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.

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.

what is insider trading meaning

What is Insider Trading? And What makes it illegal?

Understanding Insider Trading and its implications: Since the time the first stock exchange was established in the sixteenth century, a lot many people have tried different unethical ways to make money from it. Although a few are able to fool the market and make sustainable profits, however, most gets caught from the governing bodies. One such fraud on which most of the regulatory bodies keep an eagle eye is “Insider’s Trading”. In this article, we are going to discuss what exactly is Insider trading, why it is illegal and how you can protect yourself from it. Let’s get started!

What is Insider Trading?

The stock market is able to work in an efficient way when all the investors have the same information, this creates a level playing field. Here, the investors are rewarded for their analysis and expertise.

Insider Trading throws this level playing field out the window. In insider trading people who have access to sensitive private information take advantage of investors who are oblivious to these facts. Insider trading refers to trades made based on material price sensitive non-public information about the company. 

What is Insider Trading? meaning and concept

 

Insider Trading in India is governed by the SEBI Act of 1992. Any individual who is proved guilty of insider trading can be imprisoned for a maximum of 5 years and fined between Rs. 5 lakh to Rs. 25 crores or 3 times of the profit made whichever is higher. The rules governing such trades and the degree of enforcement vary significantly from country to country.

What forms a part of insider trading?

The timing when the person in question makes the trade is also important. If the information in question is still non-public when the buy/sell of shares takes place it constitutes insider trading. It is also important to note that if the person accused of insider trading is linked to someone within the company or someone who is associated with the company, then both can be prosecuted. Acting on the information does not only constitute trading the share of the company in the stock market. Even further passing on the information is illegal. In India, close relatives of company officials are also considered as insiders.

Case 1: Say an employee of a company shares some price-sensitive information with his father. His father then goes onto share this information with his friend who uses it to profit from the stock market. Here all three involved can be prosecuted for insider trading.

Case 2: A person overhears material information at the cafeteria from employees of a company. He then goes onto profit based on this information. As long as he has no connection to the employees of the company he is not guilty of insider trading.

Case 3: An employee of a company enters into a disinvestment plan with his broker. According to this plan, he would sell his stake in the company over regular intervals over a period of one year. After 9 months the employee is made available with some material non-public information. According to this material information, the employee would make a loss if the shares are held by him. In this case, as long as the employee can prove his trades were part of a preexisting plan he can be acquitted of the insider trading charges.

Unfortunately enough at times, those accused of insider trading make use of ‘Case 2’ and ‘Case 3’ in their defense. Individuals who have brokers trading on behalf of them also claim that they had no idea of the trades taking place as they were acted on by the broker.

Who can be implicated for Insider Trading?

To understand insider trading better it is necessary to understand who can be implicated in insider trading. Generally, insider trading revolves around members of an organization who possess material information. But it isn’t always necessary for you to be a member of the organization to be a part of insider trading. Important decisions that may impact the share price involves parties that may not work within an organization. Say for example A company planning to undergo a merger with another company will involve many third parties like bankers, lawyers, and other professionals who offer their services to the company. If they act on the information they receive they can be prosecuted for insider trading.

The implementation of various decisions taken by the company requires prior approval from the government. Hence government officials too can be incriminated for acting on the confidential decisions they receive while executing their duties.

Insider trading, however, is not limited to white-collar relations. Members of an organization or employees may share the information with friends or family or acquaintances. If this information that is yet to be made public is acted on they will also be prosecuted under insider trading.

Infamous insider trading cases

— Dilip Pendse

Dilip Pendse insider trading

Dilip Pendse served as the Managing director of Nishkalpa, a wholly-owned subsidiary of TATA Finance Ltd. (TFL). As of March 31st, 2001 Nishkalpa made a loss of 79.37 crores. This information was to be made public only a month later on April 30th. This information was price sensitive as it would lead to a fall in prices if leaked. Dilip Pendse was in access to this information due to the role he played within the company.

During this period Dilip leaked this price-sensitive information to his wife. In between this period, 90,000 shares which were held by his wife and a company jointly run by his wife and her father in law in Nishkalpa were sold in order to avoid losses. Dilip Pendse, his wife, and the company jointly owned by his wife and her father in law were found guilty of insider trading.

A penalty of Rs 500,000 was imposed on each of them and Dilip Pendse was banned from capital markets for three years. 

— Martha Stewart

Martha Stewart insider trading

(Snoop Dogg and Martha Stewart on the sets of their TV Show. In 2003 Martha Stewart  was charged for insider trading)

Martha Stewart is a prominent TV personality who has also won an Emmy for her work on the ‘Martha and Snoops Dinner Party’. In the year 2001 Martha Stewart owned up to 4000 shares of the BioPharma Company ‘ImClone Systems’. Her broker received a tipoff that the CEO of ImClone Systems sold all his holdings held in ImClone. The CEO did this as he received information that the FDA was about to reject one of ImClone’s cancer treatment drugs. Shortly after this news became public the shares of ImClone dropped 16% in one day.

Martha Stewart was able to save herself from losses amounting to $45,676. In 2004, Martha Stewart was convicted as the trade was made on the information that the CEO sold his stake, which was non-public info. Martha Stewart and her broker were announced guilty. She received 5 months in a federal correction facility and fined $30,000. The CEO of ImClone Systems was also convicted and sentenced for 7 years with a fine of $ 4.3 million.

— Rajesh Jhunjhunwala

Rajesh Jhunjhunwala insider trading

Rakesh Jhunjhunwala was probed by the SEBI in January 2020 on account of alleged insider trading. These allegations were based on the trades made by him and his family in the IT education firm Aptech. Aptech is the only firm in Jhunjhunwala’s portfolio in which he owns managerial control. SEBI also questioned Jhunjhunwalas wife, brother, and mother in law. This, however, is not the first time that Rakesh Jhunjhunwala has been embroiled in insider trading controversy.

In 2018 too he was questioned over suspicion of insider trading in the shares of the Geometric. Rakesh Jhunjhunwala settled the case through a Consent order mechanism. In a consent order, SEBI and the accused negotiate a settlement in order to avoid a long drawn litigation process. Here an alleged violation can be settled by the accused by paying SEBI a fee without the admission or denial of guilt.

Also read: Pump and Dump- The Infamous and Endless Stock Market Scam!

Other Controversial Insider trading cases

— Foster Winans

Foster Winans insider trading

Foster Winans was a columnist at the Wall Street Journal. Due to the reach of WSJ, the stocks that he wrote about would react accordingly. Winans then began leaking the contents of his columns to a group of stockbrokers who would position themselves accordingly to make a profit.

Winans in an interview with CCR, “One day, I met a stockbroker, Peter Brant, and was going to write an article about him. After a few months, that kind of fell beside the wayside. He one day said to me — that column you write is very powerful, it moves stocks, you are doing a great job, how much do they pay you, isn’t it terrible, only $25,000 a year, with all of the skill and talent that you have, if you told me what you were going to write about the day before it is published, we’d make a lot of money.”

Winans took the deal offered by Peter Brant and was eventually caught by the SEC after being involved in 24 influenced trades over 3-4 months. But in this case, the information was the personal opinion of R. Foster Winans. His defense argued in the courts that although what Winans did was wrong he still could not be considered an insider. This was because the case did not involve any insiders(people within a company or their relatives and connections).

He was still convicted as the information shared with the stockbrokers was not public until his column was published. Winans received a sentence of 18 months in prison which was later reduced.

— Barry Switzer

Barry Switzer insider tradingBarry Switzer was the football coach for Oklahoma in 1981. While at a track meet he overheard some executives talk about some sensitive insider information. This led him to buy shares of Pheonix Resources. By doing this Barry Switzer went on to make a profit of $98,000. Barry Switzer was later acquitted due to a lack of evidence. In this case, Barry Switzer would have been guilty if any of his players or someone he knew was related to the executives present at the track meet.

How to avoid being implicated in Insider trading?

After looking at the above it may be clear that dealing with data that is non-public could be just one step away from being accused of insider trading and hence become a victim of an unnecessarily long litigation proceedings. The following steps help in avoiding this:

-If you are an employee or are dealing with an organization in a role that involves dealing with sensitive data it is important that you are aware of who you share your data with. If you aren’t directly connected with the organization identify your sources ( whether they are in any way connected to insiders). Generally, organization employees and third-party players are required to sign a non-disclosure agreement. 

-Even if you receive data that is important to your trade, verify that the data you have received is public. Do this by checking reliable public sources. If you find yourself in a dilemma it is best to report the information received to the authorities.

-Do not go looking for non-public information about the company from its personnel or those who deal with the company. This will further put you at risk of being investigated if the information is leaked out. You may be accused of insider trading even if you only divulge the info you have received, even if it was overheard.

Also read: Harshad Mehta Scam- How one man deceived entire Dalal Street?

Arguments for Insider Trading being legal

Foster Winans the WSJ journalist argued for insider trading asserting “ The only reason to invest in the market is that you think you know something others don’t.” Arguments have been drawn on who is actually harmed because of insider trading. As your transactions take place with parties that have already decided on the position and want to sell or buy. The Atlantic even described insider trading as “ arguably the closest thing that modern finance has to a victimless crime.”

There have also been arguments made calling to legalize insider trading that involves dealing with negative information. It is because this is the information companies generally keep from their shareholders. Milton Friedman who received the Nobel Memorial Price in Economic Sciences in 1976 said, “ You want more Insider Trading, not less. You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that.”

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.

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.

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.

Intraday Trading vs Long-term Investing: What are Pros and Cons?

Intraday Trading vs Long-term Investing: What are Pros and Cons?

An overview of Intraday Trading vs Long-term Investing: The stock market is risky but equally rewarding. There are basically two ways by which people make money in the stock market – trading or investing. Here, you may either invest for the long-term or trade to build wealth through day trading (also known as Intraday trading). However, both these are two different approaches to make money in the equity markets.

When you invest in stocks for the long-term, it primarily means that you hold on to the investment for a longer period of time, probably between three to five years or more. In comparison, intraday trading means that you square off all your positions before the end of trading hours on the same day. You do not hold the shares for more than a day i.e. do not take delivery of the shares when you undertake intraday trading.

In this post, we are going to discuss the difference between Intraday trading and long-term investment. Here, we’ll look into different factors like holding period, capital growth potential, risks involved, and more. Let’s get started.

Differences between Intraday Trading vs Long-term Investing

1. Holding period

Long-term stocks are held for several years and any fluctuations in the short-term do not affect your investment decision. Here, holding period may vary from two years to even several decades. In comparison, in Intraday trading you do not keep any position open at the end of the hours on a trading day. A holding period maybe between just a minute to a few hours.

2. Capital growth

When the price moves in the expected direction, the trader will exit his intraday stock position. For example, if you have purchased 100 shares of ABC Limited at INR 50 and the price increases to INR 55, you will sell the shares and book the profits. Similarly, you will cut your loss in case the price decreases, using tools like stop loss.

However, with long-term investments, short-term price fluctuations do not affect your decision. The stocks are held for several years allowing you to build wealth through capital appreciation.

3. Risks Involved

There are inherent risks to intraday trading as well as long-term investing. However, the risks in day trading are higher as price volatility can be significant in just a few hours. Because daily market fluctuations do not affect long-term stocks, risks involved with long-term investments are lower. Here, investors have the potential to create wealth through dividends and price appreciation over the years.

4. Art versus skill

Day traders require technical skills to analyze and study market trends. Moreover, Intraday trading is also related to market psychology. On the other hand, long-term investing requires skills to identify good and reliable stocks. Here, investment decisions are primarily based on the business model, financial strength, and company philosophy.

5. Investor profile

Traders want to potentially earn higher profits from the daily price fluctuations. However, here if you miss the right time, it may result in huge losses. Intraday stocks are identified based on price volatility during the trading hours. On the other hand, long-term investors do not rely on trends and invest based on the fundamentals and value of the company over the years. They patiently hold on to the shares until the desired price levels are reached.

Let us now look at the pros and cons of intraday trading and long-term investing.

Pros and Cons of Intraday Trading vs Long-term Investing

— Pros of intraday trading

  1. While Intraday trading, substantial profits may be earned in a shorter period
  2. You require a lesser principal amount and enjoy benefits of margins.
  3. You do not have to lock-in your investment for the long-term enabling you to trade more frequently for higher profits
  4. Most reliable brokers like mastertrust offer margin trading on intraday stocks providing higher leverage for your capital

— Cons of intraday trading

  1. The price volatility increases the risk of losing money
  2. Knowledge of technical analysis is necessary and you cannot rely on tips received from others

— Pros of long-term investing

  1. Historically, when you invest in the equity market for a longer period, you are able to earn returns that are more than the rate of inflation, which allows you to build wealth over the years
  2. Long-term stocks benefit from economic growth resulting in higher revenue through an increase in consumer demand, which bodes well for an increase in its share price.
  3. Long-term investing not only provides capital growth through price appreciation but also allows you to earn more returns through periodic dividends.
  4. These days, it is very easy to invest in shares for the long-term through a stockbroker or online platforms.

— Cons of long-term investing

  1. There is an inherent risk of losing the principal in case the company does not perform as per expectations resulting in the decline of its share price.
  2. Share prices change from one minute to the next. Many times, the investment may be based on emotions rather than sticking to the fundamentals.
  3. Long-term investing means a long holding period that may last for three to five years or longer. This also means that you won’t be able to leverage your money to earn higher returns, from other alternatives.

Closing Thoughts

Both intraday trading vs long-term investing are proven ways to make money from the stock market. The decision to invest for the long-term or intraday totally depends on your requirements, financial goals, investment horizon, and risk profile. Further, here the diversification to allocate your money to various assets should be based on your financial goals.

Seek expert advice from professionals at mastertrust to know the best investment strategy to meet your goals. This stockbroker offers online broking, in-depth research and analysis, and investment advice at affordable charges. Open demat account and start trading today!

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.

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.

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!”

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”

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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.

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.

Stock Trade Settlement Process in India cover

Stock Trade Settlement Process in India: Trading & Clearing Cycle

Stock Trade Settlement Process in India: As Investors, we play the role of both buyers and sellers in the stock market. We indulge in trading activities to either purchase or sell shares. Although the mechanism may look simple with only a few parties involved, there are a number of activities performed by various other groups behind the scenes.  This is to ensure trading activities take place smoothly with minimal risk.

In today’s article, we’ll look into the stock trade settlement process in India. Here, we aim at understanding the Trade cycle, Clearing, and Settlement process while trading in shares.

Trade Cycle in India

NSE India

The Stock Exchange in India follows a ‘T+2’ rolling settlement cycle. The day the trade is executed is known as the ‘Trade Date’ and is signified as ‘T’. Every working day after the trade date is signified as T+1, T+2 and so on (weekends and stock exchange holidays not included). The trades in India settle on T+2 day.

Example: Mr. Ajay buys shares of company ABC on Monday. He buys 10 shares at Rs 1,000 per share. This activity is performed on Monday. Here Monday and the date associated is known as the Trade Date. It is signified by ‘T’.

  • On the trade date ‘T’, Rs. 10,000 is deducted from Ajay’s account and the broker provides him with a Contract Note as proof of the transaction. 
  • On T+1 day, all the internal processing of the trade gets worked out. 
  • On T+2 day, Mr. Ajay will receive shares of company ABC in the DEMAT account by the end of the day.

If in the above example Mr. Ajay had sold his shares instead of buying, then the shares would get blocked in his DEMAT account before T+2 day. They would be moved out of his DEMAT Account before T+2 day. On T+2 day proceeds from the sale will be credited to his trading account after deduction.

The example we went through above is what we, from the investor perspective, would experience while trading. We will now go through the process that makes this possible.

Process involved in the Transfer of Shares

The transfer of shares includes three processes.

1. Execution

Execution is when the order to buy/sell is completed by the buyer and the seller. An execution is said to be completed only when it is filled. This is after the trader places an order and based on the instructions of the order the broker fulfills the requirements of the order in the stock market. Only then the order is said to be filled.

2. Clearance

After the trade is executed the clearing process begins. In clearing process, it is identified how much money is owed to the seller and how many shares are owed to the buyer. Apart from identification trade recording, confirmation, determination of the obligation of different parties and risk assessment also take place. This process is managed by a third party known as a Clearing House. Clearing Activities take place on T+1 day.

Also read: Different Charges on Share Trading Explained- Brokerage, STT & More

3. Settlement

The stage involves the actual exchange of shares and money. Here the shares are moved to the buyer’s DEMAT Account and the money is transferred to the sellers trading account. These activities take place on T+2 days.

Participants involved in the Process

In the trading, clearing, and settlement stages “the Stock exchanges ensure a platform for trading while Clearing Corporation ensures the funds and security-related issues of the trading members and make sure that the trade is settled through the exchange of obligations. The depositories and clearing banks provide the necessary interface between the custodians or clearing members for settlement of securities and funds obligations”.

From the above short explanation of activities that take place, we will first look at what are the roles of different parties involved and link them to understand the procedure that takes place to ensure a clearer understanding.

1. Clearing Corporation

The National Securities Clearing Corporation Limited (NSCCL) is responsible for clearing and settlement of trades executed and risk management at the stock exchange. It ensures short and consistent containment cycles. The NSCCL is also obligated to meet all the settlements regardless of member defaults.

2. Clearing Members / Custodians

The trading members of the stock exchange place deals in the Stock Exchange which is moved to the NSCCL. The NSCCL transfers these deals to the clearing members. A clearing member is responsible for determining the position of shares and funds to suit the trade. And once it is confirmed the actual settlement process takes place.

3. Clearing Banks

The settlement of funds takes place through Clearing Banks. Every clearing member is required to open a clearing account with one of the following 13 clearing banks

  • HDFC Bank
  • ICICI Bank Ltd
  • Axis Bank Ltd
  • Kotak Mahindra Bank
  • JP Morgan Chase Bank
  • State Bank of India
  • HSBC Bank
  • Stock Holding Corporation of India Ltd
  • Infrastructure Leasing and Financial Services Ltd,
  • Deutsche Bank, Standard Chartered Bank
  • Orbis Financial Corporation Ltd
  • DBS Bank
  • Citibank.

The Clearing members receive funds in case of a pay-out in the clearing account or are to make funds available in the clearing account in case of a pay-in.

4. Depositories

We may not be thoroughly familiar with the term depository but are familiar with a related term called DEMAT Account. There are 2 depositories in India NSDL and CDSL. These depositories hold the investor DEMAT (Dematerialised) Accounts. Clearing members are also required to maintain a clearing pool Account with the depositories. The required securities must be transferred to the clearing pool account by the clearing members on the settlement day.

5. Professional Clearing Members

NSCCL admits a special category of members namely professional clearing members. PCM are not allowed to trade. They can only clear and settle trades similarly like the custodians for their clients.

Clearing and Stock Trade Settlement Process

Clearing and Stock Trade Settlement Process

(Source: AdityaTrading)

  1. Trade Details are transferred from Stock Exchange to National Securities Clearing Corporation Limited (NSCCL).
  2. NSCCL notifies the details of trade to clearing members or custodians who affirm back. Based on the affirmation, it determines obligations.
  3. Download of obligation and pay-in advice of funds or securities are sent by NSCCL to clearing members or custodians.
  4. Instructions sent to clearing banks to make funds available by pay-in time.
  5. Instructions to depositories to make securities available by pay-in-time.
  6. Pay-in of securities (NSCCL directs to debit pool account of custodians or Clearing members and credit its account to depository and depository do it)
  7. Pay-in of funds (NSCCL directs to the debit account of custodians or Clearing members and credit its account to Clearing Banks and clearing bank do it)
  8. Pay-out of securities (NSCCL directs to credit pool account of custodians or Clearing members and debit its account to depository and depository do it)
  9. Pay-out of funds (NSCCL directs to credit account of custodians or Clearing members and debit its account to Clearing Banks and clearing bank do it)
  10. Depository informs custodians 
  11. Clearing Banks inform custodians or Clearing members.

Also read: 8 Best Discount Brokers in India – Stockbrokers List 2020

Closing Thoughts

The above explained stock trade settlement process in India might look complicated but they work in perfect synchronization to ensure smooth functioning of the stock market. If we are to compare how far the markets have come since the 1960s and 1970s to today, the difference will be huge. At those times, the payments were still made with paper checks. The exchanges closed on Wednesday and took 5 business days to settle trades so that the paperwork could get done.

In comparison to the stock market not even functioning throughout the week and five days for the trade cycle, we can thank technological and procedural advances for the ease of functioning we enjoy.

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.

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.

Should Stock Markets Close Over Coronavirus Epidemic cover

Should Stock Markets Close Over Coronavirus Pandemic?

Should Stock Markets Close Over Coronavirus Pandemic?: A walk down memory lane, India just lost their second wicket as Sachin walks back after 6.1 overs. This moment from the 2011 World Cup final has been etched in our memories. With the two important pillars gone lets hypothetically imagine someone decides to call it quits and shuts the TV off. What new levels to your anxiety would you discover? Similar is the anxiety-driven plight of an investor on hearing the news of market closure in tough times.

Should Indian Stock Markets Close Over Coronavirus Epidemic sensex

( The Sensex Index showing a 34.22% fall from Jan 17th to Apr 03)

The stock markets, however, face stakes a million times higher. Ever since the Sensex summited at 41945.37 points on 17th January, it has fallen a total of 34.22%. The Sensex broke the max single-day fall a number of times, losing over 13% in a day ( on March 23rd) and ended at 27590.95 points as of 3rd April. After the government took additional measures by imposing a lockdown to fight Coronavirus, the ANMI ( Asociation of National Exchange Members) requested the SEBI to close the stock market.

This request was made due to the difficulty faced by employees of member partners to commute to work amidst the lockdown. The request also included that the markets should be shut till the depository and broking services are declared essential by the government. We can also see #bandkarobazaar trending on twitter but this was supported mainly to avoid further fall of the market.

Today we look at the historical market closures, reasons supporting a market shutdown and also why such an action may be detrimental.

Historical Stock Market Closures

Dating back to the 19th century the stock markets have been shut a few times around the world over dreadful occasions. The most infamous of these market closures being the 9/11 crash in the US, where the market was closed for a week.

stock market closure world war 1

HongKong had halted its trading in wake of The Black Monday crash in 1987 and Greece closed its markets for five weeks in 2015 during the economic crisis. Moreover, the stock exchanges have been forced to shut down a number of times during natural calamities too.

Nonetheless, there also have been periods of extreme difficulty such as The Great Depression of 1929, World war 2, and even the 2008 crisis of our time where the market remained open.

Should Stock Markets Close Over Coronavirus Pandemic?

Argument for closure of the market

One of the major reasons for the call towards the closure of markets has been to reduce the volatility of markets and panic selling. A closure of the markets will give investors a few days to catch their breath and reevaluate their positions instead of blindly following the market sentiments due to the COVID-19 pandemic.

— Why closure is required in the Current Scenario?

In the wake of the COVID-19 pandemic, social distancing has become a necessity. This would prove challenging for stock market employees and the employees of dependant services to risk their lives by venturing out to work. This may further escalate to the market being crippled if they are infected. 

Argument against the closure of the stock market.

— Investor confidence at risk

One of the major reasons against the closure of markets is that a market closure will further erode all investor confidence in a particular country. This will be caused due to the lack of transparency and data available to investors during the closure. In a time of crisis where investors are already panicking, a closure will only intensify their anxiety. This will increase the possibility of them selling out of the markets.

— Lack of liquidity

The effect the closure will have on the liquidity needs of individuals will also be severe. This is due to the fact that a number of individuals depend on trading for their daily income. Apart from this, investors depend on the stock market for liquidity. In a country like India, which is already troubled by the 21-day lockdown, the closure of stock markets will further intensify the liquidity issues. This is because a number of individuals have already lost their regular income by means of unemployment or pay-cuts. The stock market shutdown would further hurt them as converting their investments could have helped them through these difficult times.

Other Stock Market Closures around the world

— Phillippines

The Philippines Exchange shut on March 17th following the lockdown imposed by President Duterte. The Sri Lankan markets also followed suit. The Philippine stock exchange, however, suffered severe losses once it opened up two days after the closure. The opening day slashed 13.34%.

(Jeffrey Halley, a senior market analyst at Oanda Asia Pacific Pte)

— China

We also take a look at the Chinese stock market which was one of the worst-performing stock markets in the world before the crisis. During the crisis, however, the SSE Composite Index fell only 10%. This was despite them being the epicenter of the pandemic, whereas markets around the world shed a quarter of their earnings.

The COVID-19 hit China at a different time in comparison to the rest of the world. The markets closed on January 23rd (also due to the Chinese new year when china was still battling COVID-19)  at 2976 points and opened on February 3rd falling to 2746 points. During this period china had anticipated the effects and infused $173 billion into the markets but still suffered the loss.

However, the Chinese markets cannot be set as an example as only 4% of their market amounts to foreign capital. The rest remaining in the hands of the Chinese government, directly or Indirectly. Also, China is not known to release adverse data into the public eye. They have been accused of manipulating the actual figures of COVID-19 cases. They were also accused of suppressing the outbreak which then lead to a wider spread.

Also read: 21 Day Lockdown (COVID-19) – Is India headed in Right Direction?

Closing Thoughts

In this article, we tried to answer should stock markets close over coronavirus pandemic. In short, it could be assumed that investors around the world may forgive closures due to the COVID-19 outbreak.  This, however, does not offer enough validation in support of the closure. Thanks to technology and additional support in the form of ‘Work From Home’ continuity can be ensured.

In addition, the stock exchange can take notes from the BCP plans of RBI. The individuals critical to the RBI continuity were moved to a secure location. Here, everyone involved including the support staff (hotel etc.) were quarantined. They will even be working with hazmat suits, maintaining social distancing with a backup team too. Hopefully, the show keeps going and market closures do not add to the woes of 2020.

Virtual Stock Trading in India

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

Best Sites to Learn Virtual Stock Trading in India (Paper trading): Entering the Indian stock market can be a tedious job for beginners. First, you need to open your brokerage account (demat and trading account). This means that you have to pay the account opening charges and go through the complex documentation process. Further, as stock market trading involves market risk, you can always lose some money— especially, you are a beginner.

So, how to solve this problem? How to Learn stock trading in India without actually risking any money. The answer is by using virtual stock trading platforms.

In this post, we are going to discuss how to use virtual stock trading platforms in India. It’s going to be an exciting post. Therefore, without wasting any time, let’s get started. Here are the topics that we’ll cover today:

1. What is Virtual Stock Trading?

A virtual stock trading (also known as paper trading) is similar to the actual trading where you can buy and sell stocks. However, here no real money is involved. You invest only in virtual money. Such platforms that provide virtual trading facilities are called stock simulators.

When you register in these stock simulators, you will get virtual money (Say Rs 10 lakhs or 1 Crore) in your account. You can use this money to practice trading.

Stock simulators provide real-time stock data, which means that you can try out different strategies of trading in stocks just like the real world stock market, but risk-free.

Also read: 7 Must Know Websites for Indian Stock Market Investors.

2. How do virtual stock trading platforms work?

It’s a really straightforward process to use a stock simulator to do the virtual stock trading. Here are the steps required to start virtual stock trading in India-

  1. Open a free account (using your email-id) on a simulating platform (discussed below).
  2. Get instant virtual money in your account.
  3. Start buying/selling stocks like real trading scenarios.
  4. Monitor your portfolio and track profit/loss.
  5. Try different strategies and learn the trading basics.
  6. When you get enough confidence and experience- move to real trading.

3. What are the pros and cons of using the virtual trading platform?

Nothing is perfect in this world. Although there are many advantages of using virtual trading platforms (especially for beginners), however, there are also a few disadvantages. Let’s discuss them- one by one:

— Advantages of using Virtual stock trading platforms

  1. No need to open a demat/trading account or go through any documentation process.
  2. No real money is required to start virtual trading.
  3. Real-time market scenarios to try out different strategies and to learn the basics.
  4. Risk-free trading practice.
  5. Okay to make mistakes and take risks as there’s no real loss here.

— Disadvantages of using virtual stock trading platforms

  1. There’s no emotional attachment as real money is not involved. 
  2. You can quickly get bored as winning/losing virtual money is not much exciting.
  3. The real market scenario might be a little different than the virtual trading environment. (In the virtual trading platforms, participants take extra risks and bets than they would actually take in a real scenario.)

Also read: 7 Best Stock Market Apps that Makes Stock Research 10x Easier.

#3 Best sites to learn virtual stock trading in India.

1. Moneybhai

MONEY BHAI - Virtual Stock Trading in India

Website — https://moneybhai.moneycontrol.com/

Moneycontrol website offers Moneybhai. It is a free virtual trading platform where you’ll get Rs 1 crore virtual cash on registration which you can use to invest in shares, commodities, mutual funds, or fixed deposits on the platform.

At Moneybhai, you can also compete with fellow Indian traders by joining different leagues. There’s also a free forum on this website where you can ask your queries or participate in the on-going discussion threads.

2. TrakInvest

TRAK INVEST - Virtual Stock Trading in India

Website— http://www.trakinvest.com/

TrakInvest is a global trading platform that helps you to learn, develop and improve your investing skills. Currently, it provides a curated market data and news from 10 exchanges. It also offers beginners’ guides and videos, certification courses designed by industry experts and simulations for competing for rewards.

At TrakInvest, you can also track other traders and dig deeper into their trading activity (portfolio) where you can replicate their trades using the ‘Copy Trade’ facility. Overall, TrakInvest provides a simple and friendly platform for ‘Social’ virtual trading for beginners.

3. Dalal Street

DSIJ Virtual Stock Trading in India

Website: https://www.dsij.in/Stock-Market-Challenge

Dalal Street Investment Journal (DSIJ) popular virtual stock trading platform in India which helps you to understand the different trading nuances and to test your investment strategies.

On registration, you’ll get virtual cash of Rs 1,000,0000 to create your portfolio. At DSIJ, you can also discuss strategies with like-minded participants in the discussion group.

New to stocks? Confused where to begin?  Here’s an amazing online course for beginners: ‘HOW TO PICK WINNING STOCKS?‘ This course is currently available at a discount. 

Bonus: Investopedia stock simulator

Website: https://www.investopedia.com/simulator/

This is my favorite stock simulator.

Investopedia provides a FREE stock simulation platform where you can easily learn how to place trade orders (like market order, limit order, stop loss, etc), how to create a portfolio, how to create a watchlist and more. On registration, you’ll get $100,000 as virtual cash which you can use to trade. You can also compete with thousands of Investopedia traders/players on the same platform.

The reason why I didn’t place this platform in the top 3 is that you cannot trade in Indian stocks on the Investopedia stock simulator. Therefore, if you’re looking to learn virtual stock trading in India, then it might not be a good option. However, if you are comfortable with trading in foreign stocks like Apple, Google, Amazon, etc, then feel free to check out this simulating platform.

Closing Thoughts on Virtual Trading

Virtual stock trading in India is an excellent way to learn the basics of trading in the stock market. Using these platforms, you can try different investment/trading strategies without any fear to lose your real money. It’s always advisable to try paper trading (virtual stock trading) for a few weeks before directly jumping into the market.

what is stop loss

What is Stop Loss? And How it actually works?

A quick overview of what is Stop Loss (Updated Mar 2020): When most of the traders are busy deciding the entry and exit price of a stock, there’s one point that they most easily overlook. And it is stop-loss. In this post, we are going to discuss what exactly is a stop loss and understand all the aspects of stop loss in detail.

Although ‘stop-loss’ might sound a little complicated to the beginners, however, it is really simple to understand. Therefore, without wasting any time, let’s learn what is stop loss and how it actually works.

1. What is Stop Loss?

The Stop loss is a very powerful tool available to the traders/investors to limit their losses. It is an advance order to sell the shares if the share price reaches a particular price point. Therefore, it helps to automate the selling process in different market scenarios.

For example, let’s say that you bought 200 shares of a company ABC at Rs 100. However, you do not want to lose more than 5% of your money, in case the trade didn’t work out as expected because of any reason. Here, you can put a stop loss to automatically sell your shares if its price falls below Rs 95.

Therefore, by putting a stop loss, you are limiting your losses.  You are booking a loss at 5% and avoiding the scenario in case the trade might turn out ‘sour’ and the share price falls more than 5% (say 7 or 10%).

Stop-loss can be used for both short-term and long-term, but mostly effective for day traders. Further, most brokers do not charge extra for this type of order, making it more effective for the traders.

Also read: Zerodha Product Codes Explained- MIS, Stop-Loss (SL) & More.

zerodha kite stop loss place

2. Advantages of using a stop loss.

Here are a few of the top reasons to use stop loss

  1. Cutting your losses: Stop loss helps you to cut your losses and ensures you against a big loss. Many a time, your stock trade would have turned out to be quite ‘ugly’ if you didn’t place a stop order and the price falls steeply.
  2. Automation: Stop loss helps to automate your selling and hence you do not need to be present all the time. A stop loss will be automatically triggered in case stock touches a specific price.
  3. To maintain ‘Risk and Reward’: It’s really important to maintain risk and reward while trading. For a specific reward, you should be stubborn that you will take only a fixed amount of risk. For example, you can define that you’ll take only 2%, 5%, or 8% risk for getting that much profit. And, a stop loss helps you to maintain your ‘risk and reward’.
  4. Promotes discipline: It’s really important to detach yourself from market emotions. Stop loss helps you to stick to your strategy and promotes disciplined trading.

Also read: 

3. Stop loss in Intraday

There are a number of stop-loss strategies to be followed while trading. Here’s a video by Market Gurukul  that can help to learn some of them.

Note: If you want to learn more technical analysis, I would personally recommend you to watch Market Gurukul videos (Freely available on their youtube channel). You can learn excellent technical strategies there.

4. Should long-term investors use a stop loss?

A majority of the long-term investors do not use stop-loss in their long-term holdings. They argue that they do not mind short-term fluctuations in the market.

Moreover, it makes perfect sense not to exit a stock (which you have properly analyzed and researched for weeks), just because the market was volatile on a specific date. If you are investing for five years or more, there will always be a few days when the stock will get beaten by the market. Nevertheless, if you are confident about the stocks’ long-term performance, why to get afraid of a few short-term fluctuations.

Also read: The One Strategy Warren Buffett Will Never Use

Nevertheless, there is a minority of long-term investors who believe that it’s always a good strategy to keep your investments inside your risk appetite. They believe to decide a stop-loss price, even for their long-term holdings.

Personally, I do not use stop loss on my long-term holdings. However, this is my personal choice and not a piece of advice. I leave it totally up to you to decide which strategy works best for you.

5. Word of caution

There are a number of times when you have to remain cautious even if you placed a stop loss on your order.

Let’s say you placed a limit order to buy a share (along with stop loss) on a particular day. However, in case, the stock opened at a ‘gap-down’ in the pre-opening session. In such a scenario, your stop loss will never get triggered and you might have to bear some losses.

For example, let’s say that you placed a stop loss at Rs 95. However, during the pre-opening session, the stock opened on a gap-down at a price of Rs 90. In such a case, your stop loss will not get triggered, and hence, your sell order never gets placed.

Also read: How Much Can a Share Price Rise or Fall in a Day?

Another disadvantage of using stop loss is that it can get activated by short-term fluctuations.

For example, for the same scenario, let’s say that for the same stock, the share price first fell to Rs 94 and then renounced and went up to Rs 105. As you have placed a stop loss at Rs 95, your holdings will be sold automatically, once the stop loss price is triggered. Although even the stock rises after reaching Rs 94, still you have to book a loss as you would have left your position automatically.

Overall, the key point while choosing a stop-loss is that it should allow the stock to fluctuate day-to-day while preventing the downside risk as much as possible. A 5% stop loss for a stock with a history of 8-10% daily fluctuations won’t work out well.

Quick Note: If you are new to stocks and confused where to start, here’s an amazing online course for the newbie investors: INVESTING IN STOCKS- THE COMPLETE COURSE FOR BEGINNERS. Enroll now and start your stock market journey today!

6. Closing Thoughts

Although there are few limitations of using stop loss, however, it is a very useful tool to limit your losses. A big loss in one trading session might erode the profits of your last ten successful tradings.

Moreover, if you are a new trader and not have the skill yet to decide ‘quickly’ the price action of a share, then you should definitely learn the proper stop loss placement techniques.

That’s all. I hope this post on ‘What is Stop Loss? And How it actually works?’ was useful to you.  Please comment below if you have any questions. #HappyInvesting.

What is derivative trading

What is Derivative Trading? Futures & Options Explained

Hello readers. One of the most frequently asked questions by Trade Brains’ readers is what is futures and options trading. In this article, we are going to cover this topic and discuss what is derivative trading along with explaining futures and options. Let’s get started.

What are Derivatives?

A derivative is a device whose monetary value is extracted from the value of one or more primary variables called bases. Here, the bases mainly indicate underlying assets, interest rate or indexes. These underlying assets further comprise equity, foreign exchange, commodity, or any other asset.

As the value of these underlying assets keeps fluctuating, these changes in value can help traders to earn profits from derivative trading. The most common types of derivatives are futures, options, forwards and swaps.

This evolution of the market for derivative products like Forwards, Futures, and Options dates back to the compliance of risk hesitant economic advocates to shield themselves against volatilities emerging out of ups and downs in asset prices. In other words, it acts as a hedging apparatus against oscillation in commodity prices.

Post-1970, financial derivatives majorly came under the limelight due to thriving fluctuations in the markets. Ever since they seeped into the picture, these products have gained quite a popularity and have reckoned for about two-thirds of total transactions in derivative products by 1990.

In the class of equity derivatives, Future and Options have acquired more eminence than individual stocks. The trend is especially prominent among institutional investors who are frequent partakers of index-linked derivatives. Financial markets are marked by an escalated amplitude of volatility but with the utilization of derivative products, it is viable to partially or fully shift the price risks by remanding the asset prices.

As equipment of risk management, these generally do not determine the inconstancy in the underlying asset prices. However, by tapping in asset prices, derivative products reduce the influence of fluctuations in asset prices on the profitability and cash flow scenario of risk-afraid investors.

Factors driving the Growth of Derivatives

In the last thirty years, the derivatives market has seen an exemplary advancement. A huge variety of derivative contracts have been introduced at exchanges across the globe. Some of the factors which are surging the cultivation of financial derivatives are:

  1. Elevated synthesis of national financial markets with the global markets.
  2. Considerable development in communication amenities and acute declination in their costs.
  3. Growth of more sophisticated risk management devices, providing economic agents with a variety of choices.

Derivative Products

Derivative contracts have diversified variants. The most basic variants are Forwards, Futures & Options. 

1. Forward Contract :

A forward contract is a customized contract between two individuals, where settlement takes place on a definite date in the future at the current pre-compiled price. Other contract details like delivery date, price, and quantity are negotiated bilaterally by the parties. The forward contracts are generally traded outside the exchanges.

On the expiration date, the contract has to be settled by the delivery of the asset. If the party wishes to counterpole the contract, it has to imperatively go to the same counter-party, which often results in charging higher prices. In certain markets, Forward Contracts have become standardized like in the case of foreign exchanges. Such standardization reduces transaction costs and increases transaction volumes.

For example, let us consider an exporter who expects to receive payment in dollars three months later. He is exposed to the risk of exchange rate fluctuations. Thus, utilizing the currency forward market to sell dollars forward, he can clinch on to a rate today and diminish his uncertainty.

2. Futures Contract:

A futures contract is an alliance between two parties to purchase or sell an asset at a stipulated time in the future at a specific price. Futures contracts are special types of forward contracts that are traded on exchanges. Future Contracts also facilitate the elimination of risk and provide more liquidity to a market participant. The terminology of the Futures Contract consists of Spot Price, Futures Price, Contract Cycle, Expiry Date & Contract Size.

For example, if you buy/sell a crude oil futures contract, you are agreeing to buy/sell a set amount of crude oil at a specific price (the price you place an order at) at some future date. You don’t actually need to take delivery of the crude oil, rather you make or lose money based on whether the contract you bought/sold goes up or down in value relative to where you bought/sold it. You can then close out the trade at any time before it expires to lock in your profit or loss.

3. Options  Contract:

Options are of two types namely, Calls & Puts. Calls give the buyer the authority but not the obligation to purchase a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the authority, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date. Unlike, Futures Contract, the purchase of an Option requires up-front payment. 

Also read: What Drives Stock Returns? (Divergence Analysis)

Participants in the Derivative markets

There are four broad categories of participants namely Hedgers, Speculators, Margin Traders, and Arbitrageurs. Let’s discuss each of them now:

1. Hedgers: Traders who aspire to secure themselves from the risk involved price actions generally participate in the derivatives market. They have been called hedgers because they try to hedge the price of their assets by undertaking an exact opposite trade in the derivatives market. 

2. Speculators: Unlike hedgers, Speculators look for opportunities to take on risk in the hope of making returns. These stark contrast in risk figuration and market views sets apart hedgers from speculators.

3. Margin Traders: Dealing with derivative products doesn’t require payment of the total value of the upfront position. Instead,  depositing only a fraction of the total sum does the work and is known as Margin Trading. Margin Trading results in a high leverage factor in derivative trade because, with a small deposit, one is able to keep a large outstanding position.

4. Arbitrageurs: Derivative instruments are valued on the basis of the underlying asset’s value in the spot market. However, there are times when the price level of stock in the cash market is lower or higher in comparison to its price in the derivatives market. Arbitrageurs tap the opportunities and exploit these blemishes and disorganization to their favor.

Arbitrage trade is a low-risk trade, where a parallel deal in securities is done in one market and a corresponding sale is executed in another market. Such a trade is carried out when the same securities are being quoted at different prices in two different markets.

For example, in the cash market, let us consider the price is quoting at Rs. 1000 per share. On the other hand, it is at Rs. 1010 in the futures market. An arbitrageur would purchase 100 shares at Rs. 1000 in the cash market and sell 100 shares at Rs. 1010 per share in the futures market, thereby making a profit of Rs. 10 per share.

Also read: The Stock Market Cycle: 4 Stages That Every Trader Should Know!

Summary: Derivative Trading

A derivative is a device whose monetary value is extracted from the value of one or more primary variables called bases. Here, the bases mainly indicate underlying assets, interest rate or indexes. Further, the asset can be anything from stocks, commodities, currency to interest rates.

The most common types of derivatives are futures, options, forwards and swaps. In derivative trading, the traders take advantage of the fluctuating value of underlying assets to make profits.