Tuesday, 2 February 2016


There is a general rule that applies to option trading:
It is important to have more than a single strategy in your trade arsenal because no single strategy is appropriate for all market conditions.
Basically, there are two types of market-neutral trading, based on one of the Greeks that option traders use to risk: Gamma. Market-neutral strategies begin life with neither a bullish nor bearish bias. However, if the market moves higher or lower, they can turn into bullish/bearish positions.
Sample strategies: Sell calls or puts; sell calls and puts (straddle, strangle), sell out of the money credit spreads.
When you own positions with negative gamma, the path to earning a profit comes from collecting time decay -- measured by the Greek, Theta -- by holding onto the position as time passes. And time always passes.
However, earning a profit is not that simple because the stock price does not always remain in a narrow area. When the price of the underlying asset (stock or index) changes by enough, then the money lost exceeds the sum earned from Theta, Why? As the stock price moves higher, negative gamma results in the position becoming short an accelerating number of Delta. In other words, your position is short in a rising market (or long in a falling market) -- and that is a money-losing situation.



Monday, 1 February 2016


Options have been misunderstood by the majority of individual investors for as long as they existed. Options have been around for a long time (since biblical times when a clever person bought call options on as many olive presses as possible and reaped large profits when the harvest was huge and people had to come to him to gain access to the presses), but they have been traded on an exchange only since 1973 (when the CBOE opened its doors).
Despite the fears of uneducated investors, these two statements are true: 
·         Options are risk-reducing investment tools.
·         Many option traders adopt very risky strategies using options, despite the fact that far more conservative strategies are available.

1.       DON'T BE GREEDY.
Be willing to own positions where profit potential is limited, rather than unlimited. 
Adopt strategies where losses are capped -- preventing a financial disaster -- and with a high probability of success.
Bullish traders can sell out-of-the-money put spreads.
Bearish traders can sell out-of-the-money call spreads.
In either scenario, do not sell spreads with a tiny premium.

Selling naked options places the seller at risk of a large loss. Remember that markets do unexpected things every so often, and it is important to practice sound risk management by avoiding owning positions that could -- no matter how unlikely -- blow up your account.
Note: It is acceptable to sell naked put options if two conditions are met: (a) You want to own shares of the underlying stock, even if the price plunges below the strike price; (b) you have enough cash in your account to buy those shares, if you are assigned an exercise notice on those puts.

2.      Understand that using options as mini-lottery tickets is a money-losing proposition. It is understandable that you want to dream big dreams. However, when placing your money at risk (every trade comes with some risk), it is important for traders to consider the probability of earning a profit, and not only the size of that potential profit. 
Do not make a habit of buying inexpensive, low-Delta, out-of-the-money options. Sure it is tempting to buy an option for $10 or $20 when there is a chance of scoring a 10-bagger (i.e., earning 10 times the cost of the option), but those options have very little chance of performing as you hope. 
You may believe that the price of a specific stock has a good chance rise from $44 to $57 over the next couple of months, but that is a very unrealistic expectation (unless you have inside information -- in which case it is against the law to buy options). Buying calls with a $55 strike price options is just foolish because such options tend to expire worthless. Sure the loss is small, but the chances of earning money with this strategy are even smaller.

Saturday, 30 January 2016


It concerns risk taking, and although the statement may seem to be trivial, it is far from it. It is an important concept. 
Don’t expect to make more money for taking risk; just know you have to take additional risk to make more money.
If you don’t understand the difference, you should not be taking risk.

One of the basic concepts regarding investing is that there are no free lunches and that you, the investor, must take some risk in order to earn a return on your investment.
If you are a very skilled trader, you may be able to get away with taking very little risk. However, for the vast majority of investors/traders, we must take on additional risk when we seek to earn a higher profit.
I hope that makes sense. If you were able to earn a high reward on your investments with very low risk, then almost every investor on the planet would go after those rewards.
Usually, no further discussion is required because we all understand when many people go after the same investment product, then there are often those who are willing to accept a slightly lower reward. That in turn drives down the overall reward available to investors. To understand why this is true, just imagine a $100 bond that returned $10 every year. You love that 10% annual return. But another investor may we willing to accept less and may bid $105 for that bond. When that happens, you can no longer buy the bond for $100. The price is now higher and the reward is now less. The process continues (i.e., the cost of the bond increases) until equilibrium is reached and no one is willing to pay a higher price.
By the time that happens, the bond could easily be selling for $120 and the annual return would be 8.33%.
magine a careless, inexperienced trader adding risk to his/her portfolio with the expectation that it will lead to greater gains.
Using the above bond example, the fact that the business had to pay as much as 10% to sell the bonds initially suggests that the company may never be able to repay the debt. Financially sound companies do not have to pay so far about current market rates when selling bonds. The fact that this company has to pay so much in order to attract lenders says a lot about the high risk involved when lending money to them. It's great to earn $10/year per $100 investment, but if the company defaults and you never get back any of the $100 invested, that is an example of no reward.

Friday, 29 January 2016


"SELL TATAMOTORS FUTURE BELOW 336 TGT 334.5/332.2 SL 338.9" 
"BUY NIFTY 7500 CALL@ 154 TGT 179/194 SL 128"
Whether you are a trader or an investor, your objective is to make money. And your secondary objective is to do so with the minimum acceptable level of risk.
One of the major difficulties for new option traders arises because they do not really understanding how to use options to accomplish their financial goals. Sure, they all know that buying something now and selling it later at a higher price is the path to profits.
But that is not good enough for option traders because option prices do not always behave as expected. 
For example, experienced stock traders do not always buy stock. Sometimes they know sell short hoping to profit when the stock price declines. Too many novice option traders do not consider the concept of selling options (hedged to limit risk), rather than buying them.
Options are very special investment tools and there is far more a trader can do than simply buy and sell individual options. Options have characteristics that are not available elsewhere in the investment universe. For example, there is a set of mathematical tools ("the Greeks") that traders use to measure risk. If you don't grasp just how important that is, think about this:
If you can measure risk (i.e. maximum gain or loss) for a given position, then you can manage risk. Translation: Traders can avoid nasty surprises by knowing how much money can be lost when the worst-case scenario occurs.
Similarly, traders must know the potential reward for any position in order to determine whether seeking that potential reward is worth the risk required.  
For example, a few factors that option traders use to gauge risk/reward potential:
·         Holding a position for a specific period of time. Unlike stock, all options lose value as time passes. The Greek letter "Theta" is used to describe how the passage of one day affects the value of an option.
·         Delta measures how a price change -- either higher or lower -- for underlying stock or index affects the price of an option.
·         Continued price change. As a stock continues to move in one direction, the rate at which profits or losses accumulates changes. That is another way of saying that the option Delta is not constant, but changes. The Greek, Gamma describes the rate at which Delta changes.
This is very different for stock (no matter the stock price, the value of one share of stock always changes by $1 when the stock price changes by $1) and the concept is something with which a new option trader must be comfortable.  
·         A changing volatility environment. When trading stock, a more volatile market translates into larger daily price changes for stocks. In the options world, changing volatility plays a large role in the pricing of the options. Vega measure how much the price of an option changes when estimated volatility changes.

Thursday, 28 January 2016


I prefer to begin discussions about learning various option strategies with Writing Covered Calls because it is easy to understand and because it will feel natural to stock market investors.
First, a definition: A covered call is a position consisting of two parts:
·         Long (that means you own) 100 shares of stock.
·         Short (i.e., you sold) one call option whose underlying asset is that same stock. 
Although it is not true for every new option trader, most people who come to the options world have some prior trading experience -- specifically, buying and selling stock. Writing covered calls is an extension of that investment strategy. I recommend beginning an options education with this strategy for one basic reason: It is a natural extension of something that most new option traders are already familiar with (buying stock).
That makes it much easier to glide into using options.
This is not the appropriate space to talk about whether an individual investor is better off choosing individual stocks or sticking with index funds or specific exchange-traded funds (ETFs).  I have a deep dislike for traditional mutual funds because of their steep sales charges (loads and/or redemption fees) and excessive management fees. If you are someone who already invests in individual stocks, then the strategy described below is likely to be very useful during the early stages of your options-trading career.
Covered call writing (CCW) is a method for reducing risk associated with owning stock. Stockholders may earn a very large profit when the stock price soars, but they are subject to large losses when the stock price tumbles.
If you prefer to hedge that downside risk, then selling (writing) one call option for each 100 shares of stock owned is an efficient hedging method. 
As a reminder, when you sell a call option, the buyer is granted the right to buy your stock (at the strike price) at any time before the option expires.
Therefore, if the stock is trading above that strike price when expiration arrives, the call owner will exercise her rights to buy the shares, and you are obligated to sell. Profits are limited because you cannot sell your stock at any price higher than the strike price as long as you remain short that call option. In other words, you sacrificed the possibility of selling stock at a higher price in exchange for the cash premium that you were paid when selling the call.

Wednesday, 27 January 2016


If you find yourself thinking along these lines [placing a wager that recovers lost money and gets you back to break-even status is so important, that taking extra risk is acceptable], then don’t worry, you are like the majority of people in the world today.
Just remember that though it can be very tempting to take a big risk in order to break even, that risk might put you much further in the hole. Before you take that gamble, think very seriously about the consequences of losing.

If you can consider it rationally, you will realize that it’s much better to stop before you do further damage. Sometimes it’s better to accept a loss and walk away—much like sunk money.
It is very difficult for most people to walk away from a situation in which money has been lost. The temptation to continue playing the game is so strong -- not only for financial reasons -- but because it is psychologically unsatisfying to end the game as a loser. Getting back to break even is almost addictive.
In different language: Consider this scenario: You play poker, bet at the racetrack or invest in the stock market, and find yourself losing $100. You can walk away or continue to play. For most people, the possibility of recovering that $100 is so tempting that they may wind up losing far more money than they can afford to lose -- just in an attempt to recover losses.
This is the important part that is difficult for rational people to recognize: When people make an investment, earning $100 has a certain amount of pleasure associated with it. However, if they first lose $100, then earning $100 is far more satisfying -- despite the fact that it has the same financial value. "Not losing" is more satisfying than "winning" -- and that may lead to taking more risk than is prudent.
When money has been lost and cannot be recovered, there is nothing that can be done. That is the sunk cost.