# 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.

🙂

# Are you Saying These are Small Losses, Mr. Nath?

No.

Everything is taking a hit.

Sure.

Hit’s actually in the “Wealth” segment…

…and not as such in the “Income” segment.

Would you like to elaborate on this one, sounds pivotal?

Yes it is exactly that, pivotal. Because of this one fact, I’m talking to you with a straight face.

I see.

Auto-pilot income-creating avenues are still doing what they’re supposed to do, i.e. creating income. Nothing has changed there, yet.

You mean something could change there?

Sure, if companies start going bust, their bonds won’t create income. Instead, principal will take a hit. It’s not come to that yet, at least in India. You have an odd company going bust here and there now and then, but nothing major as of now. Income is intact, for now. If were done with CoVID in two months, this factor might not change. Let’s focus on this scenario.

Right.

Secondly, we’re highly liquid. We try and become as liquid as possible during good times, ideally aiming to be 80% in cash before a crisis appears.

How do you know a crisis is going to appear?

This is the age of crises. A six sigma event has now become the norm. After Corona it will be something else. This has been going on from the time the stock market started. It’s nothing new. Come good times, we start liquidating all the stuff we don’t want.

Don’t want?

Ya, one changes one’s mind about an underlying down the line. At this point, one shifts this underlying mentally into the “Don’t Want” category. Come good times, one makes the market exit oneself from this entity on a high.

Makes the market exit oneself?

Yes, through trigger-entry of sell order.

Why not just exit on limit?

Then you’ll just sell on the high of that particular day at best. However, through trigger-exit, your sell order will be triggered after a high has been made and the price starts to fall. It won’t be triggered if the underlying closes on a high. That way, if you’re closing on a high, you might get a good run the next day, and then you try the same strategy again, and again. In market frenzies, you might get a five to seven day run, bettering your exit by 15-20%, for example. Who wouldn’t like that?

You talk of market frenzies at a time like this, my dear Sir…

The market is like a rubber band. What were witnessing currently is the opposite pole of a market frenzy. Humans beings are bipolar. If they’re reacting like this, they sure as hell will react like the opposite pole when conditions reverse. Especially in India. We’re brimming with emotions.

Which brings us back to the initial question…

Yes, these notional losses look huge. But, who’s translating them into actual losses? Not us. We’re busy enhancing our portfolios as multiples get more and more lucrative for purchase. That’s entirely where our focus is. We are numb to pain from the hit because our focus is so shifted.

And there’s no worry?

With such high levels of liquidity, shift of focus, income tap on, dividend tap on – yeah, please don’t ignore the extra big incoming dividends, underlyings taking a hit currently are paying out stellar dividends, and these big amounts are entering our accounts, because we’ve bought such quality – – – we’re ok.

Stellar would be?

Many underlying have shared double digit dividend yields with their shareholders! That’s huge!

So no worries?

No! We’ll just keep doing what we’ve been doing, i.e. buying quality. We’ll keep getting extraordinary entries as the fall deepens.

What if that takes a long-long time?

Well, the year is 2020. We’re all on speed-dial. 18 months in 2020 is like 15 years in 1929. Because we follow the small entry quantum strategy, our liquidity should hold out over such period, providing us entries through and through.

And what if it’s a four digit bottom on the main benchmark, still no worries?

NO! Look at the STELLAR entry over there. A bluechip bought at that level of the benchmark can be held for life without worries. So yes, NO WORRIES.

Thanks Mr. Nath.

One more thing.

Yes, what’s that?

What’s my maximum downside in an underlying?

100%.

Correct. Now what’s my maximum upside in an underlying?

Ummm, don’t know exactly.

Unlimited.

Unlimited?

Yes, unlimited. Entries at lucrative levels eventually translate into unreal multiples. Looking at things from this perspective, now, the size of these notional losses pales in comparison to potential return multiples. It’s a combination of psychology, fundamentals, mathematics and what have you. In comparison, these are still small losses. If we can’t take these swings in our side, we shouldn’t be in the markets in the first place, focusing our energies on avenues we’re good at instead.

Right, got it.

Cheers, here’s wishing you safe and lucrative investing.

🙂

# Nath on Trading – V – Make that a Hundred

81). Paper trading has limited value.

82). That’s because money on the line activates your emotions.

83). Is there a holy grail? No. Stop looking for it.

84). Small edges taken to the nth – that’s what cuts it.

86). Many advisories ignore sheer basics such as risk : reward.

87). Advisories are after commission and management fees rather than your long-term benefit.

88). If you’re lookig for an advisory, look hard, and don’t be afraid to keep rejecting till you find someone who knows the game and is not greedy.

89). Everything is out there, for you, for the taking, on the internet.

90). Most of this everything is free, if you just make that extra effort to get it.

91). Disclosure laws are so strict, that you can get into the un*erp*nts of a management today, literally at the speed of thought.

92). Thus, to play the market, any market, all you need is funds, due diligence and a device.

93). Due diligence gives you confidence to hold the line.

94). Funds need to be saved first. What goes into trading is that portion of your savings which you are not going to need – at all, at best.

95). Your device needs to become a seamless extension of you. Work on your device till it becomes that.

96). The best ideas are born in silence.

97). The best ideas are also the simplest in nature.

98). Sophistication is a net-net loser’s game.

99). If you’re doing it right, and if you’re not a day-trader by profession, trading takes up only a small portion of your day.

100). Life has myriads of avenues, trading being one small such aspect. Being a trader doesn’t mean losing out on life’s countless drawing boards. Trade. Fine. Live too, and live well. Do all-round justice to your opportunity.

# Frozen

Frozen?

It’s ok.

Breathe.

You need to acknowledge that you’re frozen.

Without that, the next step won’t come.

It’s normal to freeze sometimes. Just acknowledge it. Then learn.

For example, I acknowledge that I’m currently frozen wrt to the USDINR short trade. Missed entry. Next opportunity to enter never developed for me, and the underlying is currently in free fall. Don’t have the guts to short it at this level. Yeah, I’m frozen all right.

However, the fact that I’m acknowledging it opens up the learning window.

Why did I miss entry?

I know why I froze. Fear. What I need to understand is why I allowed a situation to develop that would lead to fear.

Ok.

Was running super busy.

Neglected the underlying.

Kept postponing entry…

… till free-fall started.

It’s good to be busy.

Hmmm, so this can happen again.

How do I stop this from happening again?

If I ID a setup, I need to take it.

No second-guessing.

Meaning, am I going with a short strategy for USDINR? Or am I keeping the window open for a long strategy?

See, that’s it.

Keeping short and long windows open makes me second-guess all the time.

So can I go in one-direction wrt USDINR all the time?

What speaks for it?

Underlying is falling from a height. Good.

Short only means no second-guessing. You just go short, period.

Stoploss will save ruin.

Not nipping profits in the bud will amass fortunes.

Can the underlying keep falling over the next few years?

Why not? Modi’s looking set for 2019.

Hmmm, so a short only strategy has a lot going for itself.

There’s more. Future month contracts are quoted at a premium. The premium evaporates over the current month. This move is in your favour if you’re short.

Ok, enough.

Yeah, there’s enough on the table to warrant a short only strategy for USDINR.

SEE?

Learning process.

Why did it happen?

Because I acknowledged that I had frozen.

Now, my strategy is more fine-tuned and I’m probably less prone to second-guessing.

You need to pull off such stuff when you freeze.

Use the freeze to evolve.

# Multiples obey skewed mathematics

Income-oriented linear growth…

… is single-digit.

It’s going to be there tomorrow, and after that.

Safety means less return.

You’re ok with that as far as basic income is concerned.

Not so the case when it comes to wealth.

With wealth, the multiple comes into play.

Multiples dance to a different tune.

The search for multiples can lead to negative return – for a while at least.

It’s risky.

The level of reward is coupled to a corresponding level of risk.

In comes time.

Wealth-play is palatable because of time not pushing you to the wall.

With time on your side, the ingredients of your cooking-pot have ample opportunity to sprout and grow into big trees.

If growth is not able to take off owing to lack of circumstance, this becomes the breeding ground for negative return. High deductibles add to the bleeding. After all, it’s wealth you’re seeking to generate, and there will be a little blood.

Such is the game.

If you can’t stomach the ride till the multiples emerge, play the income-game full-time instead.

However, once you start to digest the wealth-game, you realize that is really quite headache-free and pretty much an auto-pilot avenue.

You’ll even start to like it when the first multiples emerge!

# 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.

🙂

# How much is too much?

Risk?

Sure.

No risk no gain.

However…

… I’m sure you’ve also heard…

… “want gain not pain“.

How do we achieve that?

It boils down to the level of risk.

How much risk is too much?

Do we have a measure?

Sure.

Meaning, without getting into any mathematics?

Yes.

What’s a hands-on everyday TomDickHarry dumdum yet practical cum successful measure for risk without any hype or brouhaha?

Sleep.

Sleep?

Yeah.

How?

Are we sleeping well?

Is our sleep getting disturbed because of the risk we’ve taken?

No?

We’re fine.

The risk we’ve taken is bearable.

It’s not disturbing us enough to disturb our sleep.

Yes? Sleep disturbed? Because of risk?

We’ll, too much then.

Reduce the risk.

By how much?

Till your sleep is not disturbed because of it.

It’s as simple as that.

# When Do You Bet The Farm?

Safety-…

…-net.

Basics.

You gather yourself to carve out a comfortable life for your family.

Build-up.

Debt-free-ness.

Yeah, zero-debt.

Feel the freedom.

Breathe.

No bondage.

No tension.

You have to feel it.

Surplus.

First, small surplus.

Then, big surplus.

You’ve made sure that nobody ever will remind you to pay your bills.

Great! Well done. Now…

… keeping all basics intact…

… you play with small surplus.

Risk. Calculated. Digestible.

Multiplier.

Loss. Cut small.

Win. Allowed to grow.

Small surplus starts giving regular fruit.

You put back the principal into your family’s basic corpus.

Repeat.

Many of your small surpluses have grown into fruit-bearing trees.

Your farm is bursting with grain and fruit.

Have you taken any big, indigestible risks?

No.

Have you ever put your family basics at risk?

No.

Have you ever thought about betting the farm?

NO.

Will you ever bet the farm, no matter how big the lure?

NEVER.

# Nath on Equity : have stuff – will talk

Behind Equity, there’s 41). human capital.

It’s human capital that keeps 42). adjusting equity for inflation.

43). No other asset-class quotes on an inflation-adjusted basis.

That’s good news for you, because 44). equity takes care of the number one wealth-eater (inflation) for you.

All world equity ever quoted, whether currently existing or not, has 45). returned 6% per annum compounded, adjusted for inflation.

46). All equity ever quoted that still exists has yielded 11% per annum compounded, adjusted for inflation.

Equity selected with good due diligence, common-sense and adherence to basic rules listed here and in previous articles is 47). well-capable of yielding 15%+ per annum compounded, adjusted for inflation.

However, equity is 48). a battle of nerves, at times.

This asset-class is 49). more about creating long-term wealth.

It can be used, though, to 50). generate income through trading.

51). Trading, however, is burdened with more taxation, commission-generation and sheer tension.

Investing in equity 53). gives you enough room to pursue many other activities during your day.

Trading strategies are 54). diametrically opposite to investing strategies.

55). It takes market-players the longest time to digest and fully comprehend 54).

For long-term players, 56). up-side is unlimited. This is a vital fact.

Also, 57). downside is limited to input. Factor in good DD, and that very probably won’t even go half-way.

58). Thus, 56). and 57). make for a very lucrative reward : risk ratio.

Equity needs courage, to 59). enter when there’s blood on the streets.

It also needs detachment, to 60). either exit when required for monetary reasons, or when everyone else is getting ultra-greedy and bidding the underlying up no-end.

# Finding Structure Within

You are you. He is he. She is she. I am I. It is it.

Even if the above is the only thing that you carry home from this space, you’re done already.

Move on then, with your life, because you’ve understood something big.

You are not I. I am not you. He is not she. She is not he. That’s it.

Here’s the next biggie.

Those who come into funds need to know how to manage them. Period.

Do what you want. Run umpteen miles. Put up a million facades. Muster up all the drama you’re capable of. After that you’ll come to this conclusion …

… that nobody else is more capable of managing your funds than you yourself.

Why?

Because you are you. You know yourself best. A third party is firstly (realistically) not bothered about knowing you, and secondly is only capable of seeping into a minuscule portion of you, if he or she makes the effort. Forget about third parties.

So you realize you need to manage your own funds, what then?

Jump into the water.

While your corpus is small, make mistakes. Learn from them. That’s college. Tuition fees.

Recognize your strengths. Play to them. Pulverize your weaknesses after identifying them.

Then come the structures, from within. These are your structures. They’ll come from inside of you.

There’s you, and there’s the battle-field. The two are face to face. It’s a do or die situation. You go into reflex-action mode. Your systems start to function at full capacity. That’s when structures emerge.

Yeah, structures need an activation barrier to emerge.

There’s a protective structure. It’s your protective structure. It guides you to build your moat. It protects your family.

Then there’s your post-protection bulk-game structure. It guides you towards building up your innings without the worries of basic bread and butter.

Lastly, there’s your multiplication structure. It chalks out high-reward-high-risk strategies, tweaks them towards maximum possible safety, and tells you where to put that minute percentage of your corpus with the intent of achieving extra-ordinary gains.

Allow such structures to emerge. Embrace them. Innovate. Improvise. Achieve. Educate.

Go for the jugular.

# 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.

# Why work for less than 1:1?

It’s a funny world.

In this funny world, many people work for less than 1:1.

Many of these people don’t have a choice. Their circumstances are such.

Some do, and they still choose losing odds.

The reward : risk ratio.

In the marketplace, our risk needs to be defined by default.

If we’re not thinking about defining our risk pinpointedly before entering the marketplace, let’s just pack our bags and study music instead, or biochemistry, if you please, with no disrespect to either music or biochemistry.

Define your risk! Set a stop!

Nobody plays to lose, right?

Once the risk is understood, one starts looking at reward.

Reward potential must be at least equal to or greater than the defined risk. This statement, coupled with a large sample size and more than 50 trades moving your way out of every 100 is already a winning combination.

Anyone can pick 50:50. All you need is a coin-flip.

60:40 is definitely achievable with research.

You don’t need more to win big.

Now make the 1:1 work for you. In 40 out of  100 trades, you’re stopped out at – 1 (minus being for trade going against you, and 1 being your defined unit of risk). I know it’s difficult to do, but take the next trade with a smile. When a trade starts to run, don’t cut your profit at the  +1 level. Let your profit run.

At +1, lift your stop to 0. At +2 lift your stop to +1. So on, so forth.

Don’t exit manually.

Let the market throw you and your profit out.

That’s called a proper exit.

Well, there you have it.

Cheers!

# Three Ways to Double Down

To win big as a trader, one needs to understand and implement a strategy of doubling down when things are looking good.

The difference between mediocre success and mega-success as a trader is linked to a trader’s ability to double down at the proper time.

We’ve discussed position-sizing. That’s one way to double down.

A day-trader, or a very short-term trader has the luxury of seeing one trade culminate and the next trade start off after the first one culminates at its logical conclusion. For most longer-term traders, many trades can be occurring simultaneously, because started trades have not yet come to their logical end, and new opportunities have cropped up before trades commenced have come to their logical end.

What do such traders do? I mean, they do not know the final outcome of the preceeding trades.

Yeah, how could such traders position-size properly?

Well, a trade might not have come to its logical conclusion, but you do know how much profit or loss you are sitting on at any given point of time. The calculation of the traded value for the next trade is simply a function of this profit or loss you are sitting on. Simple, right?

Well, what if you don’t like to position-size in that manner?

What if you say, that here I am, and I’ve finally identified a scrip that is moving, and that I’m invested in it, and am sitting on a profit. Now that I know that this scrip is moving, I’d like to invest more in this very scrip.

Good thinking. Nothing wrong at all with the thinking process.

You now pinpoint a technical level for second entry into the scrip. Once your level is there, you go in. No heavy or deep thinking required. As a trader, you are now accustomed to plunging after trade identification and upon setup arrival.

Question is, how much do you go in with?

Is your second entry a position-sized new trade? Or, do you see how much profit you are sitting on, and enter with the exact amount of profit you are sitting on? The latter approach is called pyramiding, by the way. Pyramiding is a close cousin of position-sizing. Normally, one speaks about pyramiding into one very scrip, when the trader buys more of that very scrip after showing a profit in that scrip. Once could, however, also pyramid one’s profits into different scrips.

When you’re pyramiding into one very scrip, you’re putting many eggs in one basket. Right, the risk of loss is higher. The thing going for you is that this risk for loss is higher at a time when your profits are up in a scrip that’s on its way up. Therefore, the risk during a downslide is higher, but the probability of that risk’s ability to result in an overall loss for you is lower than normal. You understand that you have balanced your risk equation, and with that understanding, you don’t have a problem putting many eggs in the same basket. After all, it’s a basket you are watching closely. Yeah, you know your basket inside out. You are mentally and strategically prepared to take that higher risk.

There’s yet another way to double down. I’d like to call this the “stubborn-bull trading approach”.

Let’s say you are sitting on a profitable trade. Yeah, let’s say you are deep in the money.

Now, a safe player would start raising the stop as the scrip in question keeps going higher and higher.

On the other hand, a trader with an appetite for risk could risk more and more in the scrip as it keeps going higher and higher – by not raising the stop, till a multibagger is captured. On the other hand, this trader would also be setting him- or herself up to give back hard-earned profits. Yeah, no risk – no gain.

What’s the difference between the stubborn-bull trading approach (SBTA) and investing?

When you’re adopting the SBTA, you’ll cut the trade once it loses more than your stop. You’ll sit on it stubbornly only after it has shown you multibagger-potential, let’s say by being up 20-50% in a very short time. You’ll keep sitting on it stubbornly till your pre-determined two-bagger, three-bagger or x-bagger target-level is reached. After that, you’ll start raising the stop aggressively, as the scrip goes still higher. Eventually, the market will throw you out of your big winning trade. You see, the SBTA strategy is very different from an investment strategy. For starters, your entry into this scrip has been at a trading level, not at an undervalued investment level. Undervalued scrips normally don’t start dancing about like that immediately.

Let’s be very clear – to reap big profits in the long run, you, as a trader, will need to adopt at least one of these doubling down strategies – position-sizing, pyramiding and / or the stubborn-bull trading approach.

Have a profitable trading day / week / month / career! 🙂

# How Does One Position-Size?

What is the singular most lucrative aspect of trading?

Any ideas?

Want a hint?

Ok, here’s the hint. It is also the safest aspect of trading.

Give up?

Here’s the answer. It’s called position-sizing. (The pioneer of position-sizing is Dr. Van K. Tharp, @ www.iitm.com, and I have learnt this concept through him).

Surprised? I would be surprised if you weren’t surprised.

Yeah, trade selection is important too, but other things are more important while trading.

For example, trade management is more important than trade selection. So is exit. Entry might be paramount to an investor, but to the trader, entry is run of the mill. It happens day in, day out. The trader … just enters a selected trade. There’s no deep thinking involved. The trader knows this. Crux issues are to follow. The trader is saving his or her energies for the crux issues.

So far, we’ve spoken about the chronology of a trade, i.e. entry – management – exit.

Before entry, you decide how much you want to trade with, and how much you want to risk. That’s the size of your position, or your position-size. Remember, for the concept of position-sizing to make any sense, your stop-loss percentage must remain constant from trade to trade. Only your traded value goes up or down.

It depends upon HOW WELL YOU ARE DOING.

If you’re on a roll, your traded value for the next trade goes up. The increment is proportional to the profits you are sitting on. Since the stop is a constant percentage, the amount risked is also higher. Return is proportional to the amount at risk, and the long-term net return of such a trade will also be higher. All this means, that the more you make, the more you set yourself up to make even more…!

Now, two things can happen.

Firstly, if you keep losing, and hit your loss cut-off level for the month, well, then, you just stop trading for the rest of your month. You then spend the rest of the month reviewing your losses and your system. You tweak at whatever needs tweaking, and come back fresh and rested the following month. Position-sizing kept you in the market, ready to take the next opportunity to earn big. The auto-cut takes you out of the market for a while. That’s why, in my opinion, while position-size is still activated, it provides more safety, because it keeps you in the market to recover everything and then some, starting with your VERY NEXT trade. Having said that, auto-cut is auto-cut. It overrides position-sizing.

The second thing that can happen is that your losing streak ends before your month’s cut-off is reached. Yayyy, position-sizing is still activated! You’ve lost lesser and lesser on each losing trade as long as you were in the losing streak, and now that you are winning again, each win sets you up to win more in the trade that follows.

Your position-sizing strategy has kept raising your corpus, because your system is 60:40+, and you win more than you lose. Ultimately, your corpus has become substantial. Its size exceeds your expectations BY FAR.

All thanks to position-sizing.

# 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.