I do not like to contract Technical Analysts when they predict future because their predictions can come true. But I do believe that a Technical Analyst is no match for the collective wisdom of millions of investors and traders. A technical analyst has number of tools that worked in the past. He tries to predict future using the tools that worked in the past. Technical Analysis most often does not produce the same results because nothing remains the same on two occasions.
Once upon a time I was a big fan of Technical Analysis. It was in 1992 that I started taking classes on Technical Analysis. At that time there were not many services providing soft wares for Technical Analysis. Internet has just arrived in India and our telephone lines were very slow to transfer data. In spite of the problems I bought a software from Capital Markets paying more than Rs50000. Its name was something like ‘Capitaline series’. This gave me more confidence because there were not many people who had such software. I had access to charts on all indices and stocks. I could analyze any stock within minutes. Armed with such superior tools I had no doubt that I could make millions from stock markets.
Using this software I started trading in the markets. To my utter surprise I found that short term trading using this software produced more losses than profits. At the same time I found that Technical Analysis is a wonderful tool for investing and it does not work with illiquid stock. I could not under stand the difference at that time. After many years of losses in day trading wisdom dawned in me. There is big difference when we use technical analysis for short term trading. All markets have long term trends. These trends can be bullish, bearish or neutral. Technical Analysis gives clear signals when a long term trend changes. Therefore investors can use the information to book profits, to enter in a stock or remain invested. However in the short term, there are many noises in the market and most often noises are more predominant than main trend. This results in false signals. For example people were predicting 10-15% fall in Nifty last week. I do not say that it could not happen. However a person shorting Nifty following the prediction is in big problem now. How much can he wait? Analyst has an easy answer ‘put stop losses. Then comes the level at which stop loss is to be put. Once a stop loss is put is very common that markets takes the stop loss and somersault. In my opinion it is better not predict short term trends for trading as it results in losses more often.
Cyriac J. Kandathil, Chief adviser AssuredGain.com
Every trader wants to know how to manage risk on one specific trade. Here are some easy-to-implement suggestions to get your risk under control:
Source: www.thekirkreport.com
The Federal Reserve isn’t nearly as powerful as is commonly believed.There isn’t a person or group of people in charge of the market.
There’s no such thing as a “healthy correction.”
Good stocks can go down for no reason.
Bad stocks can go up for no reason.
A trend can last much longer than you thought possible.
Stocks don’t know you own them.
The market doesn’t care about politics.
The most important variable to the stock market, by far, is the direction of long-term interest rates.
Mega-mergers rarely work.
Investment bubbles aren’t due to the moral failings of the market participants.
Ignore anyone who tells you that the Federal Reserve is a private bank.
Commodities are almost always terrible investments.
The stock market hates inflation. The only thing it hates more is deflation. The best environment for stocks is a low stable inflation rate.
As an investment tool, P/E Ratios work much better for individual stocks than for the market as a whole.
The best three fundamental metrics are (in order) ROE, Debt Ratios and Cash Flow.
Wherever possible, seek out stocks with expanding margins.
Dividends are underrated by investors, especially companies that consistently raise them.
Portfolio diversity is overrated.
As a general rule, IPOs are a bad deal.
Boring but profitable always beats exciting and unprofitable.
CAPM and MPT are nonsense.
No one can consistently time the market. No one.
The Equity Risk Premium (over long-term debt) is probably much smaller than commonly believed.
The data showing a return premium for small-cap stocks is probably wrong.
The media never questions the bond market. Only stock investors are “greedy.”
Perma-bears are never held to account for being wrong so if you want to sound smart, be very bearish and very vague.
The market really does “climb a wall of worry.”
Follow unfollowed stocks.
The market is self-aware. Scary but true.
It’s far easier to rationalize selling than buying.
The market isn’t efficient—it can be beaten.
But it’s very, very, very, very hard.
Most technical analysis is complete garbage.
A high P/E Ratio is much better sign of a stock to sell than a low P/E Ratio is a sign to buy.
It’s pointless to measure the stock market relative to gold or in euros or pork bellies or whatever else people can come up with.
Ignore any chart that has seemingly similar lines trying to show how this market is “just like’ the one in 1831.
Except at very low levels, volatility is neutral.
Many gold bugs are quite simply fanatics.
Whatever the issue, your typical finance professor will blame the investing public and urge more self-denial as the solution. Bank on it.
Never base an investment decision of demographics.
The worst investor in the world is the guy holding on to a small loss waiting for the rally because “they don’t want to take the loss.” Again, the stock doesn’t know you own it.
Very, very few serious companies are traded on the pink sheets.
Never stress out about what a stock does after you sell it.
Source: CrossingWallStreet.com (Eddy Elfenbein)
Dear readers,
I would like to thank all readers of marketcalls for your mails. As I was busy with my new sub-broker, I could not update here. Most retail traders buy put option to make money in falling stock or index. Have you ever wondered who is selling the put options that you are buying? Most likely, it is another trader who has the opposite outlook for the stock (bullish).
For example, when you buy a stock put option you think the price of a stock is going to plunge. Sellers of a put option don’t think it will, Or do they? A trader who selling put options may have another intention in mind. They might be selling put options with the purpose of buying stocks at inexpensive prices and they are collecting income while they stay calm to do this.
When you buy a put you are buying the right to sell a stock at the strike price of the put anytime before the option expires. You have the right to do this even if the stock price falls to zero. Who is going to buy the stock at inexpensive price? It is the same trader who sold the put option.
As you very well know, blue-chips don’t fall much even in the worst bear run, if they fall, they are likely to bounce back as market bounces back from fall. Even the strongest blue chip stocks undergo periods of weakness. This is when smart investors jump in and sell puts. The key is to only sell puts at strike prices at which you want to buy the stock. And as with buying options, you can earn this return without ever having to actually buy the stock.
Here’s a specific example of how that actually works.
I recommended selling (short) RELIANCE 960 put @Rs.10(LTP as on 30/04/10), (Rs.3000 premium) using this kind of options technique is called “naked put write.” When you write a naked put you are compelled to buy 300 reliance shares at the option strike price (i.e.Rs.960), regardless of how low the reliance price might actually be when the option expires.
Here are the possible outcomes of the position:
If Reliance was above 960 at May 27, 2010 (expiration) the put would expire worthless. You will have earned Rs.10 per contract or Rs.3000 per lot.
If Reliance was below 960 at expiration you would have to buy 300 shares of the Reliance at Rs.960 per share. Because of this risk of potential stock ownership, when you write puts you must set aside enough capital to cover the stock purchase should the necessity arise. More important, you must also want to buy the stock.
Though most stock brokers will try to tell you otherwise, writing puts to buy stocks is actually a conservative option-writing strategy, as long as you keep up the control to only write puts on stocks you want to buy, at strike prices at which you want to buy them, and don’t write too many puts at one time (limit to 1 or 2 lots). Buying put options is just one way to profit if stocks start taking on a bearish movement.
Selling or writing calls is another. Writing (selling) covered calls in one of the most basic and also the safest of all option strategies. You can generate additional income from stocks that you own, and this income helps hedge against the risk of owning the stocks.
But in order to write a covered call, you must first own at least 300 shares of the underlying stock (example Reliance in this case).
Narendar Rathod, Options strategist, www.AssuredGain.com
Most people believe that option players are extreme risk takers. After all, they purchase an asset with a very short life, and hope it skyrockets in value. Option buyers might make 500% or more if they buy the right option, just as they would do if they picked the winning horse at the track
.
The waiting period to see if you’re a big winner is a little longer than a horse race, but not much. In a month or two, if the stock does not go way up, you lose your entire investment bet. Just tear up your ticket. You picked the wrong horse.
If the stock stays flat, most option buyers lose their entire bet as well. No wonder people think option trading is risky. At least if you buy a stock, and it stays flat, you don’t lose anything but the opportunity to have done better in another investment.
When you buy an option, it is a declining asset. It depreciates faster than a new car. It becomes worthless in a matter of months.
High-risk, high reward – that is an investment fact embraced by most people. They believe that any system that offers the opportunity for extraordinary profits must necessarily involve an inordinately high degree of risk.
As far as I am concerned, nothing could be further from the truth when it comes to intelligent options trading.
I am reminded of the legend of the blind men examining an elephant – each man touched a single part of the animal, and came to an entirely different conclusion as to what he was touching.
Viewed as single transactions, the following two statements are undeniably true:
1) Buying stock options is extremely risky.
Buying stock options may indeed be the risky kind of investment that scares most prudent investors. If we examined this one small part of stock market investing, we could understandably conclude that stock options investing involved high risk.
2) Selling stock options is even more risky.
Selling stock options, when viewed as a single transaction, is even worse! Selling an option alone is called selling naked (because that’s how you feel the whole time you have that short sale in your account). You have the possibility of unlimited risk. You can lose many times more money than you invested. At least at the horse race, you only lose the money you bet.
No wonder people believe that stock options investing is risky. There seems to be extreme risk all around. Just like the blind men examining the elephant, they are only looking at a single part of the picture.
Since most people have not made the effort to understand stock options, they quickly conclude that the risk level is too high for them, and put their money into a “safe” place like mutual funds. Somehow if they are paying some “expert” to pick the stocks they own, they delude themselves into believing they are investing prudently.
Nothing could be further from the truth.
If your money is in a “safe” mutual fund, these are the facts:
1) If stocks go up, you will make money (but your profits will be reduced by the management fees, sales fees, and expenses you incur). For the past 50 years, the stock market has gained an average of about 10% a year. That is the most gain you should expect with your mutual fund investments.
2) If stocks stay flat, you lose money (management fees and inflation reduce the value of your holdings).
3) If stocks go down in value, you lose money.
Contrast those facts with the case of a properly executed stock options investment
1) If the underlying stock goes up, you make money, often at a rate of over 100% a year.
2) If the underlying stock stays flat, you make money, often at a rate of over 100% a year.
3) If the underlying stock goes down, you may still make a profit. Only if the stock goes down a great deal in a very short time will you lose money. (Of course, your mutual fund would get clobbered in this scenario as well.)
Which of the above two investments seems to be the most risky? It seems to me that the mutual fund investment is a whole lot riskier than the stock options investment (not to mention that it yields a profit of only 1/10th what the stock option portfolio might gain).
Why then does stock option investing get such a bad rap on the risk issue? It is clearly due to the fact that people look at only a single part of the picture (buying or selling options) and ignore the total picture.
They conclude that if buying options is dangerous, and selling options is even more dangerous, that option trading must be doubly dangerous. It does not occur to most people that a system of simultaneously buying and selling options might be even less risky than owning the stock. This is the case, but most people never take the next step and learn the truth.
The truth is that a properly-executed stock options strategy is considerably less risky than the purchase of stock or a mutual fund. However, it takes work. You will have to learn a little about how options work, and be an active part of the investment process. You can’t plunk down your money like you do with a mutual fund, and passively ignore your investment.
The fact that stock options investing takes work discourages most people from even considering an investment in stock options. That is fine with me. When I compare my returns each year with what the mutual funds are making, I feel like a real winner. I may work a little harder, but that’s a small price to pay for the returns I make.
Mr. Cyriac J. Kandathil, Chief adviser AssuredGain.com
Note: I hope this will be eye opener for all those who have failed to make money using options – Narendar Rathod, AssuredGain.com – Trade Wisely and Relax.
In today’s blog, I will divide trading into two basic categories: directional and non-directional and discuss about using non-directional to make profitable options trading.
If you have been trading for a long time, you may know it’s very difficult to predict market. I remember a wonderful quote by Louis Navellier, “Just when you think you are smart, the market will show you just how really dumb you are.” I would like to highlight another quote by William Bernstein, “There are two kinds of investors, be they large or small: those who don’t know where the market is headed, and those who don’t know that they don’t know. Then again, there is a third type of investor – the investment professional, who indeed knows that he or she doesn’t know, but whose livelihood depends upon appearing to know.”
Directional trading: Example: A traders after making detailed technical analysis(Gann, EWT, candle-stick, etc) and buys NIFTY future expecting the NIFTY to bounce above the cost price, reach target and finally book profit IF NIFTY has bounced as predicted. One more trader who also had done detailed technical analysis (Gann, EWT, candle-stick, etc) and predicted that NIFTY would fall, shorts NIFTY future expecting NIFTY to fall below short price, reach target and finally book profit IF nifty had fallen as predicted. These are speculation trades. One can lose huge money in this kind of speculative activity of predicting and trading if he is not managing his risk properly. Market can go expire anywhere above 5200, between 5200 and 5000, or below 5000 or 4600. Predicting where the NIFTY will expire is a difficult task for many of us. On the other hand predicting where the NIFTY will not go is a much easier task that predicting the direction. Non Directional Trading is about making money predicting where the market will not go. Ask yourself, which is easier, to predict where the market will go or to predict where the market won’t go?
Following is the list of non-directional option strategies which works without predicting market direction or neutral option strategies
To be continued….
Trade Wisely & Relax
Zero cost collar or zero cost option is an option technique to safeguard the gains obtained on holding stocks. This is very simple option strategy which can be used safely to protect the profit accrued on holding stocks. This can be used by investors who do not wish to trade intraday or positional trades and invest in blue-chip stocks for long-term gain. Most of us buy insurance for our life but fail to buy insurance for stocks which we hold for long-term investment. In case if you own a stock that has increased considerably in value since you bought it? You may book profit or wait for more upside but you don’t wish to sell that stock as you feel that is more upside potential if one holds for longer duration. At the same, you want to insure your stocks from any crash, collar is the best strategy to insure your stocks without any cost and insure you in case if the stock price falls drastically. Using collars you can preserve or "lock in" profit on your stock while allowing you to benefit from additional upside gains. In effect, you can place a "collar" around your stock which limits downside risk while taking advantage of upside movement with little or no cost.
Definition: A collar is an options trading strategy that is constructed by holding shares of the underlying stock while simultaneously buying protective puts and selling call options against that holding. The puts and the calls are both out-of-the-money options having the same expiration month and must be equal in number of contracts.
Let’s discuss this strategy with example: There are two parts to creating a costless collar. The first step is to protect or lock in your profit. This is done by purchasing a put contract on the stock you own. A put contract gives you the right to sell the underlying shares of stock. For example, if you own 100 shares of Infosys currently trading at Rs.2640 per share that cost you Rs.1500 per share, you have an (unrealized) gain of Rs. 1, 14,000. He can sell INFOSYSTCH 2700 CE @32.50 and buy INFOSYSTCH 2550 PE @23.35.
There are three possible scenarios when the options expire:
Happy trading options
Dear Readers,
In today’s post I will concentrate on some significant thoughts for the newbie option traders. Options trading get so much press these days that it’s tough for newbie traders to kick start trading options. I think there is a natural evolution to the whole process and it can’t be hurried. Options can’t be learnt overnight and traded. It requires discipline and perseverance. If you think, you can become rich overnight by trading options, you are wrong. Options are not a get rich plan that you can jump into. You may ask me if people make a lot of money trading options. Yes, and they also lose a lot of money. The risk and reward is superior and every blunder is exaggerated. Never jump into trading options without understanding them. You may be blown-up in case if you make blunder. Don’t be frightened, once you learn options you will never go back to trading anything else.
1. Read, read, read. I would request you to start with “The Bible of Options Strategies” by Guy Cohen, The Option Trader Handbook: Strategies and Trade Adjustments by George Jabbour & Phillip Budwick and The Volatility Edge in Options Trading by Jeff Augen. Learn all that you can about option trading. Larry McMillan is the best known author for option trading books. 2. Trade options as an addition of your portfolio. Options give you the flexibility to construct risk and reward. Don’t do any speculative trade. Use them to hedge and generate income.
3. Be suitably capitalized. If you do not have Rs. 50,000 of speculative risk capital, you should not be trading options. Options are not a recently discovered vehicle to financial freedom. They are a complex, dynamic product that will strip you of everything the second you let your guard down and can give steady income in any market if used appropriately.
4. Set reasonable expectations. If I make 25% a year (in any market, bull-bear or sideways) I’ve met my target. You will hear people talk about making 20% per month, those are very high –risk trades which can wipe one year again in one month.
5. Be ready to lose some money. After 8 years I still have a few losing trades. Managing risk should be giving top priority and making money second priority.
6. Spread out your money and never allocate more than 10% to any one trade. When possible, scale into positions.
7. Never short call or put without any hedge.
Many retail traders do NIFTY trading by predicting market directions, For instance, some retail traders are bullish on NIFTY and expecting NIFTY to rally after budget, others are bearish and predict NIFTY to touch 4600. These are directional trades and are very risky if done without hedge. Never trade NIFTY future without hedging as you may incur huge loss if NIFTY does not move as per your prediction. What is the solution for this problem? Can NIFTY be traded without knowing market direction? Yes, you can trade NIFTY options without predicting market direction. There are many strategies an option trader can pursue which are non-directional and can give decent profit. Classical example is selling out of the money options is one way of trading without predicting where the market direction.
If you are an option seller you may be know the advantages of time decay as a factor in non-directional trading. There are numerous occasions where the market moves unfavorably to your position but your trade still ends up a winning one because the passage of time eroded the value of the option.
Let’s take a quick look at how this is possible. On Feb 1, 2010, NIFTY spot value was 4899.70. Let’s assume that at the close of the day we sold a 4900 call@117 (short) and bought the 5000 call @72(long). We collected Rs. 2250, excluding commissions and fees, while constructing a call spread, which provides us with limited, pre-determined risk.
There are 100 ways to depart your girl friend but there are only 5 ways NIFTY can move from here.
1) NIFTY can stay range bound and trade between 4800 and 4900. 2) Enter a slow bearish trend reaching, at expiration, the 4700 level. 3) Enter a strong bearish trend expiring well below the 4700 level. 4) Enter a slow bullish trend expiring at the 4950 level. 5) Enter a strong bullish trend expiring above 4950. As the seller of this spread you may profit in four out of the five possible scenarios. In case of directional trade, probability is 50:50(up or down) but here it’s very low. Only a strong bullish trend, which will bring the underlying market well past your short option strike price at expiration, will turn this spread into a losing one. Any of the other four scenarios will make your trade a winner at expiration.
Trouble for option sellers arises if the market without a doubt enters a strong trend adverse to your position. But what if you could trade in such a way that would minimize your dependency on market moves? Delta Neutral trading is precisely that. Indeed, in any system of trading there is a little thought, as small as it may be, to direction? Delta Neutral, while indeed influenced by quick moves or gapping markets, attempts to minimize the affect of such market movement on your position and focuses on profiting mostly from the one aspect all option sellers look for – time decay.
Narendar Rathod, Options Strategist, www.assuredgain.com
