# Playing Over-hot Underlyings with the Call Butterfly

A call butterfly is a fully hedged options trade …

… with an upwards bias.

It consists of four call options.

…and 2 sells.

One can play any overtly rising underlying with the call butterfly, without batting an eyelid.

Why?

Firstly, and most importantly, one is fully hedged.

Meaning?

At first look, the call butterfly seems market neutral as far as basic mathematics is concerned, that is +1, -2, +1, net net 0.

So, net net, one isn’t looking at a large loss if one is wrong.

When is one wrong here?

If the underlying doesn’t move, or if it falls, in the stipulated period, then one is wrong,…

…and one will incur a loss.

However, the loss will be relatively small, because of the call butterfly’s structural market neutrality.

And that’s magic, at least to my ears.

Method to enter anything flying off the handle with the chance of a small loss?

Will take it.

Then, also very importantly, the margin requirement is relatively less, when one uses the following chronology.

Then come the sells.

Upon the upholding of this chronology, the market regulator is lenient with one on margin requirement, as long as the trade-construct is market neutral.

Typically, for one butterfly, total margin requirement is in the range of 50 to a 100k.

Now let’s talk about what one is looking to make.

5k per single-lot trade-construct, if it’s fast, as in execute today, square-off tomorrow, or even intraday, if expiry is close.

10k if slow, as in 7 to 10 days.

If the butterfly is not yielding because the underlying is not moving, then one is looking to exit, typically with a minus of under 3k.

Just do the math. Numbers are great.

What kind of a maximum loss are we looking at, if things go badly wrong, as in if the underlying sinks?

5k to 10k.

Can the loss be more?

If the trade construct is such that the butterfly can even give 40 odd k till expiry, one could even be looking at a max loss of about 15k too.

Here’s an example of a call butterfly trade that can lose around 15-16k, but has the potential to make upto around 45k till expiry. The graphical representation is courtesy Sensibull.

I mean, it’s all still acceptable.

Tweaks?

Let’s say one is losing.

Sells will be in biggish plus.

Square-off the sells. Yeah, break the hedge.

They are losing big.

With some time to go till expiry, if the underlying goes back up, the buys gain.

What one makes off the trade is proportional to how much the underlying goes up.

It’s riskier. Correspondingly, profit potential is higher.

Money risked here will be up to double of the fully hedged version of the trade, and one could lose this amount if the underlying does not come back up appropriately and in time. Pocketed premium of the squared-off sells softens the hit.

Therefore, it makes more sense to pull this tweak with at least ten days to go before expiry, giving the underlying time to recoup.

Got another tweak.

Underlying’s on a roll, and you want to make the most possible off the opportunity.

Square-off the sells at a huge loss.

Let the buys, which are winning big, run for some part of the day.

Chances of them yielding more are very high.

If the underlying promises to close on a high, square-off the out-of-the-money buy before close of trade, and take the in-the-money buy overnight.

Risky, though.

You could lessen your risk, and increase your chances of taking most profits off the table by squaring off the in-the-money buy and taking the out-of-the-money buy overnight.

Square-off the overnight buy next morning on a high, or wherever feasible.

With this particular tweak, the trade becomes somewhat more like a lesser exposed futures transaction, at least for some time, after the hedge is broken.

There’s another thing one can do with the call butterfly.

One can adjust it as per the level of perceived bullishness.

If -1 and -1 are set at the same level, one trades for averagely perceived bullishness.

If one -1 is closer to the lower +1, and the other -1 is above this first -1, then one trades for below average perceived bullishness.

If one -1 is closer to the upper +1, and the other -1 is below this first -1, then one trades for above average perceived bullishness.

Anything else worth mentioning?

Volume. Need it.

Scaling up needs to correspond to one’s risk-profile, requirement, temperament and acumen.

One can make it an income thing by scaling up, during bull runs, or generally, just in case an up move is tending to pan out.

One can make the call butterfly do a lot of things.

It’s a very versatile trade to play a rising market, with low risk and low capital requirement.

🙂

# What’s on your mind, Mr. Nath?

Any questions, Mr. Nath?

Ya, I did have something on my mind.

I want to ask someone else.

Who?

Mrs. Market.

How are you going to do that?

I’ll just imagine that I could.

And, what’s the question, for the sake of discussion?

It’s not so much a question, really…

What is it then?

An observation perhaps…

…or a regret, maybe…

… not able to pinpoint exactly.

Hmmm, why don’t you just say it in words.

Rewiring?

Yes. The words coming out are “Couldn’t you rewire us earlier?”

Who’s the you?

Mrs. Market.

Doesn’t your rewiring depend upon you?

Yes, that’s why perhaps it’s more of a regret.

What is this rewiring?

We are taught to win in life, and to hide our losses, if any, under the rug. That’s how we grow up. And that doesn’t work in the markets.

True. That’s what needs to be rewired?

Yes, to win in the markets, we need to get accustomed to loss, small loss, as a way of life. Wins are few, but they are big. So big, that they nullify all losses and then some. We make these wins big by not nipping them in the bud.

How long did it take you to rewire?

Seven years.

What’s your regret? A shorter time-frame would have resulted in half-baked learning.

You are right, it’s not a regret then. Let’s just call it an observation.

It’s a very useful observation for someone starting out in the markets.

Let’s pin-down the bottomline here.

And that would be?

Till one is rewired, one needs to tread lightly. No scaling up…

…till one is rewired.

And how would one know that one’s rewired?

No sleepless nights despite many small losses in a row, because one has faith in one’s system. Resisting successfully the urge to take a small winner home…

…because it is this small winner that has the potential to grow into a multibagger…

…and a few multibaggers is all that one needs in one’s market-life.

# Control

Longevity.

We look for it in the markets too.

It’s natural.

Our first instinct is to survive.

Our second instinct is to survive well.

In the markets, both these instincts are addressed by our definition and understanding of control.

Are we control-freaks?

There’s no harm in admitting it, it’ll save us from losses.

Well, if we are, we’re better off seeking another career where control-freaking is an asset.

In the markets, it’s not.

Yeah, surprise surprise, Mrs. Market is gonna keep hitting our stops again and again and again, till we get tired of second-guessing her and just sheer quit.

Or, if we’re adamant too, she’ll just drive us bankrupt.

Are we giving her complete leeway?

Well, then she’ll drive us bankrupt anyways, with no stops in place.

Mrs. Market works against us when we exhibit extreme behaviour wrt control.

Let’s fine-tune control.

We’ll find the median for stop-size.

Something that’s workable.

We then move with her.

If she moves in our direction of the trade, we keep raising our stop with her, from a distance, quietly.

She’ll stop us out eventually, perhaps after some profit.

Good.

As in, workable.

When she goes berserk in our direction of the trade, we’ll ignore her and just let her do her thing.

Minimum control.

No definition of targets.

Stop is far away. It’s deep in profits, and being raised quietly. She’ll need to stop us out with a big swing against us. Yeah, deep in profit, we’ve kept a large leeway between stop and CMP.

We’re not micromanaging her.

Motive?

We wish to allow her to go even more berserk in our direction of the trade.

We’re daring her too, as in “come and get our stop, if you have the guts to fall this far”.

Control.

Very subtle.

We’re controlling our environment, while simultaneously ignoring her.

Very workable.

We’ll live long in the markets.

# Does your Exit hurt you?

Good.

Good?

Yeah. Good.

A proper exit – hurts.

Huh?

What about exiting on a high?

Sure.

Who’s stopping you?

However…

… who’s to say that the high won’t become higher?

Exactly.

No one knows.

So, while the uncertainty about the high becoming higher is still out there – smarty – why are we going to not let it play out?

Exactly.

We are going to let it play out.

Purpose?

A new high might be posted. We then make more profit.

Or, trade starts going against us, and we start to lose some of what we’ve gained.

Hurt starts.

When you can’t stand this hurt anymore – exit.

That’s a proper exit.

It’s leaving a bad taste in your mouth in the end. That’s when you know it’s a proper exit.

You’ve stomped out the possibility of a new high.

You’ve taken what the trade has to give.

You’ve let the hurt set in.

You’ve let the trade arrive at its logical conclusion.

Now, you are exiting.

Congratulations, you are exiting properly.

Continue like this and you’ll become a great trader.

What, have I let the cat out of the bag?

Don’t worry, one can say it a million times and 99% of all traders will still continue to exit improperly.

It’s human nature.

Human nature works against the mindset of a winning trader.

# Winning Marketplay, Anyone?

Two words.

Psychology.

Strategy.

That’s it.

Prediction?

No.

Prediction is not pivotal here.

We’re getting psychology and strategy right.

We want winning marketplay, right?

Prediction is for losing marketplay. Prediction might be wrong. That’s when strategy and psychology save you from big loss. A big loss can wipe you out. Thus, dependence upon sheer prediction brings a wipe-out into play. That’s why, prediction is almost always relegated to the bottom rank when one talks about winning marketplay.

We’ll travel with a hint of prediction, though. Just a hint. Doesn’t suffice for losing yet.

For entry purposes. Only.

Even this hint of prediction is bias-giving, though. Once we enter, we need to quickly lose the bias. Yeah, once we enter, we only react to what we see.

Our system has an edge. It helps us choose market direction. After that, psychology and strategy take over.

Meaning, after we’ve entered, there’s no more prediction in play.

So what’s in play then?

And you.

At this point, all your mental strength comes into play.

You do have a strategy, right?

As in, if x happens, they y, and if a happens then b.

You need a stoploss too.

You don’t have to show it. It can be mental, provided you don’t fool yourself into not using it when the time comes.

Sure.

Again and again.

Till you teach yourself how to.

Till you lose big. And are still left standing. To want to enter again.

Learning to take a small hit, again and again and again – that’s winning marketplay. Requires huge psychological strength. You acquire this. You don’t have to be born with it.

Now comes another punchline.

That profit-sapling just emerging…see it? You will not nip it in the bud.

You’ll still do it.

And again.

You’ll nip it in the bud.

Again and again.

Till you teach yourself not to.

It’s not easy.

95%+ of all market players continue to nip profits in the bud all their lives.

To allow the sapling to grow into a tree is the most difficult of all market lessons. Learning to let profits run is winning market play.

To want more profits, you have to risk some of your current profits.

No more risk, no more gain.

You want to quickly exit and post that 22% gain on your Excel sheet. Sure. Why can’t you let it grow into an 82% gain? God alone knows. That’s how the cookie crumbles. You nip the opportunity to make that 82%.

What’s with 82?

Just a random number.

Am trying to get a point across. There’s a run happening. In a direction. It’s crossing +22%. Fast. Momentum could see it to +102%, to then backtrack and settle at +82%. It’s a probable scenario.

Anyways, there are some smarties that risk 12 of the 22% and stay in the trade. Soon the 22 can even go beyond 82. Lets say it does. What do you do?

Nip?

No.

Not yet.

You let it travel. Momentum is to be allowed free leeway, till it halts. Let’s say it halts at 102. You say to yourself that the winds might change if 102 goes back to 82, and tell your broker to exit if 82 is hit intraday.

That and that alone is the proper way to exit a winning trade. You exit it with the taste of loss. You let the market throw you out. For all you know, the market might be in the mood for 152. You want to give the trade that chance. Thus, a momentum target exit while the move is still on would be less lucrative for you in the long run, or so I think.

Why?

Statistics are defined by big wins. These matter. Big-time. Allow them to happen. Again and again and again.

Now add position-sizing into your strategy. The ideology of position-sizing has been discovered and fantastically developed by Dr. Van Tharp.

In a nutshell, position-sizing means that an increasing trading corpus due to winning should result in an increasing level risked. Also, correspondingly, a decreasing trading corpus due to losing should result in a decreasing level risked.

Psychological strength that comes from experiencing first-hand and digesting learning from varied market scenarios, coupled with a stoploss/profitrun position-sizing strategy – that’s a winning combination.

Wishing you happy and lucrative trading!

🙂

# Dealing from a Position of Weakness

When you’re losing…

Why?

You lower the risk.

Is risk quantifiable?

You bet.

Risk is no abstract entity without a body.

When you’re losing, you either lower the magnitude of your stop, or lower the quantity of your one position.

Till when?

Till your corpus crosses par and then some.

Normal stop.

Normal quantity.

What is normal?

Depends on you.

What is normal for you?

That’s what goes.

Why the caution when below par?

Lots works against you at this time.

Sheer math for example. Downsizing sets this right.

Emotions.

Whoever’s got a remedy for those is king already.

You.

Your body-chemistry is affected. You’re sluggish. More prone to error. Nobody’s got a remedy for you, except you. Wait for your body to heal before trying out that perfect cover-drive, or what have you.

Winning or losing in the markets depends a lot upon psychology, chronology, systems, strategy, application and adaptation of style.

I like to call this “getting one’s meta-game together”.

Let’s go people.

Let’s get our meta-games together.

Then we can scale it up.

🙂

# The Pinch of Minuscule Loss

Did I drop the 200 bucks this morning?

Hmmmm…

…naehhh.

I don’t drop cash.

It was probably nicked from my rucksack.

You know what, this incident is pinching me.

I’m trying to brush it off.

Was I careless?

Yes.

Why?

God knows.

Over-confidence?

Maybe.

Do you see?

Even minuscule loss has it’s thought-process-baggage.

Minuscule loss pinches too.

Where does that leave us?

We’re market-people.

We’re faced with minuscule losses everyday.

Hopefully miniscule.

Meaning, hopefully everyone has by now graduated to putting stops.

Don’t underestimate the business of stops.

The human mind gets used to stops very slowly indeed.

Society teaches us to win at all costs. It doesn’t teach us to take a small loss and get out.

You can’t will a losing trade to win.

Society teaches us to book a winner and post it on social media immediately.

A small winner needs to be left alone, so that it can grow into a multibagger.

When we enter into the world of trading, we have to first swear to ourselves that we will start to program our minds from day one.

We need to teach our minds to let winners win some more.

And, we need to programme our minds to cut many, many small losers while they are still small, simultaneously and slowly getting immune to the pinch of minuscule losses by taking these in stride, one, after another after another…

…, till, the rest, as they say, is recorded as successful trading by History.

# I Don’t Want the Cancer

Are you hurt?

A.

Do you want the cancer?

B.

I do get hurt. Yeah, things hurt me. I’m an emotionally penetrable human being.

Fine. That’s me.

What I definitely don’t want is option B.

Who wants option B?

Can’t think of anyone.

Who gets option B?

Many.

But who?

Those who can’t forget the hurt. Yeah, people who’re unable to move on.

To forget the hurt and move on, simultaneously saving ourselves from the cancer, we need to forgive.

Someone’s misbehaved. Hurt you. Are you going to ruin your future days? No.

Forgive. Forget. Move on.

Just remove the mould in which cancer can potentially set in.

What makes you think it’s different in the markets?

A loss is a hurt.

Need I say more?

You can do the math.

# Dealing with “Situation Change”

When does a situation change?

For example, one could move on to a new field in finance.

Or, a particular goal could have been achieved. Now, one’s approach is supposed to incorporate predefined changes for financial strategy post goal-accomplishment.

Family dynamics could be responsible for situation changes too.

Sure, health. Never underestimate the power of health. It can make you, and it can break you.

Emotion. Fell in love? Going crazy? Outbursts? Hot flashes? Preggers?

Logistics? Moving? New girl-friend in New York?

Night duty?

Looking after your parents in their old age?

Wife wants to party all the time? Lack of sleep?

Promotion? Demotion? Fired? Jobless? Suddenly self-employed?

Gone single? Date-circuit? Got married? Had a kid?

Situation changes come to all. Not once, but many times in life.

Why are we talking about them?

They have an effect on our financial strategy. That’s suffices.

I’ll tell you how I deal with situation change. You can then BODMAS your way to your own approach, using my approach as a broad outline.

My first approach is to put on auto-pilot as many of my financial activity as possible. Going paper-less helps. Trusted auto-bill-pay channels are assets. Fixed-income generators with auto annual-alerts give financial security with zero involvement. SIPs and dividend pay-ins are further examples of having gone auto.

Then I look at what is left. What has not yet gone on auto-pilot? Can it? Ever? If there’s a chance, I go for it. For example, I’m currently developing a software robot to automate my forex trading.

Lastly, I size up what is not pushable into auto-mode. Do I want to keep it? Can I do without it? Weigh, weigh, weigh, scrap A, scrap B, C is something I just have to do, manually, period, so keep C. Eventually, C, G, P, X and Z are five manual financial activities I keep, having scrapped the others (that refused to go on auto) out of my life, since I didn’t consider them burningly essential. C, G, P, X and Z are the ones that’ll weigh me down when my situation changes. I’ve kept them on doable levels. Some are on semi-auto but do require manual intervention. The others are fully manual.

My situation changes.

My auto-pilot activities continue their smooth run. They are my assets, my stars.

P, X and Z are on semi-auto. I barely gather the energy to look into their manual aspects, just about managing to keep them going with reasonable results.

C and G are bogging me down. Can’t keep up. No energy. No motivation. Situation change has drained me. Relentlessly, I try. C has turned a loser. Beginning to feel sick. I shut down C. Losses.

G is sucking me out. Emotionally. It’s a winner, though. Can’t keep up. Can I turn it into semi-auto? It required constant monitoring till it started winning big. I’ll still need to feed in my stop daily. That’s the manual part. I stop looking at G. Problem with equity orders is that your stop has little technical value overnight. A new day requires renewed stop-considerations. Ok, five minutes daily for G. Open terminal, set trigger-stop 9.99% below opening price, close terminal, don’t look left or right, done.

Phew.

Save health. Don’t fall sick.

If sick, rest.

Recuperate.

Regain health.

Get used to new situation.

Normalize.

Gear up for next situation change, whatever it is, whenever it comes.

Gear up now.

# Dealing with Noise…the Old-Fashioned Way

There’s a sure-shot way to deal with noise…

Yeah, the best ideas in the world are – simple.

Let’s not complicate things, ok?

So, what kinda noise are we talking about here?

We’re not talking about audio, you got that right…!

The concept is related, though.

If you’re charting, you’ve dealt with noise.

Yeah, we’re talking about minute to minute, hour to hour or day to day fluctuations in a chart of any underlying.

Markets fluctuate.

While discussing noise, we are pointing towards relatively small fluctuations which generally don’t affect the long-term trend.

However, noise has the capability of deceiving our minds into believing that the long-term trend is turning, or is over.

Don’t let noise fool you.

When has the long-term trend changed?

When the chart proves it to you through pre-defined fashion. That’s it. You don’t let noise to get you to believe that the long-term trend has changed, or is changing. Ever.

Moving averages crossing over? Support broken? Resistance pierced? Trend-line shattered? ADX below 15? Fine, fine, FINE.

Take your pick. You have many avenues giving decent signals that the long-term trend has changed or is changing.

How about eyeballing? Works for some. Like I said, let’s keep this simple.

So let’s get noise out of the way.

Random numbers generate trends – you knew that, right?

You don’t need more.

Once you’ve identified a trend, that’s your cue to latch on to it.

We’re not talking about predicting here. We don’t need to predict. We just need to identify a trend, and latch on. That’s all. No predictions. Not required.

From this point on, two things can happen.

Further random numbers deepen the trend you’ve latched on to. You make money. Good.

Or, the next set of random numbers make your trade go against you, and your stop gets hit.

If your stop is getting hit, please let it get hit. Even that qualifies as a good trade.

What you’re not doing is letting noise throw you out of the trade by deceiving your mind.

So, here’s what you do.

Till when?

Don’t look at your trade till you’ve decided not to look at it. For the day-trader, this could be a couple of hours. For the positional trader, it could be days, or weeks.

By not looking, you won’t let noise deceive you.

If the trend doesn’t deepen, or goes against you, you lose the risked small amount.

Just remember one thing.

A loss has immense informational value. It teaches you about market behaviour patterns. It also highlights your trading errors. Many times, losses occur without any mistakes made by you.

Ultimately, if the trend deepens, you’ll have made good money, and can then further manage your trade after the stipulated period of not looking.

This is the sweet spot.

This is where you want to be, again, and again and again.

Sitting on a large profit gives you room to play for more profit by lifting your stop and your target simultaneously.

To reach this sweet spot again, and again and again, you have to position yourself out there and appropriately, again, and again and again.

This is also the nature of trading.

Wishing you happy and lucrative trading!

🙂

# And…How Much Connection Time Exactly?

Well, somebody’s got to ask these questions…

Don’t see very many around me doing so, so I just thought what the heck, let it be me…

This one’s not for all you test-tube jocks in the lab, you know…

Nevertheless, this is a very important question.

Answer it wrongly for yourself, and market-play will wreck your life – all avenues of your life, that is.

And, answer it correctly for yourself – lo and behold, you’ll actually start enjoying your market activity.

The human being ultimately excels in anything he or she enjoys doing.

This means that if you answer this question correctly, your market activity will yield you profits.

Told you. This question is important. Answer it.

Let me tell you how I’ve answered it for myself.

Before that, please understand, that my answer doesn’t have to apply to you.

However, for those who don’t know where to begin while trying to answer the question, it’s a start.

I detest giving Mrs. Market too much power. This was my clue initially, and I built up on this fact.

Initially, Mrs. M used to take over my life. She used to govern my emotions. It started to rub off on my family. I knew I had to draw a line.

I started to trade lightly – amounts which my mind could ignore. Then, I did one more thing.

I started to connect minimally. The was the key step, and it swung the emotional tussle in my favour. Mrs. M’s days of emotional control were over.

What does minimal connection mean?

You only connect when you have to. Period.

When you don’t have to connect, you just don’t.

I’ll tell you when all I connect to Mrs. M.

Order-feed – 0 to once a day. Very rarely twice for this in one day.

Connection for me is having my trading terminal on, and seeing live price-feeds face to face.

My market research is all offline, so that’s not a connection for me.

Squaring-off a position – again 0 to once a day. Very rarely twice a day.

Watching the live price-feed – 0 to once a day, and only if if I’m unclear about the buying-pressure versus selling pressure ratio.

That’s it.

When I don’t identify a potential trade in my offline research, I don’t connect at all.

When do I connect next?

Whenever I’ve identified the next trade, or a squaring-off situation, all offline.

There can be two or even three day stretches when I just don’t connect.

I use options, because they allow me this kind of play for Indian equities.

Why am I stressing upon the value of minimal connection?

Connection means exposure to the “Line”. You’ve met the Line before. If not, look up the link on the left (“The Line”).

Connection to the Line taxes your system, because market forces interfere with your bio-chem.

Keeping the connection minimal keeps you healthy, and you can go out and do other stuff in life, which rounds you off and refreshes you for your next market-play.

Keeping the connection minimal detaches you from Mrs. M. You are able to detach at will. This lets you focus on your family when your family members require your attention.

Keeping the connection minimal makes the task of swallowing your small losses smoother.

Lastly, keeping the connection minimal helps you let your profits run.

So, how does one define minimal?

Do the math, and come out with rules for your minimal connectivity, like the ones I’ve come out with above, for myself.

After that, while sticking to your rules for minimal connectivity, only connect to Mrs. M when you feel the burning desire to do so, like for example upon the identification of a sizzling hot trade, or for the order-feed of a trigger exit after a profit-run or something like that.

Yeah, you minimise even after your rules.

# Options Strategy – Entry, Stop and Exit

What are we doing with options anyways?

We are trying to play a market without needing to be with the market the whole time. Also, we are defining our risk quite exactly. The option premium is the money that’s at risk. You don’t have to lose all of it if the trade goes against you. You can bail out anytime and save whatever option premium is left. The option premium is the total you can lose in the trade. With that, you’ve done one great thing. You’ve installed a stop which will stay with you during the entire trade. Is that possible in any other segment in India? Nope. If my info is correct, stops have to be installed everywhere on a day to day basis. Not so the case with options. You have your stop with you, always.

That allows you to do other stuff. You can have an alternate profession, and still play options.

You don’t need to be afraid of the time element in options. You can trade them in a manner where the time element is rendered useless. I’ll tell you how.

Though you try and go with the overall long-term trend, you try and pick up an option during a retracement. That’s when you’ll get it cheap.

The idea is to buy cheap and sell expensive, right?

Secondly, give yourself breathing space. If the current month is well under way, pick up the corresponding option for the next series month. Give the trade 4-5 weeks to pan out in your favour.

A lot can happen over 4-5 weeks.

Thirdly, you’re trying to pick up out-of-the-money options, which seem to have gotten out-of-the-money as an aberration. These will be even cheaper. Like what happened to Tata Motors the other day. For no apparent reason, the stock drifted towards what was formerly seeming to be an unlikely support to be hit, around the Rs. 430 level. On the previous day, it was nowhere near this level, and didn’t look like reaching it in a hurry at all. An event in the US occurred, and Asia opened down, with the scrip in question falling to the support and bouncing off. At the market price of Rs. 430 – Rs. 435, if you’d have picked up the out-of-the-money option of Tata Motors for the strike price of Rs. 450, which was going very cheap, that would have resulted in a good trade.

Basically you are looking for such predefined setups – buying off a support / selling off a resistance, buying / selling at a defined retracement level, buying / selling upon piercing of a bar etc. etc. etc.

Let’s say you’ve identified a setup.

You’ve seen buying pressure, or selling pressure. Chances of repetition are high, you feel. You try and enter into the option at a time when the buying or selling pressure is off, and everyone thinks that this buying or selling pressure is not coming back.

In this manner you’ll get some cheap entries.

Now you have to wait, to see if your analysis is correct. If not, you’ll probably lose most or all of your option premium. Don’t be afraid of loss. It’s a chance you have to take. Without taking the risk, there is no chance of reward. You have to put yourself in line for the reward by going out there and entering into the option.

It’s possible that the scenario you imagined actually plays out. Let it play out even more.

You can exit in two ways. You could trail the market with a manual stop. This way you’ll be in the trade to perhaps see another day of even more profits. The downside is, that during lulls in the day, your stop could well be hit. The second exit possibility is to calculate an unusually high price, which is slightly unlikely to be reached. You feed in the limit order at this price. If this price is reached, you’re out after having made good money. Now, the scrip can go down for all you care. The downside is that the scrip can go deeper in your trade direction after you’ve exited, and that’s a little painful. The reason this latter scenario is often used is that the time-element keeps getting scraped off the selling price for the option as the series month approaches its end, and your exit on that very day at an unusually high price is more lucrative than you might think. You see, buying or selling pressure in your direction might or might not make itself felt again in the current month. If not, you’ve lost a prime opportunity to cash out at a high. Is it the high? You’ll never know. Therefore, you’ll need to try both exit scenarios and see which suits you more. Sooner or later, you’ll get a feel for both exit scenarios, and will be able to implement either, depending upon the situation.

That’s it for today.

Heavy?

It’s not.

Options are easy.

Playing options is like playing poker. it’s fun!

🙂

# We Like to Move it Move it

We do our home-work.

We know our risk-profile.

Our systems are in place.

We know the exact market-segments we are tapping into, and those we are leaving alone.

Our fund-allocation profile is at the back of our palms. We know where what is, and when. We know how to move it.

In our identified segment of activity, we have a feel for the underlying. We can sense it. We don’t need to preempt the underlying, but we can if we want to.

We are not afraid of small loss. It can happen again, and again, and again, as far as we are concerned.

We use stops. Definition of risk is our abc.

We try not to follow news. It gives us a bias. We trade the setup we are observing on the chart of the underlying. Everything else is “egal”, as they say in German, as far as the trade is concerned. We are not going to be biased while trading. We are going to take the setup, in whichever direction it presents itself.

We are nice to our families. We gel with them, and have enough time for them. We are happy in their company. They are not a distraction to our work, but a welcome change. We’ve got a substantial-sized emergency fund going for them, which more than takes care of their needs. This fund generates regular incomes for our families, and we don’t touch the emergency fund, come what may. We might keep adding to it, though.

We take high risks with a very small size of our networths, everyday. Our risks are calculated, and can generate high returns. They can also result in total losses. We practise sound money-management, and put ourselves in line for big profits, again, and again and again.

Yeah, we like to move it move it …

… from one trade setup to another, to another, to yet another, an so on and so forth.

# Emotion in the Marketplace – Enemy or Ally?

Either or…

… choice is yours baby.

I’m not going to pretend we don’t have emotions.

We do.

We need to make these work for us.

Everyone feels exhilaration upon winning.

We’re down after a loss.

Before you enter the marketplace again, dump all this somewhere …

… which, btw, is the most difficult thing in the world.

Didn’t anyone tell you that? What about your professor in financial college? Oh, I forgot, he or she never had his or her own money on the line, so he or she didn’t know this one.

Arghhhhhhhhhhh@#\$%^!

Don’t learn anything about finance from anyone who doesn’t have his or her own money on the line, and that too regularly on the line (((financial theory is worth mud unless it is realistic, applicable, and ultimately…profitable).

So, what is this “line”? [More about “The Line” here – https://magicalbull.wordpress.com/2012/01/13/the-line/ ].

The line is an invisible connection between the vicissitudes of the marketplace and our emotional centres in the brain.

The line gets activated once one is in a trade, or once one has initiated an investment.

Once the line has been activated, we need to deal with its effects upon our systems. For optimal efficiency, we need to nullify the effects of the line on our systems. After that, we enter the marketplace again.

So, acknowledge whatever emotion you are experiencing. Then deal with it.

Dump the emotion of a loss in a safe place, to be nullified by a big future win.

Dump the emotion of a big win in another safe place, lest it causes you to exit improperly and prematurely.

How does one nullify this particular emotion?

You see, your next activity in the marketplace can make you blow up, if there is any remnant hubris from a previous big win.

You close your eyes, tell yourself that under no circumstances are you going to suffer the humiliation of blowing up, you centre, focus, you identify the next trade, and then you just take the next trade, as if nothing has happened.

You have to work yourself around your own emotions. In the marketplace, emotions are your allies only if and when they are properly dealt with before the next market activity.

Loss can lead to depression and ultimate exit from the marketplace. One needs to understand and accept the concept of taking small losses. Why small? Why not small? You can define your loss. You can cut it when it’s small. Once one has understood and accepted the idea of taking small losses, these won’t bother you any more. That’s how you set yourself up to win big. Big wins, unless dealt with properly, lead to hubris, which can cause one to blow up permanently. We work ourselves around the negative potential of big wins through visualisation.

Once you’ve sorted out the emotional angle…well, just take the next trade. Don’t wait. Just take it.

# One Up on the Romans

Sometimes, words are hard to come by.

Like now.

It’s a dry spell.

Happens.

At other times, well, they burst forth as if a geyser’s exploded.

Then, I’m not able to stop their flow.

That also happens.

Welcome to the dual-natured environment of Earth.

While we’re steeped in this duality, there’s no option but to get used to it.

One can always go on to then master it.

Oh, I forgot, that’s optional.

I’ll tell you what I’ve done to master such fluctuating fortunes, as far as word-flow is concerned.

Two simple steps, that’s all.

When we’re dry,…, we’re dry. No PhDing over the fact that we’re dry. We’re just dry. Period. Accepted. Digested. We just go on to do other stuff. There are millions of other things that grab our interest on this dual planet.

When we’re up and running – that’s just it – we’re up and running. No PhDing over why we’re up and running. We let the flow happen. We can decide to make it happen even more. That’s optional…, but we don’t stop the flow… till the tap dries itself out.

Similarly, you can experience a string of losses in the markets. Losses make you hit your cut-off. A cut-off is a cut-off. You don’t keep on trading. Nature’s telling you to lay off till your mind and body align themselves with the flow of the markets again. Just do other stuff till you’re mentally and physically back.

On the other hand, when profits run, they can really run. PLEASE LET THEM RUN. Don’t PhD about the run. Let them run till they dry out.

When in dualism, the idea here is to first live through dualism, in order to understand its nature.

We’re one up on the Romans, though.

We’re trying to be masters over our fluctuating dualistic environment.

Yeah, in the markets, we’re getting through losing spells with minimal damage.

Simultaneously, we’re maximizing the potential of profit-runs.

That’s what we’re doing.

If not, then that’s exactly what we are going to do.

Cheers

🙂

# The Art of Emotional Recycling

Taken a hit?

If yes, at least admit it… to yourself and for your own sake.

People take hits at various times in their lives.
That’s the way of the market.

That’s how it teaches us to make money next time.

Think of your loss as tuition fees.

In my opinion, the best way forward is to take lots of small hits in the first seven years.

Then, in nine cases out of ten, you won’t fall for the big ones.

Big hits can decapacitate a player, especially when they come late, since there is no time for full recovery. Besides, emotional breakdown at a late stage is very difficult to get out of.

Make it a point never to take a big hit.

That’s only possible, if at any given time, the capital that is risked is within reasonable limits.

Let’s say you risk not more than 1% of your networth at any given time. What’s the maximum hit you will take at one time? Right, 1%.

That’s bearable.

That’s something you can shake yourself out of, and move on.

Moving on is a huge quality to possess in the markets.

Taken a hit?

All this while, you are putting any remnant emotional hurt in cold storage.

Yeah, there’s a certain portion of emotional hurt that won’t be nullified by family time, vacations, hobbies etc. We’re talking about the hurt to your ego. Only a big win will wash that away. Only then is your emotional recycling complete.

Put yourself in line for that win.

After a hit, rest, recuperate, grab your wits, focus, and…

… put on the next trade.

# Shaken, and not Stirred, Mr. Trader…

Does this shake you?

Please don’t let it. Models are meant to crumble.

Your belief in your model might be shaken, but you are not stirred, right? Helooooo, Mr. Trader, are you there?

Let’s get this straight – you are not stirred. You stand solid as a rock.

What allows you to do so?

Firstly, your safety net stands. Meaning, nothing’s making your safety net crumble. That’s the first thing you do as a trader – construct  a safety net that stands. Your safety net generates steady income and affords your family a comfortable lifestyle. Before that happens, not a single trade is pulled.

Secondly, ever since your safety net has been standing, you have been trading lightly. You’ve been chiselling away at this trading model, but are still a little uncertain about it, and thus, you’ve been going light. It’s recent crumbling has given you losses – which are also light. You are able to swallow such losses easily, since their magnitude is digestible. You’ve been very sensible in not scaling up prematurely.