# 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.

🙂

# Focused Diversification : Mantra for all Times

I’m more into focus.

One can focus on one thing at a time.

Agreed.

What if after that one thing starts running, it doesn’t require any more focus?

Wow.

Then I focus on another thing.

Get it running.

Then another.

Till my focus window is full.

Let me tell you about my focus window.

I focus on cash, debt, equity, forex, gold, real-estate, arbitrage, and options.

With that, my professional focus in finance is full full full.

I get something running.

That’s it.

Then I don’t need to be with it. Mostly.

Let me run you through.

1). Cash – Bind it in a worry-free and accessible manner. Done.

2). Debt – Study the underlying very thoroughly. Reject 10 underlyings. Take up the 11th which passes all criteria. Be happy with a slightly better than FD-return. Done.

3). Equity – Invest for life. Study till you drop the stock or take it up. Only invest in what meets all criteria and offers margin of safety at time of investing. On top of that – SIP (systematic investment plan). Done.

4). Forex – Get a software robot to trade it for you. Or some human-capital. All available online. Requires a bit of fine-tuning. Keep tuning till you start making a return. Done.

5). Gold – Buy physical gold. Research your source. Needs to be impeccable. Bullion. Coins. SIP. Accessible. No jewellery. Done.

6). Real-estate – Make your real-estate yield you an income. Regular income? Done.

7). Arbitrage – Understand what this is, and why it gives you a tax benefit. Get an online MF account going with Kotak MF or DWS. Divert some funds into their arbitrage MF, either or. I prefer Kotak. Monthly dividend payout option. Done.

8). Options – Get the option-strategy going. You don’t require a desktop. Mobile is sufficient. All you now need to do is take care of square-off. On mobile. This means a slightly higher level of engagement than the above avenues. Only slightly. Are you ok with that? Fine. Done.

In a flow, it’s all doable.

And, you remain focused.

Why all this?

Times demand it. You never know what might come in handy, and when.

Yeah, times are tough.

However, you are tougher.

To use Nassim Nicholas Taleb’s terminology, you are antifragile.

# Making Sense of Losing Battles

Winning gets boring after a while.

Unbelievable, but true.

However, losing continues to pinch, time after time.

That’s the key difference between winning and losing.

Life’s bipolar game is skewed more towards the pinch of continuous loss than towards the continued pleasure of winning.

Get used to losing… but, lose small.

Win big. Don’t nip a small win in the bud and thus stop it from becoming a big win.

Sometimes, you identify losing battles.

These are areas where you’re just not able to win.

What do you do with a losing battle?

Walk away. One option. Weigh the odds. If your walking away impacts no one, and simultaneously betters your existence, yeah, this is a very valid option. For example, one walks away from a losing trade.

Fight. Second option. You’re not beyond your stop, whether in a trade or in life. You fight, to save the battle, and perhaps to win.

Learn. Third option. You’re not able to get away from the losing battle, because your exit impacts something or someone. You hang on. No choice. Your pain teaches you big things. You learn. Sometimes, such a big losing battle suddenly turns into a glorious win. That’s because all the lessons from the scenario have been learnt. Enjoy, you deserve it.

Devolution. Not an option. Don’t allow your losing battle to devolve you into a demon.

Incorporation. Very valid option. Incorporate the learnt lessons from your losing battles into winning strategies for other battles in life.

Cheers.

# The Market Aha Moment

What is an Aha moment?

Any ideas?

Simple. It’s when you go “Aha, so that’s what it’s like!”

Or “Aha, so that’s what it’s supposed to be!”

You’ve understood something big. Finally. You see light. That’s an Aha moment.

The human being likes to be happy.

Professional happiness adds to our well-being.

To be professionally happy, you need to be doing something during which you forget about time.

What is this something for you?

Let’s assume you’ve decided upon a profession in the markets. The next question is… which market?

Which market draws you out fully? Which market consumes you? In which market do you perform the best? In which market are you happy?

Why isn’t your Aha moment coming here too?

Well, Aha moments aren’t for free. You have to struggle for them.

Start trying out different markets.

See what gives you a kick.

See where you have a natural flair.

See what lingers.

Hit and try.

Try everything if you must.

Eventually, something will speak to you.

You’ll want to be in one particular market, perhaps two.

Aha.

I’ll tell you how it went with me.

I started with Equity.

Fluked a few. Made some money. Bet bigger. Thought I was good. Won some more. Bet really big. Lost huge. Thought to myself – no more Equity.

Then came Gold and Silver. Did ok. Found it boring. No more Gold and silver.

Tried Private equity. Did ok. Boring.

Arbitrage. Boring. But, an avenue for parking.

Real estate. Corrupt.

Commodities…didn’t get a kick. The delivery option always loomed over my head. What if I forgot to square off?

Stock futures. Got hammered. No more.

Foreign stocks. Time difference killed my evenings. Out.

Foreign mutual funds. Expense ratios were sky-high. Slugged it out for a while, but then finished it off. Lost.

Structures – broke even, then won a bit. Got bored.

Debentures. Only do short term ones, to park funds. No kicks. Debt is boring by default.

Mutual funds. Yeah, well, did my fair bit of them. Did excite me, since they were connected to Equity. As of now, there’s just light MF activity.

Stock options. Lost a bit, but didn’t actually get hammered. Gave me a bit of a kick. Well, it was Equity related, so no wonder. Started interfering with my second Equity stint. I let options go.

Second Equity stint. Did ok…ok…ok…lost a bit, won a bit, was enjoying it, when suddenly…came Forex.

Forex…whoaahh…I loved it. Swept me away. Technology, charting, skill-set, I wanted to be here. Aha. Huge leverage, though. Risk. This had to be my second game, not my first. Yeah, safety first, always. Alright, what would be my first game? Yeah, what would be my bulk game?

Equity of course. I understood it and enjoyed it. I’d done ok. Had leant lessons. Knew how to handle it. Infrastructure was in place. Aha. Nailed it in the third attempt.

So and thus, I found my games upon my Aha moments. That’s where I am. Don’t plan to do anything else.

Work towards it.

# Moving away from the Greeks

I’ve never been to Greece.

I have nothing against people from Greece.

I don’t like Greeks, though.

Yeah, I’m an options player.

The Greeks I don’t like are options Greeks, he he he…!

What, you thought I didn’t like actual Greeks?

Come on, I’m sure I’ll love Greece and actual Greeks!

When you don’t like something, you can try to go around it.

I don’t need options Greeks to play options. I’ve found a way around the Greeks.

I’m sure others have discovered this too, because truth is truth.

Let me tell you about it.

You’re buying in the direction of the long-term trend.

You’re buying (calls / puts) after a significant correction / rally level has been hit.

You’re buying post a small move in the direction of the long-term trend, after the correction / rally level has been hit.

You’re buying out of the money to compound the cheapness.

You’re not booking without a very solid reason, once the trade is running in your favour.

You’re trying to book (deep) in the money.

You must, must, must let your profits run as long as you can. This is the toughest part, but also the most essential one.

That’s all.

No Greeks.

Just common sense.

# So… Where do Options Fit in?

I’m on the move.

I play the markets.

How do I combine these two facts?

Life didn’t give me a desk job.

It did give me an appetite for risk, though.

Another two facts to be combined…

I like doing new stuff.

I don’t like following old norms.

You got it, another two facts…

I like breathing easy.

I want to participate, though.

I don’t mind losing… small…

… as long as I can win big too…

… without risking too much…

… facts, facts, facts.

What’s the one common denominator?

Options.

What do options mean to me?

– an auto-stop that doesn’t need to be fed in daily.

– low risk market participation.

– freedom to be on the move.

– freedom to not look at the markets for many days in a row.

– implementation of new poker-like strategies with huge reward : risk ratios…

– … for which the price is time-component corrosion of the option premium.

– peace of mind.

– the satisfaction that markets don’t rule my day.

– a very challenging arena that pushes my faculties to the maximum.

– an avenue that teaches me about singular stocks, their nuances, how they move, basically their nervous system… this is invaluable knowledge, which no university is capable of teaching.

I could go on.

Discover Options.

# 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 Setup El Cheapo

What are the basic ingredients of a cheap options setup?

We’re not bothered about what the underlying is.

We’re outlining in general.

A correction / rally needs to have taken place.

The correction / rally level needs to be significant.

That’ll account for the cheapness of the option.

I suppose it’s obvio, but I’m still saying it nevertheless, that you’re going to be trading in the counter-correction or counter-rally direction, but in tandem with the overall long-term trend.

Then, a slight move needs to have started in your trade direction after this significant correction / rally.

That could account for correct choice of trade direction.

We need just one more ingredient.

Can you guess what that is?

Yeah, breathing space.

Buy an option which has at least 3-4 weeks left till expiry, if not more.

That’s it.

It’s as simple as that.

Lucrative ideas are simple. There is nothing complicated about them.

Lose your sophistication and / or complicatedness. You’re not going to make it big by being sophisticated or complicated. These two characteristics will negatively affect your trading. Flush them down the drain.

Be simple.

🙂

# 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!

🙂

# That Thing about High Growth

Panipat, India, 2004…

The Asia-Pacific Head’s speech was intriguing. I still remember it, even though it was delivered a decade ago.

He’d come to inaugurate his bank’s branch in our town. He said that he loved opening new branches in the middle of chaos, where he can barely manage to park his car, and where there is just about an iota of order amidst disorder.

We were puzzled, and I believe one of the invitee’s even ventured asking why. “That’s where 8%+ growth exists” replied he, or something to that effect, and his words stamped themselves in my memory.

Cut to 2014.

Look around you.

Can you find any corner in the world, where high growth is linear?

Very low single digit growth can be linear, yes. In such countries, there are systems, that check short-cuts and mal-practices. Governments are overall honest. Social security systems are up and running.

There is some element or the other of a banana republic to any really high-growth economy you find today. You don’t really know what’s cooking in China’s soup, do you, behind the media-ban? Brazil’s let so many starve to host a successfully organised world cup. How much of Russia is about mafia, and crime? And, India might be a democracy, but you just need to look at the inflation and deficit numbers to figure out that something’s off. We’ve just gone through the BRIC nations, prime examples of high non-linear growth.

Let’s not grieve about what all is wrong with high-growth nations. Let’s look at what we do have going in our favour. What’s common to such nations?

– The fact that growth comes in spurts, when some conducive event occurs, like a sound governance stretch.

– The fact that these economies are all highly volatile.

– The fact that we don’t need anything else – to trade them.

Yes, we are going to trade such economies. Regular volatility, both ways, is what a trader wants.

You can invest in such economies if you want to, sure. In that case, you’ll need to use your common-sense and not believe every balance-sheet that is being presented to you. You’ll need to read between the lines at every step. Some people are good at that.

I’m more comfortable trading a volatile market.

Thus, I really don’t care why a Ranbaxy might be poised to go down. I’ll just be looking to purchase a cheap Put upon noticing that a key support level has broken down.

At the same time, I couldn’t care less if an Infosys is just about to disclose stupendous numbers. I’ll just be looking to purchase a cheap call based on a technical level being pierced towards the up-side.

That’s the thing I love about trading. You don’t need to ask more than a few basic questions before taking the plunge. Also, with avenues like options now being liquid both ways, risk is exactly defined and relatively low.

The thing about high-growth economies is that you can play them well enough with options.

Wishing for you happy and safe trading.

🙂

# Connection & Disconnection

Sizzling hot stuff is best kept at an arm’s length … … something I learnt along the path … …

You reach for it at a conducive time, do what you need to do, and then you let it be. This way it doesn’t burn you.

When you’ve let it be, you’re not thinking about it. Your mind has switched off from it. It is utilising its resources to do other stuff … … till it’s time to work with your sizzling hot stuff again.

Now replace sizzling hot stuff with Mrs. Market.

There’s no doubt in my mind that Mrs. Market can burn you. You need to work with it in a manner that it doesn’t.

You’ve understood that whole deal about the establishment of an emergency fund. Such a fund will render any burns only temporary. You have to have an emergency fund going first up, before you enter Mrs. Market. The income generated from this fund needs to cater for the basic requirements of your core family. Period.

Ok, good, so now you’ve got your protective gear on. Till you’re getting it on, you are absolutely disconnected from Mrs. Market.

Now let’s talk constant connection and disconnection.

Why allow something or someone to control your moods?

No!

You are absolutely not giving Mrs. M that much power.

Therefore, play small.

How small?

Small enough to not lose any sleep over Mrs. M.

Play with stops. These allow you to disconnect from Mrs. M and focus on other work. Other work is as important as Mrs. M, or perhaps more important. Yeah, show Mrs. M her place in your life. This way she’ll behave herself. Giver her any more leeway, and she’ll take over your life, and you don’t want that, right?

So, connect to Mr. M, do your work, place your stops, and disconnect.

Don’t think about Mrs. M till you connect to her again.

The period in between connection and disconnection is your time. Use it for any activity that has nothing to do with Mrs. M.

Day in, day out.

# Satisfying One’s Video Game Urge

We’re all kids on some level.

Do you remember when video game parlours hit your town?

We used to pretty much storm them, and blow up a lot of pocket money.

Do you remember the Gulf War (1991), and how it was portrayed on television like a video game?

If we don’t click a button for a day, we have an urge to click buttons. We get withdrawal symptoms.

Cut to the markets.

The marketplace today is at your fingertips. You can contol your interaction with a few button-clicks.

What’s the inherent danger?

More and more clicks, of course.

Your circumstances allow you to get as much action as you please. Play the markets to your heart’s content.

Is that good?

Depends.

What this does is satisfy your craving for action.

It also generates fat brokerage for your broker.

Volume does not necessarily translate into profits. So, it’s not a given that you’ve made more money by trading more.

The inherent danger is that your A-game is threatened by the extra action.

Never let anything threaten your A-game.

For example, if your A-game is investing, the extra trading action might confuse you, and you might start treating your investment portfolio like a trading portfolio.

Over a few months, your investment portfolio will then actually start looking like a trading portfolio. Does that solve your purpose?

No.

Nobody’s asking you not to get your daily shot of button-clicks. It’s a free world. Go, get your daily dose. Fine.

However, anyone with common-sense will ask you to keep your A-game intact. Your reckless button-clicking, thus, needs to be channelized, and should not blow over to ruin your A-game.

Welcome to the world of options, as in the trading instruments called “options”. Fire away, satisfy your video game urge. There are cheap options, and there are expensive options. Move amongst the cheaper ones. Satisfy your video game urge. It doesn’t matter if you lose money. The sums in question will be small. At least you’ve gotten all your impulsiveness out of the way. Now, when you approach your long-term investment portfolio, you are not brash, but focused.

Can drain you. Life might become moody. Kids and family would then bear the brunt of your trading hangover.

Worth it? Naehhhh.

So what do you do?

If trading’s your A-game, satisfy your video-game urge on an actual playstation or something. Use your imagination. Play the keyboard. Write. Whatever it takes for you not to …

What’s the thin line between normal trading and overtrading? How do you notice that you are overtrading?

Energy reserves. You know it when energy you’ve reserved for something else is seeping into your trading. That’s when you are overtrading.

You see, so much in this field is not mathematical or formula-based, but feeling- and art-based. Discovering the thin line between normal trading and overtrading is an art.

Frankly, even stock-picking is an art. You can go on about numbers, and trendlines and blah, blah, blah, but fact remains that ultimately and in the end, picking a multibagger is more of a gut-feel thing.

While trading, you’re looking for spikes. When and where is the next spike going to happen? Ultimately and in the end, that’s also a gut-feel thing.

In the marketplace, apart from needing to be technically savvy, or needing to be a number-cruncher, one needs to be an artist too. Yeah, the artist’s touch binds the game together, and makes it enjoyable to play.

# R&D Experimental Action – BHEL – Nov 30 2012

Scrip – BHEL.

Currently Market Price – Rs. 232.10.

Experimental Action – Buy 240 Call Option (expiry Dec 27 2012) now.

Rationale – is explained in the chart given in this link : BHEL – PATTERN BUY – NOV 30 2012.

Disclaimer and Disclosure – Technicals are gauged and shown using Advanced GET 9.1 EoD Dashboard Edition. I entered this trade around 11:30 am today. Opinions given here are mine only. You are free to build your own view on the stock. I bear no responsibility for any resulting loss, should you choose to enter this trade.

Upside – roughly > 2 times the option premium (estimated). Estimation of the upside here could be considered an art, roughly based on the chart patterns at hand, coupled with my interpretation of suggestions by the software OptionScope Version 9.1 by Equis international.

Thus, reward : risk for the strategy discussed is rougly > 2 : 1 (estimated).

Cheers. 🙂

# What U Gonna Do When They Come For U?

what u gonna do…

… when they come for you?”

Lots of bad boys floating around.

They make a beeline for an underlying, for example Gold. Hike up its price. Entice you to enter at a peak. They cash out. You, the slow poke, are left high and dry.

Then the bad boys gang up and short the underlying simultaneously. Price tanks. From one day to the next, you are sitting on a large loss. You get out, disgusted.

Don’t make yourself vulnerable to such bad boys. Get your strategy right.

Buy at strategic points. If you are buying at dips, do so at pinpointed levels, like Fibonacci ones. You can also buy when a resistance is broken. Or, you can buy when a high is taken out with volume. Don’t buy above that. Meaning to say, that’s the vulnerability cut off. After that, you expose yourself to the bad boys, because you don’t have any margin of safety after that point. Through your actions, you activate bad boy zone.

On the short side, go short at strategic points in a rally. That’s where margin of safety is maximum. You can also short when a support is broken. Or, you may go short when a low is taken out with volume. Below that is bad boy zone.

At times, the human being likes the thrill of being in bad boy zone. Got me there, I like it too. Only sometimes. In bad boy territory, you need to be light. Don’t carry too much cash in your pockets when they come for you. In bad boy territory, do options. Options are your best friends here.

The advantage of operating in bad boy territory is that every now and then, there’s a jackpot for the taking. There’s no telling how far bad boys take an underlying in a particular direction. Where there’s risk, there’s reward. Out of ten option trades you put on, at least two or three should hit the pot if your research is good. That’s all you need.

In bad boy territory, the only position you want to be in is about showing the jackpot in the one hand and the finger from the other. By default, your losses must be small here, and they are, because you are doing options. Period. With that, you’ve shown the necessary aggression that is required in this territory, and you’ve also shown proper backfoot (defence) strategy. That is winning behaviour in bad boy territory. That’s the language understood by bad boys, telling them to lay off. Now, even if they try to come for you, they’ll not get you. Ever.

# Options 1.0.3

Has your stop ever been jumped over?

Yes?

Did it make you angry?

Yes?

It might make you angrier to know that Mrs. Market couldn’t care less about you on a personal level. It’s you who has to adapt, not Mrs. Market.

So, next time you see Mrs. Market moving many points in one shot, you have a choice. Either you can choose to take the chance of having your stop jumped over in the hope of huge rewards, or you can use options as an instrument to trade.

In general, a stop getting jumped over is a non-issue with options, because you are pre-defining your maximum loss here. Your option-premium is the maximum loss you will incur on the trade. Once you’ve mentally aligned yourself with this potential maximum loss, you are actually then asking Mrs. Market to do all the jumping she wishes to do. It just doesn’t bother you anymore. You travel, do other stuff, and then take a sneak-peak at your position.

Once your position starts making money, you might decide to fine-tune your trade-management after achieving your target. If you then make sure that your trailing stop is wide-gapped, you can still relax and do other stuff. Maybe one time out of twenty, Mrs. Market will jump even your wide-gapped trailing stop. Even if she does, you are well in the money, and you do not forget to install a new stop. Also, a little while ago, you were mentally prepared to forgo your whole option-premium, so giving back a part of your profits seems a piece of cake to you.

Welcome to the world of options. We have plunged right in. I believe that the best way to learn something is to plunge right in. Gone are the days of bookish learning.

The options market in India is just about coming into its own. At any given time, there will be at least 20 scrips on the National Stock Exchange showing very high options volume for long trades, and at least 10 scrips showing heavy volume for short trades. Bottomline: you can get into a liquid trade on either side, anytime you want. The number of scrips showing this kind of liquidity is picking up. We are still very, very far away from the mature options market in the US. What can be said is that the Indian options market will offer you liquid trades, anytime, both on the long and the short side. Frankly, that’s all one needs.

On the flip side, options on commodities have yet to come to India. Also, only the current month options are adequately liquid in India. Regarding options, the Indian market is getting there. Well, as long as you get a liquid trade anytime you want, who cares if we’re not as mature as the US options market? I don’t.

Over the last few months, options have been the instruments of choice, with unfathomable volatility abounding. I was dying to have a go, but have been caught up in so much other distracting stuff, that I’ve not traded for two months now. I like sticking to my trading rules. One of them is to not trade if I’m distracted. I really stick to this one.

Those who did trade the options market over this period would have done exceptionally well, because ideal conditions persisted. Big and quick moves, like a see-saw. The scenario would look like this: Long options give quick profits, short options simultaneously becoming very cheap, especially the out of the money ones. One sells the now expensive long options (which were picked up cheap), and stocks up on the now cheap out of the money short options. The market turns around and leaps to the downside, giving quick and large profits on the short options. One sells the short options and picks up now cheap out of the money long options, again. The repeat trades according to this pattern can continue till they stop working. When they stop working, what have you lost? Just your premium on some out of the money options.

Wish I’d had the frame of mind to trade options over the last two months. But then, one can’t have everything!

# Options 1.0.2

Options can be approached intuitively. I love that about options.

They carry their own stop-loss with them. That’s the second thing I love about them.

Soon, they’ll be operable from your mobile handset.

I mean, could it get any more versatile?

The voodoo mathematics surrounding options might or might not work. Sheer intuition coupled with a manual stop is another way of doing it.

Yup, one isn’t dependent on the automatic in-built stop in options, though this is a good tool when one doesn’t have access to a laptop. When one does, one can fine-tune the stop manually.

Options are getting more and more liquid in India. Still can’t compare them to the US options scenario, which is a thriving and rollicking state of affairs, but things are setting up beautifully here.

Amidst everything, I forgot to mention that options are a wonderful hedging tool. That’s probably their most important function.

# Options 1.0.1

Cricket’s great, but now back to business…

Today I’m gonna talk about options, so listen up.

For me, options are low-risk : high-reward instruments.

Hmmm, sounds utopic.

Well, it wasn’t always so. At first, I found them to be low-risk : even lower reward. It took a lot of losses and a lot of time to come up with a strategy that has turned options into low-risk : high reward. It’s a personal strategy, and works only with my own temperament and personal risk-profile. You’ll have to discover your own strategy. Bottomline is, that this is perfectly achievable.

Did you notice that all along, options have been classified as “low-risk” in this space?

Well, though that’s relative, mostly it is the case. Mostly, one sees small percentages of the porfolio being dabbled into options, so that makes most option premiums that one pays relatively low-risk when judged in view of one’s entire portfolio.

The Banoffee-pie moment is the fact that the option premium paid up is one’s stop-loss, if one enters an option and doesn’t actively monitor it. This allows one to do other things while the option works. It’s called value addition. One’s created a possible very short-term asset, and one is using one’s time after that to create more assets.

So, let us remember these two characteristics of options for now: low risk and possible very short-term asset creation.

I find options exciting. They challenge me. I don’t use mathematics with options, though many people do. The finance industry calls them “quants”. They use differential equations and calculus, and they calculate betas, gammas, rhos, thetas and what-nots. I don’t do all that. I keep it simple.

While playing options, I only use charts and gut-feel.

I can afford to, because the risk is small.