.

In the next article, we will be talking about Multi candlesticks patterns along with examples. “Happy Trading and Money Making”

April 27, 2020 Options Trading, Technical Analysis, Trading No comments yet
Options Buying and Selling - Two sides of Option Coin cover

Options Buying vs Selling: Which Strategy to Use?

Options Buying vs Selling: Every transaction, right from the days of the Barter system always has had a counterparty. Every seller got to have a buyer to consume the supply. Similarly, in Options too, every option buyer needs to have a counter option seller willing to give his right on the underlying asset.

An options buyer is one who is willing to pay a premium in advance, for having a right to buy/sell (depending on Call/Put) underlying asset on expiry. And an option seller is one who receives a premium as a fee for surrendering his right on Asset till expiry.

Benefits of Options Buying

  1. Options give you the power of Leveraging, as with limited capital one is able to ride the bigger move.
  2. The Risk involved here is to the tune of Premium paid. Say, if someone is buying a Nifty call option by paying a premium of 40. And a Nifty lot consists of 75 units. Therefore, the total premium paid will be equal to 40*75 = Rs. 3,000. So, by paying a premium of Rs. 3000 one is able to ride the full move.
  3. The option buyer has the opportunity of earning unlimited profit by just paying a premium and the loss is limited to premium invested.

Benefits of Options Selling

To understand this, let us understand the scenarios option contracts move to at expiry:

  1. When the Spot price moves above the strike price at expiry, the option expires In The Money. Options buyers gains and makes money.
  2. When the Spot price is at or near the strike price at expiry, the option expires At The Money. The Option seller earns the premium received as his income as the contract expires worthless for the buyer.
  3. When the Spot price is below the strike at expiry, the option expires Out Of Money. The Options sellers earns the premium received as income as the contract expires worthless for buyer.

So, from the three scenarios mentioned above, the Option Buyer makes money in one of the scenarios and the option seller stands to make money in two scenarios. Let us understand more on options buying vs selling with the help of an example:

call put option buying and selling sides of coin 2

Take for example if the Nifty spot is trading at 9325, and the option buyer buys weekly call option of 9400 by paying a premium of 120, then the

— Calculation for In the Money Call option P/L

  • Spot price at Expiry: 9700 (Say)
  • Premium: 120
  • Strike Price: 9400
  • Profit for Option Buyer: (9700-9400-120)*75 = Rs. 13,500
  • Loss for Option Seller: Rs. 13,500

— Calculation for At the Money Call option P/L

  • Spot price at Expiry: 9405 (Say)
  • Premium: 120
  • Strike price: 9400
  • Loss for option Buyer: (9405-9400-120)*75 =Rs. 8,625 loss
  • Profit of Option Seller: Rs. 8,625

— Calculation for Out of Money Call option P/L

  • Spot price at Expiry: 9275 (say)
  • Premium: 120
  • Strike Price: 9400

Here, loss for option Buyer: (9275-9400-120)*75 = Rs. 18375 loss. But the maximum loss for an option buyer is to the tune of premium paid. So the maximum loss to Option Buyer in Out of Money Call option is Rs. 9000

  • Profit of Option Seller: Rs. 9000

The option buyer starts making money once he reaches a breakeven point on his trade. The Breakeven point is calculated as follows: Breakeven Point = Strike price + premium paid

Also read: Options Trading Definitions – Must Know Terms for Beginners

Margin Calculation

There is no Margin required to buy an option. Just the premium is required to be paid to option seller. Say, to buy a Nifty call option, the premium required to be paid is 40. Then, the total premium to be paid will be = 40*75 = Rs. 3,000.

But in case of selling options, margin along with exposure has to kept with the broker, to account for day to day volatility. The margin is required to be deposited here because seller of an option is exposed to unlimited risk.

Margin for selling option = Initial Margin + Exposure Money

Which strategy to use?

There is no straight answer as to which is better: Buying or Selling. Each have their own benefits and negatives:

1. In case of buying, the buyers risk is limited to premium paid and in return, he gets right on underlying asset till maturity. But selling has its own benefit of receiving income (premium) beforehand and have to pay anything only if the spot price goes above the strike price. Even in that case also the seller has the protection of premium beyond strike price. Therefore, the real loss for seller happens (in case of call option) when: (strike price + premium) < spot price.

2. The option buyer is always in the game to make money, as long as the option does not expire but his probability reduces as the contracts keep moving closer to expiry. And option seller is always exposed to unlimited risk but his risk reduces with time because of less time for the individual assets to make substantial movement in a particular direction.

3. Both option buyers and sellers have the option to exit their trades before expiry. If the option buyer sees that the premium of his position is more than what he paid and he wants to book profit, he can easily do that via options market. And similarly, the option seller can get out of his position if he sees a substantial move of premium in his favour or sees a position going against him.

Also read: What is India VIX? Meaning, Range, Implications & More!

Closing Thoughts

From the above discussion, we can easily conclude by saying that there is no right strategy as to buying or selling options. And there are arguments both in favour and against options buying vs selling.

Choosing the right strategy depends on one’s objective, rational, and risk-taking appetite.

April 26, 2020 Options Trading, Trading No comments yet
Options Trading Definitions - Must Know Terms for Beginners cover

Options Trading Definitions – Must Know Terms for Beginners

Options Trading Definitions: Options as the name would suggest, gives you the right but not an obligation to own a financial instrument. But, before going deep into the technicalities of this instrument, let’s have an understanding of some of the key terminologies (jargon) used while trading options. Today, we will be covering jargon like Strike price, Underlying price, In The Money, At The Money, Out Of Money, etc.

Options Trading Definitions – Must Know Terms for Beginners

— Strike Price

The strike is the exercisable price of the options contract. The call option holder makes money if upon expiry the spot price is above the agreed strike price. And similarly, put option holder makes money if the spot price is below the agreed strike price.

The strike price is fixed in the options contract. Say, a trader has bought a call option contract (assuming 1,000 shares in a lot) of ABC Company for Rs. 75 strike price. So, over the duration of the contract, the call option holder has the right to buy 1,000 shares at Rs. 75. If the price of the share goes to Rs. 125, the option holder stands to make Rs. 50,000 (=50*1000) on the trade. And Vice versa for the Put option holder.

Also read: Options Trading 101: The Big Cat of Trading World

— Underlying Price

Underlying price is the spot price of the underlying asset of a derivative. For example, if someone owns a call option to buy one lot of ABC Enterprises. If ABC Enterprises is currently trading at Rs 15 per share, the underlying price is Rs 15. The difference between the underlying price and strike price greatly influences the option premium.

— In The Money (ITM)

As the name would suggest, ITM would simply mean something which already is making money. In options terminology, ITM means an option contract whose spot price of the underlying asset is above the strike price for call option and below the strike price in case of the Put option.

For Example, if the spot price of the ABC Company is Rs 50 then the strike price of the ITM Put option will have to be Rs. 51 or more. The premium cost as a factor must also be considered.

— At The Money (ATM)

An At The Money Option contract is one whose spot price and the strike price of the underlying asset are same. The options premiums are at their most crucial stage when the options contract are trading ATM. For example, if XYZ stock’s spot price is Rs.75, then the XYZ 75 call option (CE) is at the money and even the XYZ 75 put option (PE).

An ATM contract has no intrinsic value but has time value before expiry. For Example, on 10 April 2020, ABC share has a spot price of Rs. 100 and the 100 CE (for April Expiry) is trading ATM but still has a premium of 10. The reason for this is simply the fact that the contract still has 20 days to expiry. As and when the contract moves towards expiry, the premium erosion will happen in this contract because of less time available for the stock price to make a substantial move in any direction.

— Out of Money (OTM)

A contract is called OTM when the strike price of a call option is above the spot price of the underlying asset. In case of a Put option, a contract is called Out of Money when the strike of the underlying asset is below the spot price of an option contract. For example, if the spot price of the ABC Company is Rs. 70 then the strike price for the OTM call option will be Rs. 69 or less.

Relationship between various terminologies

For call options, the further away the strike price from the spot price, the economical the option. The following table shows the various strike price and the premiums and other factors for a stock trading at Rs 50.

Strike PriceMoneynessCall option premiumIntrinsic valueTime Value
35ITM15.5150.5
40ITM11.25101.25
45ITM752
50ATM4.504.5
55OTM2.502.5
60OTM1.501.5
65OTM0.7500.75

Conversely, for put options, the following table shows the various strike price and the premiums and other factors for a stock trading at Rs 50.

Strike PriceMoneynessCall option premiumIntrinsic valueTime Value
35OTM0.7500.75
40OTM1.501.5
45OTM2.502.5
50ATM4.504.5
55ITM752
60ITM11.25101.25
65ITM15.5150.5

— Moneyness

Moneyness in simple terms explains the amount of money the option holder was to make if he were to exercise his right immediately. It simply explains the intrinsic value (i.e., the amount received by the buyer) of an option.

— Options Expiry

In financial terms, the expiration date of an option contract is the last date on which the holder of the option may exercise it. A call/put option will be in-the-money if the stock is above/below the strike price and will be executed by the option buyer upon expiration.

If the stock price is above the Put option strike price, the option expires worthless. The weekly options expire every Thursday in Indian Equity Market and the monthly options expire on the last trading Thursday of every month. If Thursday is a holiday, then the options expire the previous day.

options expiry buyer and seller

— Options Premium

The option premium is the fees paid to the option seller by the option buyer for having a right on an underlying asset before expiry. If the option expires In the Money then the option buyer has the right to exercise the option contract. If the option expires Out of money, then the option buyer stands to lose to money i.e., the premium paid. The premium is the income generated by an option writer/seller.

Say, the stock price of XYZ Company on 10th April 2020 is Rs 500. An option buyer buys 530 call at Rs. 15 from option seller. Upon expiry, if the price of XYZ id 575, then the income made by the buyer is Rs 30 (Spot price – strike price – option premium).

Further, let’s assume upon expiry if the spot price of XYZ Company is Rs. 520, then the option will expire worthless for option buyer and the premium will be income earned by the option writer/seller.

Again if the price of XYZ shares upon expiry is Rs. 540, then the contract expires ITM for option buyer but he still stands to lose money. Following is the calculation to explain:

  • Strike Price: Rs 530
  • Option premium: Rs 15
  • Spot Price upon expiry: Rs. 540.

Here, the total Income of Option Buyer: Rs. (540- 530-15) i.e. Rs. -5. So the intrinsic value will be 0.

On the other hand, the total Income of Option Seller: Rs. (530+15-540) i.e. Rs. 5.

— Options Settlement

Let’s understand this with the help of an example: There is a call option to buy XYZ at Rs.50. The expiry is 30th Jan 2020 (last Thursday). The premium is Rs 4 and one market lot has 7,000 shares.

Assume there are two traders – Trader A and Trader B. Trader A wants to buy (option buyer) and trader B wants to sell (write) this agreement. Here is how the money movement will happen

Since the premium is Rs 4 per share, Trader A is required to pay a total of 7,000 * 4 = Rs 28,000 as a premium amount to Trader B.

Now because Trader B has received this Premium form Trader A, he is obligated to sell Trader A, 7000 shares of XYX on 30th Jan 2020, if Trader A decides to exercise his agreement. However, this does not mean that Trader B should have 7000 shares with him on 30th Jan. Options are cash-settled in India. This simply means on the last day if Trader A wants to use his right to exercise his option then Trader B is obligated to pay just the cash differential.

To help you understand this better, consider on the last Thursday (expiry day) of January XYZ is trading at Rs.65/-. This means the option buyer (Trader A) will exercise his right to buy 7000 shares of XYX at 50/-. In other words, he is getting to buy XYZ at 50/- when the same is trading at Rs.65/- in the open market.

Another way to look at it is that the option buyer is making a profit of Rs.15/- per shares (65-50) per share. Because the option is cash-settled, instead of giving the option buyer 7000 shares, the option seller directly gives him the cash equivalent of the profit he would make, which means Trader A would receive

= 15*7,000 = Rs 1,05,000/- from Trader B.

Of course, the option buyer had initially spent Rs.28,000/- towards purchasing this right, hence his real profit would be –

= Rs (1,05,000-28,000) = Rs 77,000 /-

The fact that one can make such a large exponential return is what makes options an attractive instrument to trade. This is one of the reasons why Options are one of the most favorite trading instruments amongst Traders.

Also read: What is Bank Nifty? The Index That Summarizes Economic Health

Key Takeaways

In this article, we discussed a few of the frequently used stock options trading definitions or jargon like Strike price, Underlying price, In The Money, At The Money, Out Of Money. Here are the key takeaways from this post:

  • It is advisable to buy a call option only when one anticipates an increase in the price of an asset.
  • The strike price should be as close as possible to the current price to avoid quick premium decay because of the time factor.
  • The underlying price is simply the spot price of the asset.
  • Weekly options contact expire every Thursday and monthly Option contracts expire on the last Thursday of every month. If Thursday is a holiday then it expires the previous day.
  • Options are cash-settled in India

In conclusion, a clear understanding of the complexity of the instrument goes a long way in making use of the financial instrument for meeting one’s own financial goals and financial independence.

April 24, 2020 Options Trading, Trading No comments yet
FDI RESTRICTIONS india 2020

FDI Restrictions: India tightening the leash on Dragon

“You need to revise discriminatory FDI restrictions, it is against the WTO principles of Non-discrimination and against free and fair trade” – Statement by China Embassy

The above statement came after the Indian government sanctioned new restrictions on FDI investment in India. According to these new sanctions, all the investments made by the neighboring countries in India will be under tighter scrutiny. These new rules have been specifically made keeping FDI flows from China in mind. India is trying to safeguard its interest by imposing these entry rules, as it is worried about the opportunistic takeover of Indian firms by Chinese firms in these financially vulnerable times.

As per these new sanctions, any companies (from countries that share its borders with India) will have to approach the Indian Government for permission, if they want to invest in India. Before these new sanctions, they could invest via the direct route in India. One needs to understand the fact that these new sanctions do not cap any limit on investment, it just reroutes the way to do it.

The existing FDI policies were earlier limited only to Pakistan and Bangladesh. Now, these new rules bring China, Nepal, Bhutan, and Myanmar within its gamut.

But why this sudden imposition of sanctions by India? This can be simply attributed to the fact that because of the COVID -19 pandemic, all the major stock indexes have taken a big hit and it’s made the valuation of all the companies very economical, vulnerable and attractive. So, to prevent the interest of these companies been taken over by opportunistic firms from neighboring border sharing countries, these new sanctions have been imposed.

Also read: Why did Indian Stock Market Crash in 2020? Causes & Effects!

fdi restrictions pic According to a press note released by the Department for promotion of Industry and Internal trade on 17th April 2020,

“A Non-resident entity can invest in India except for sectors or activities which are prohibited. However, an entity of country which shares its borders with India or where the beneficial owner is a citizen of country which shares its borders with India, can invest only via Government route.”

In addition to this, a company incorporated in Pakistan can invest only via Government permission, only in sectors other in defense, atomic energy and other sectors prohibited in foreign investment policy.

An article published in the Times of India states that “this move is very similar to barrier imposed by other countries like Germany, Spain, Italy, and Australia to block predatory capital for hostile takeover by China”

Now, what is the difference between the Automatic route and the Government route?

In simple terms, through the automatic route, the investor has to just inform RBI about the investment made while in case of government route, the investor has to take permission from a particular ministry or department.

According to an estimate by India-China economic council, an estimated Greenfield investment of 4 billion USD (Rs. 30,000 crores) has been made in Indian startups. Such has been the growth of investment in the Indian market by Chinese investors. So, is it the right time for India to tighten its FDI policy stance? Only time will tell. But for the moment, India has safeguarded its long term considerations by blocking hostile buyouts and takeovers.

Moreover, as per the data published by the Department for Promotion of Industry and Internal Trade,

“Between 2000 and 2019, FDI received from China was estimated around $2.3 billion dollars (nearly 14500 crore rupees) and all the other border sharing nations invested a combined FDI of 71 crore rupees”

This clearly explains the fear factor of the Indian Government.

pic fdi restrictions

The last nail in the coffin to introduce this policy by India would have been the purchase of 1.75 crore shares of HDFC Bank by China’s peoples Bank which increase its share in HDFC Bank to 1% from 0.2% earlier. This move is to safeguard the interest of Indian firms because of their current financial vulnerability.

Also read: China’s central bank buys 1% stake in HDFC

Other major investments in India come via third part routes like Singapore. For example, $ 500 million (Rs. 3500 crores) investment from Singapore subsidiary firm Xiaomi (China Origin) should also have to be added to official statistics as this investment indirectly comes from country sharing a border with India.

The reports published by the ministry of finance do show a huge investment to the tune of $4 billion. This investment comes via online wallet like Paytm (backed by Alibaba), BigBasket, and cab service provider like Ola (sizable investment from China). Mobile phone manufacturers like Vivo, Oppo, and other Chinese phone manufacturers. In the Pharma sector, the acquisition of Gland pharma by Fosun Pharma for $1.1 billion, etc. are some of the direct and indirect investment by China in India.

These new policies won’t be applicable to the existing investment but any future investment will have to follow the new policy rules. Therefore, the latest rules imposed by India might look like a decision taken in haste, but these sanctions were always on cards. The breakout of the COVID-19 epidemic made this decision quicker and faster. So, to answer China’s claim that India is breaking the WTO rules of free trade, one can simply say that there is no restriction on investment that can be made but it has to be just done via Government route.

Anyways, a few questions still remain unanswered:

  1. “It remains to be seen as to what would be the implications of these FDI sanctions over long time?”
  2. “Looking at the gravitas of these sanctions, how does the future of trade and investment shape up for these two Asian giants?”
  3. “Considering the importance of China and its expertise in technology and infrastructure, will the restrictions be relaxed in the future?”

Also read: What does Weakening Rupee Against Dollar Signify?

References:

  1. New FDI Rules Not Violation, Say Government Sources On China Criticism – NDTV India
  2. Govt approval must for all FDIs from neighbouring countries including China
  3. Press release by Ministry of Commerce & Industry, Government of India dated 18/04/2020
  4. The Economic Times newspaper dated 18/04/2020, 20/04/2020 The Times of India dated 18/04/2020, 20/04/2020
April 22, 2020 Economics, Market, News 2 comments
what is bank nifty meaning

What is Bank Nifty? Index That Summarizes Economic Health

What Is Bank Nifty? Bank Nifty is the Index that comprises of the most liquid banks listed on the National Stock Exchange (NSE). Bank Nifty comprises the twelve leading banks (inclusive of both the Public sector and Private sector) that are publically listed on NSE. Following is the list of 12 banks included:

  1. Axis Bank Ltd
  2. Bank of India
  3. HDFC Bank Limited
  4. ICICI Bank Limited
  5. Bank of Baroda
  6. Canara Bank
  7. Kotak bank limited
  8. IDBI Bank Limited
  9. Oriental Bank of Commerce
  10. State Bank of India
  11. Punjab National Bank
  12. Union Bank of India

The Bank Nifty index is the highest traded Index in Futures and Options Market. In fact, Bank Nifty and Nifty Index have a very high positive correlation because of a very high weightage of Bank Nifty in Nifty 50 Index.

A Brief History on Bank Nifty

The Bank nifty was introduced in September 2003 but its base year is considered to be January 01, 2000. The base value in the year 2000 was taken to be 1000. So, if Bank Nifty right now is trading at 20,000, that means it’s given returns of 20 times over the last 20 years.

The Bank Nifty values are available on the real-time market and its volume of trading is more than that of Nifty index. It’s the first Index with weekly expiring options with the highest volume of trading and hence very liquid.

Nifty Bank Top constituents by weightage

Here is the weightage of the top ten banks constituting Bank Nifty As on March 31, 2020:

Nifty Bank Top constituents by weightage

Source: (NSE India)

Looking at the above representation above we notice that the top 5 banks constitute almost 85% of the Bank Nifty. So naturally, any movement in one of these 5 banks have a lot of bearing on Bank nifty and even the Nifty 50 Index.

Private sector banks have a major portion in Bank Nifty and very few public sectors make the cut. This could also be because Private sector banks (unlike the public sector banks) are more modernized and technologically better equipped to tackle the needs of modern banking system. And hence the trading activity in Private sector banks are also higher.

Even if we were to see the breakup of the Nifty 50 index, we can see that Bank Nifty occupies about 28.5% share (highest for a sector), followed by Technology (18%) and Oil & Gas (14.5%). Therefore, if we see a substantial move in Index, we can safely assume that banking sector must have played a part in it and index move must have also impacted the Bank Nifty Index.

Also read: What is Nifty and Sensex? Stock Market Basics (For Beginners)

How Weightage is decided in Bank Nifty?

To simply put, the weightage of banks in Bank Nifty is purely dependent on the free-float market capitalization of banks. The Free float market capitalization does not mean the full capitalization method. It basically means the market value of the total number of shares (excluding promoter holding, government and insiders) actively trading at exchange.

The free float method is the best way to judge a banks weightage in the Bank Nifty Index. The current share price decides the weightage and the banks day to day performance has a lot of bearing on their share price and which in turns also impacts the Bank Nifty movement. The corporate policies, the innovation, the products, bank-specific news, corporate policies etc., impact the share price which in turn impacts their weightage.

Therefore, from the above discussion, we can easily conclude that HDFC bank is not guaranteed top position in the Bank Nifty index. It can be taken over by any bank if that bank share price starts to outperform that of HDFC banks share price over a period of time.

Trading Bank Nifty Futures

A futures contract is a forward with fixed expiry date and the contracts expired can be rolled over to next contract. The Bank Nifty futures contracts are derivative instruments deriving value from the Bank Nifty Index.

The Bank Nifty futures contract have three contracts running simultaneously. The 1st month (near one), the next month (the two month contract) and the far month (three month).

When the near month contract expires, a new far month contract is introduced. So at any point of time, there are three active contracts in Bank Nifty futures. Bank nifty futures contract expire on last working Thursday (or previous day if the last working Thursday is a holiday) every month

Trading Bank Nifty Options

As discussed in my previous article, options are contractual rights (not obligation) of the option buyer and obligatory duty of option seller. The Bank nifty option contracts are cash settled. Bank Nifty options contract derive their value front he Bank Nifty Index (Underlying asset).

Just like the futures contract, even the bank nifty options contract have three monthly contracts (Near one, two month one and a far one). And once with the expiry of the near month contract, a new far month contract is added. Bank Nifty has 7 weekly expiring contracts. At the expiry of near week, a new serial weekly contract is introduced.

The weekly expiry contract expire every Thursday of the week and if that Thursday is a holiday, then the contract expires the previous day. Similarly, the monthly Bank Nifty options contract expire on the last Thursday every month and again if the last Thursday is a holiday then the contract expires on the previous day.

Also read: Options Trading 101: The Big Cat of Trading World

Closing Thoughts

To Summarize this article, we can conclude by saying that the overall health of the economy can be gauged by looking at the health of its banking system. Bank Nifty goes a long way in explaining it. Bank Nifty constitutes 12 of the major public and private banks in the Indian Banking system. Bank Nifty options contract form a majority in the Indian Options market and they have a series of weekly and monthly expiring contracts.

April 20, 2020 Options Trading, Trading No comments yet
Option Trading 101 Call Put Options cover

Options Trading 101: The Big Cat of Trading World

Introduction to Options Trading: Options are financial instruments whose value is derived from the value of an underlying (aka involved) asset like security or an asset. An options deal offers the buyer the opportunity to buy or sell depending on one’s view on the value of involved security. Owning a call option gives the right to buy shares on expiration at strike price and owning a put option gives right to sell at strike price at expiry.

The options when bought or sold need not necessarily be exercised at the Expiry and at strike price. They can be exercised anytime until the options expiry. So if used judiciously the options are considered less risky than stocks or futures contract. Because of this system, options are considered derivative securities – which means their price is derived from involved assets. However, options, do not represent ownership in the company.

Let’s understand with an example

Imaging Mohan has a wedding in his house after four months and wants to buy gold for the same. However, he is fearful of the fact that the gold price might go up in the future. Therefore, to protect himself from the risk of price fluctuations, he goes to a Jewelry shop, and enters into an agreement with the shop owner whereby he fixes the price for jewelry for buying four months down the line, at the current price of Gold.

options trading gold example

But, you must be wondering as to, what is the incentive here for the Jewelry shop owner to fix the price because he is potentially taking a big price risk. If the price goes up after four months, still he’ll have to sell the jewelry at the pre-determined price. Here, his incentive is a small fee (i.e. Premium/Token) that he will be charging to Mr. Mohan for fixing the price of gold. And this fee here is non-refundable.

Say, four months down the line if the price of gold goes up then Mr. Mohan has the right to buy gold at the pre-decided price. On the other hand, if for some reason if the price of gold comes down then he does not have to exercise his right, i.e. he may choose to buy jewelry from some other shop at the discounted current price. He merely stands to lose his premium/token.

Why would an investor use options?

When an investor or trader is buying an options contract, he/she is betting on the stock price to go in his favour (up for call option and down for pit option). The price at which one agrees to buy the involved asset via the option is called the “strike price,” and the price paid for having this right is called the “options premium.”

Benefits of Options Contract

Here are a few key benefits of Options contracts:

  1. As the name would suggest, the Options contract gives the right to option buyer to exercise his contract if he wishes to. If the Spot price doesn’t go in favor of the buyer of the contract he does not have to exercise his right, he stands to lose just the premium.
  2. One time premium is the only fee that option buyer has to pay to ride the momentum of underlying price and be a part of a bigger game.
  3. If an option seller is of the opposite view to that of option buyer, he can just sell the option contract and pocket premium income.
  4. The options are less risky than equities. Say for example if a trader wants to buy 1000 shares of Reliance, then at CMP (Rs 1400 per share), one has to shed out Rs 14,00,000 (fourteen lakhs). But one can express the same view by buying 2 Call option contracts (500 shares each). Say if he buys At the Money contract of 1410 CE by paying a premium of 35 per lot. Then, his total cost would be = (500*35*2)= Rs. 35000 only. So, now If option were to expire Out of Money for option buyer, he just stands to lose premium only. But, if the share price of Reliance Industries comes down to Rs. 1300, then total loss of equity shareholders will be Rs. 1,00,000 (1000*100).
  5. Return on investment for an option buyer is very high because the cost paid is just the premium and the potential return is unlimited.

Call and Put Options

call and put options

The Call/Put options are financial derivative instrument, meaning that their movement is dependent on the price movement of the involved asset or security. The real purpose of buying a call option is that the trader/investor is expecting the price of the involved security to move up in the near future and vice versa for the call option seller.

A Put option is bought by the trader or investor when he expects the price of an involved asset to fall in near future and vice versa for put option seller or writer. The option writer although earns premium while selling but runs the risk of giving up the involved asset in case the options goes in favor of option buyer.

Breaking down Call Options

For U.S. style options, a call option buying contract gives the buyer to buy the involved asset at strike price anytime till the expiry date of contract. In case of an European style option, the call option owner has the power to exercise only on the expiry date.

It is beneficial for the call buyer to power his right to sell his call option if the spot price moves above strike price before expiry and call option writer to bind by his promise.

The premium paid by the option buyer gives him the right to buy the involved stock or security at strike price until the expiry of options agreement. If the price of the asset moves beyond the strike price, the option will be In the money

The options writer receives the premium. The premium received is the way of generating income for the option writer or seller. But the option writer’s income is limited to the money received as premium and runs the unlimited risk of paying up the option buyer in case the involved security going above the strike price.

Call options can be In, At, or Out of the money. For example, If the Index is currently trading at 9500, an In the money call option will be to buy the option with the strike below 9500 (say 9400 CE), An At the money call option will be to buy an option will the strike price at 9500 and an Out of money call option will be to but strike price above 9500 (say 9600 CE). An In the money call option are the most expensive ones and the out of money options are the cheapest but they carry the most risk of expiring worthless.

Breaking down Put Options

Options contract duration can vary from very short term (weekly) to long term (monthly contracts). It is profitable for the put option buyer to exercise or sell his option if the spot price of the involved security comes below the strike price.

The premium paid by the put option buyer gives him the right to sell the involved stock or security at strike price until the expiry of options agreement.

The options writer receives the premium. The premium received is the way of generating income for the option writer or seller. But the put option writers income is limited to the money received as premium and runs the unlimited risk of paying up the option buyer in case the involved security going below the strike price.

Just like Call option, even Put options can be In, At, or Out of the money. For example, If the Index is currently trading at 9500, an In the money put option will be to buy the option with the strike above 9500 (say 9600 PE), An At the money Put option will be to buy an option will the strike price at 9500 and an Out of money Put option will be to but strike price below 9500 (say 9400 PE).

An In the money pall option are the most expensive ones and the out of money put options are the cheapest but they carry the most risk of expiring worthless.

Also read: 3 Best Sites to Learn Virtual Stock Trading in India (Without Risking Your Money)

Various Option strategies depending on one’s view on Market

Market viewOptionPosition NameOther trading AlternativesPremium
BullishCall Option (Buy)Buy CEBuy Futures(Spot)Pay
BearishPut Option (Buy)Buy PESell FuturesPay
Flattish or BullishPut Option (Sell)Sell PEBuy Futures (Spot)Receive
Flattish or BearishCall Option (Sell)Sell CESell FuturesReceive

Closing Thoughts

In this article, we have discussed two basic options types: Call Options and Put options. But from the graph above, we see there are four different options trading players i.e., Call Option Buyer, Call option seller, Put option buyer, Put Option Seller.

Call option and put option buyers have limited risk to the tune of option premium but have unlimited gains potential. But the call and put options writer’s risks are unlimited and the maximum reward is the premium charged from option buyers.

To Summarize, an option is a contract which is optional i.e., it is not obligatory for the buyer to buy or sell the involved security or asset at pre decided strike price within the stipulated/expiration time. Because they’re cheaper to purchase (compared to buying same number of shares), they have the power of leveraging limited money of the investor.

April 16, 2020 Beginner's guide, Options Trading, Trading 7 comments
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