Hindenburg says another report coming

This is a copy of my newsletter sent to my subscribers on Tuesday, 14th of Mar 2023. You can fill out the form above to receive my newsletters.

Silicon Valley Bank Collapse – should you worry?

During March 2023, three large banks in the United States with significant exposure to the technology sector and cryptocurrency collapsed.

If you are my old newsletter subscriber you may remember that I told you many times not to invest in cryptocurrencies. If big banks with lots of exposure to cryptocurrencies can fail – what makes you think that you will not fail?

The First Bank to Fail: Silvergate Bank.

It announced it would wind down on March 8, 23 due to losses suffered in its loan portfolio.

The Second Bank to Fail: Silicon Valley Bank

This bank which had given loans to technology startup companies – mostly bad loans which never got recovered caused the Silicon Valley Bank to collapse and be taken over by regulators on March 10, 2023.

The Third Bank to Fail: Signature Bank

Signature Bank, a bank that frequently did business with cryptocurrency firms, was closed by regulators two days later on March 12, 2023, with regulators citing systemic risks.

Not sure what will happen to the money of the depositors but I am sure the authorities in the US do have some mechanism whereby the money deposited by innocent investors is not lost. US President Joe Biden promised that investors will not lose their money invested in the bank.

Should an Indian investor worry and sell banking stocks as they are falling since this news broke out?

NO.

Because the above banks do not have much exposure to Indian banks, so why share prices of our banks are falling?

NEWS, followed by PANIC.

It’s just that the investors fear that the Indian banks may be impacted too and will also fall. The truth is nowhere near that.

So hold and wait for banking stocks to recover.

Update:

Credit Suisse, a 166-Year old bank having its headquarter in Zürich, Switzerland, also collapsed in Mar 2023. Credit Suisse was more popular and trustworthy than the other banks that failed. Yet it failed.

If you hold banking stocks I suggest you wait for one year at least. They will bounce back.

Note: This post is part of the newsletter I send to my email subscribers. The dates are Feb and Mar 2023. You can sign up to receive my emails by filling out the form above. You will also get a 5 days free course on options.

If you read my emails you may have exited all Adani stocks – but unfortunately, if you have not then most of the Adani stocks are hitting the lower circuit. Even if you want to exit, you cannot sell now as the stock is down by more than 50%.

What I did do with Adani stocks?

Before buying any stock I do due diligence and basic research. I do this mostly while travelling. I know most people talk/listen to music or just close their eyes and sleep. I try to read anything interesting on stock markets/economics.

Smart tip: I have a car, but when going out for any small work alone I usually take the bus/auto rickshaw or just walk if the place is within half an hour’s walking distance. This is for these reasons –

1) it saves money
2) it saves the hassles of parking the car
3) walking in the sun improves my health
4) I get some extra time to read about the topics I am most fond of without bothering about the traffic and traffic signals. This compounds my knowledge of the subject.

One day while travelling on a bus this happened:

Not sure if this happens on your mobile, but when I open chrome they show me some interesting topics, especially on stock markets. It’s not a blank screen like when you open chrome on a desktop/laptop. I am interested in this world so I read any topic I see interesting.

Of course, Google will not throw websites from non-credible sources. So you can trust and read.

On that day there was an article on “The reality of Adani”. I got interested and started reading. This was well before the https://hindenburgresearch.com/adani/came out on January 24, 2023.

There it was written that:

Adani profitability downward: While the company’s top-line growth has been healthy, its profitability has been on a downward trajectory since FY20 – this raised my eyebrows. Why? Because Adani stocks have shot up in the last 2-3 years only.

Adani Return on equity (ROE): ROE is calculated by dividing net profit by net worth. Generally, if a company has ROE above 20%, it is considered a good investment. Adani company’s Return on equity (ROE) is at a meagre 4.1 per cent on a trailing twelve-month (TTM) basis (as of September 2022). This again raised my eyebrows. The stock growing at an exponential rate while ROE is at 4.1%. Doesn’t the price defy logic?

Adani in significant debt: The company has significant debt on its books, and promoters’ stake has been pledged to take loans. If the promoters default, their stakes will be sold by the lender to recover the loans.

As of December 31, 2022, five out of the seven listed Adani companies have their promoters’ stake pledged. Adani Power has pledged 25.0 per cent of its promoters’ stake, whereas the flagship company, Adani Enterprises, has pledged a 2.7 per cent stake.

Adani pledged shares of ACC, Ambuja Cements worth about $12.5 billion.

What is Share Pledge? Definition: Pledging of shares is one of the options that the promoters of companies use to secure loans to meet the working capital requirements, and personal needs and fund other ventures or acquisitions. A promoter shareholding in a company is used as collateral to avail of a loan.

Basically, he has kept as a guarantee/pledged (actually half of ACC and Ambuja Cement) this much money and taken a loan to expand his business.

A loan that can be repaid with profits is fine. Ambani does this a lot so RIL shares will not fall, but pledging shares are in my view a well-read and experienced reading on how businesses work – is that this is a huge mistake which comes under the definition of greed.

Today Adani Enterprises Ltd. stock fell by more than 5% due to this news. One big news of the business failing – it may become half of what it is today.

Plus not sure why he has seven companies listed in the stock market. Reliance also has many businesses but Reliance has not come out with different IPOs of different companies.

IPO is basically free money from the investors which is never given back to them. I hope you can understand what I am trying to say.

Adani Enterprises’ revenue grew at 26.4 per cent CAGR in the past three years – but ROE at 4.1 per cent again raised my eyebrows.

Adani astronomical P/E: Price to Earnings Ratio or Price to Earnings Multiple is the ratio of the share price of a stock to its earnings per share (EPS). Adani enterprises’ P/E was at that time 361 times, which is 15 times more than its 10-year median P/E of 23.7.

To justify such valuations, the company would have to grow at an unprecedented rate, never seen before in the Indian markets.

What are the chances that they can do something that the Indian markets have never seen? 1%.

But I was interested as FPO was coming – this usually takes the stock to a higher level.

Now as an investor, I had to decide to invest in not a risky business but an overpriced and highly leveraged company.

So what I did do? Read – this is very important:

I knew greed was attacking me. My Demat account was opened on my mobile. My destination was still 10 minutes away. I had to take a decision. To invest or not? So yes I did – but bought only 5 stocks – a risk that I can easily manage.

At 3534.97 my total investment is just 17,674.85. This is less than the cost of my mobile. An investment that does not bother me. This is the reason I have not taken a stop loss, but advising you to take a stop loss. Why? Because your financial situation and mine are different.

I do not know how much you have invested so I can only advise you to take a stop loss and save whatever you can.

For me, 17k just does not matter. I can easily wait for years to make a profit from this bad investment without compromising my lifestyle.

But for you, my advice is to exit and save whatever you can.

Next time greed attacks you while making an investment decision – just remember this post and take the decision accordingly.

Update: 20-Feb-2023

So next time you read such a negative report of a company just exit the stock. If the loss is huge exit 50% – leave the rest for in case the stock rebounds. Exit the next day of the news. If you delay in the hope that the stock will rebound – the stock may go down so much that there will be nothing left to exit. This is what happened to stockholders of the Adani group who did not sell the stock in hope.

See where the Adani Enterprise stock is on 17-Mar-23, two months after the Hindenburg Research report came on Adani group.

Adani has control over almost all ports in India and too many businesses. If Adani will fail NSE could go down to 16000 levels.

But Adani is trying hard to repay debts in phases. Not sure if they will be able to repay 100% of the debt. But the damage has been done. Lakhs of investors may have booked huge losses in Adani shares. I do not know the exact numbers, but the loss will be huge.

So in this Hindenburg report effect who lost? Only the retail investors – you and me. Adani has nothing to lose. He was once the richest man on Earth. This was only on paper. His net worth was calculated by the total money of free-floating shares of his 7 companies in the world. That is not his actual worth. His actual worth is the debt-free money he owns and the value of the assets he can sell like his house, cars, jewellery etc.

Here is the real-time list of world billionaires:

https://www.forbes.com/real-time-billionaires/

this is updated every 5 minutes.

I saw a news article: Hindenburg effect: Gautam Adani’s net worth drops below $50 billion

Yes, it is showing in the Forbes post as well.

So is the list real? No, it is virtual – just on paper.

Today the Adani family lives in the same house in they lived before the Hindenburg report which came out on 24-Jan-23.

He still drives the same car, eats the food made by his same chef, he has the same clothes, and all his assets are ditto same as they were before the report.

So where has the $50 billion gone? If you took a loss in any Adani share – count yourself in, not Adani.

Next time you see a report saying that blah blah net worth has increased or decreased – just tell yourself that they are talking about his company’s share price – not his net worth.

No Forbes or any other company will ever come out with a real list of the richest people on Earth. Never. Because it’s impossible to contact every rich person on Earth and ask them their actual bank balance minus debts, and their sellable holdings.

Update on :27-Feb-2023:

Hi,

I do understand what investors must be going through for the last year. In 2020 it was Covid. Job gone, stock markets down. In 2021 – covid came again in Phase 2. This was as if a builder built a housing complex, then seeing its success made its Phase 2.

Stock markets again went down then recovered.

Then in 2022 Putin was the new Covid and still, he doesn’t get the sense that it’s not the land that is important – its human lives and the economy. He ended up destroying both and still doing.

Total death toll now in this war has exceeded 200,000 (2 lakh) 🙁

After almost one year of the war, there was hope that stock markets will ignore the war and reach new heights. It did a few months back – and then…WHAM

AADDAANI…

But then it’s our fault as well. If you had Adani shares before the report came I am sure you bought them seeing last year’s returns.

Was it a correct decision?

Look at this page:
https://www.adanienterprises.com/investors/debt-information

Straight coming out from Adani’s website.

This was easy research that one should not buy Adani shares.

Here is the reason:

Adani Enterprises FY21 Net External Debt was Rs. 9,767.00 Crore

And in

Adani Enterprises FY22 Net External Debt was Rs. 24,504.00 Crore

They have not written the figures are in Crores, but you can guess, its not lakhs.
What about the entire Adani company debt?

The group had a gross debt of ₹2.26 lakh crore as of September 30, according to a stock exchange filing. Total cash and cash equivalents was ₹31,646 crore. It faces a repayment obligation of ₹17,166 crore between January 2023 and March 2024.
Source: TheHindu.com.

And if you did just 5 minutes more research you would have found that hold your breath … Adani’s group’s debt accounts for 0.5 per cent of total loans across the Indian banking sector. For public sector banks (PSU), the debt is at 0.7 per cent of total loans and for private banks, it is at 0.3 per cent.
Source:
Livemint.com

It means for every Rs.1000 loan in public sector banks, Rs 7 was given to Adani. And for the private sector, it was Rs. 3 to Adani.

We are talking about entire India.

This was enough to decide not to buy Adani shares. Even if you wanted to take a chance then you should have bought 5-6 shares. This would have given you a comfort zone now. It doesn’t matter how much a stock will fall when your stakes are low. I am in that comfort zone club.

Next time please do such research if you want to invest a big amount in a company.

Keep it Simple Stupid Works in stock market investing. We have given an example of Reliance stock.

Since Covid-19, stock markets have just moved randomly – deceiving investors and traders.

There are many proverbs in English and Hindi and I am sure in other languages too which teach us many things about wisdom and the truth of life and stock markets.

There is one that makes sense in almost everything we do: KISS – meaning – Keep it Simple, Stupid.

It is a design principle that states that design and/or systems should be as simple as possible. Wherever possible, complexity should be avoided in a system—as simplicity guarantees the greatest levels of user acceptance and interaction.

Now compare this with investing or trading or even a business.

Suppose you want to invest in Reliance, what will you look at?

Option A) 5 minutes charts?
Option B) Bollinger Bands?
Option C) Relative strength index (RSI)?
Option D) Price Action?
Option E) Fundamentals of the company?

Of course Option E. If the fundamentals of the company are strong – just invest – do not look at the price or any charts. This is what the greatest investor of all time said – Warren Buffet.

But how many follow?

Randomly chose 100 traders and ask them to invest in Reliance. Do not give them any option written above. I can guarantee that 95 of them will start looking at charts. Based on that they will take a decision.

Here is a fact – when a stock falls, nearly all Technical Analysis tools/strategies will indicate not to invest or short.

For the short term you either make money or lose. This returns a net zero or loss.

However, fundamentals almost always win.

Here is the lifetime (till date) return of Reliance:

Source: moneycontrol.com

So the investor who followed the basics of stock market investing won by a huge margin over a trader who looked at charts for a short-term profit.

Fundamental investing is following the Keep it Simple Stupid strategy and not making the entire process of investing complex.

The same strategy can be applied to options trading. Just keep the strategy simple and it will work most of the time.

The strategies in my paid courses are simple and easy to understand. They have a simple logic that options have theta (time value) – so it takes benefit of that but with a hedge so that the losses are capped at max 1500.

Option buyers run against time whereas time is with option sellers. This is the reason HNIs are option sellers, not buyers.

There are many strikes to trade options – you will learn strike selection in every strategy. When to take the profit out and when to exit the trade all is well explained.

They are so simple that execution will not give you any stress neither will the trade give.

There are seven strategies in the course.

• 4 are option strategies
• 2 are future hedging strategies – how to find the direction will be told here
• 1 is the HNI strategy for investors having 5 lakh+. This is renting the stock to make a monthly income with ZERO work.

After payment, I will send the strategies to your email in PDF format. You can start reading and for any doubts, you can contact me by Phone/Email or WhatsApp.

This support will be there for one year from the date of payment.

You can find the course fee here.

First here is the growth story of Adani Enterprises Ltd. (Stock symbol: ADANIENT – Group (A) Stock) Listed in both NSE and BSE.

On 01-Apr-2020 it closed at 137.07:

Source:
https://www.moneycontrol.com/india/stockpricequote/trading/adanienterprises/AE13

And on 07-Nov-2022 it closed at 4037.26:

This is an increase of 2845.40% in 2 and a half years.

On January 24, 2023, a USA-based company Hindenburg Research LLC – an investment research firm with a focus on activist short-selling founded by Nathan Anderson, based in New York City published a report with proof that the stock price of all 7 listed Adani companies in India was manipulated.

https://hindenburgresearch.com/adani/

My suggestion is if it is just a tiny quantity like 10-20k of holding in any Adani group shares in total then just keep it because the max loss is 10-20k. This will not have a major impact on your overall portfolio. Other good stocks will eventually recover. But if you hold more than 25k then take a stop loss.

Sell today or if you are willing to wait then make a decision this week.

If you bought the stocks a few months back you are still in profit. In that case, you are lucky. Do not think twice as the Hindenburg Research Report on the Adani group is highly detailed with proof.

It’s very big. You must have already known a few points mainly the stock prices of all groups of Adani shares were manipulated in the last 3 years.

This is the most important point:

Gautam Adani, Founder and Chairman of the Adani Group, has amassed a net worth of roughly $120 billion, adding over $100 billion in the past 3 years largely through stock price appreciation in the group’s 7 key listed companies, which have spiked an average of 819% in that period.

Here are the seven Adani Companies:

Adani Enterprises – 512599 ADANIENT Group (A)
Adani Ports & Special Economic Zone – 532921 ADANIPORTS Group (A)
Adani Transmission – 539254 ADANITRANS Group (A)
Adani Green Energy – 541450 ADANIGREEN Group (A)
Adani Total Gas – 542066 ATGL Group (A)
Adani Power – 533096 ADANIPOWER Group (A)
Adani Wilmar – 543458 AWL Group (A)

Now the next few points are also important:

1. Our research involved speaking with dozens of individuals, including former senior executives of the Adani Group, reviewing thousands of documents, and conducting diligence site visits in almost half a dozen countries.

This means they have all the proof.

2. Even if you ignore the findings of our investigation and take the financials of Adani Group at face value, its 7 key listed companies have an 85% downside purely on a fundamental basis owing to sky-high valuations.

This is a plain fundamental analysis and true.

3. Adani companies have also taken on substantial debt, including pledging shares of their inflated stock for loans, putting the entire group on precarious financial footing. 5 of 7 key listed companies have reported ‘current ratios’ below 1, indicating near-term liquidity pressure.

This was already known to investors long back but they kept investing. The company is in 40% debt as on Jan 30, 2023.

4. 4 of Adani’s listed companies are on the brink of the delisting threshold due to high promoter ownership.

They have not named them.

So yes Adani shares will fall more unless they prove Hindenburg Research biased and fake/wrong to make a profit on short selling of Adani bonds in the US.

Though Hindenburg Research has clearly said if the Adani group files a case against them – they will give all the proof plus some more and ask for evidence to prove them wrong.

There are many more points. Then they explained each point in detail – this is for the financial experts who want to know everything in detail and media.

So my view is to exit all Adani stocks for now. There are better stocks available to invest in now.

Banking stocks are also falling because they have given loans to the Adani group. I suggest holding them for now.

Update on  01-Feb-2023:

Let me first show you what happened to Adani stocks today 01-Feb-2023:

Price as on EOD 01-Feb-2023

Here are 6 steps to learn options trading. Please note that reading may be easy but implementing needs patience, hard work, commitment, money, time and energy:

Step 1: Read about options basics first here:
Options Greeks Explained Delta Gamma Theta Vega Rho

Step 2. Read 3 times the above page so that you learn the Option Greeks by heart.

Step 3. Then watch one At The Money (ATM), either Call option (CE) or Put Option (PE), move with the stock for one hour at least.

Step 4. Do this for 3 days – same stock, same time, without a break in between.

Step 5. Now on the 4th day after seeing the option move for half an hour you will get some confidence to trade. If yes – buy the option. Do not take too much risk – just one lot. Keep 5 points profit target and 2 points stop loss target in the trading account. This broker offers such an option. Do just one trade a day. Keep it intraday only. Do not take the trade the next day if you lost, and do not get excited if you win. Do not trade a second time the same day – you will lose.

Step 6. Do no. 5 for the next 10 days. Do not break the rule. If you are good – which means if you are making a profit – buy 2 lots on the 11th day – now go back to no 5 and trade for the next 10 days. See
your results after 20 days of trading. If you are still winning then on the 21st day increase the number of lots to 3.

Continue for days and days… same stock same strategy – do not deviate from the strategy. Do not get overconfident even if you are making very good money. Your stop loss and target points since now integrated in your brain should never change. Do not change the stock, and do not change the time of trading. Your body and brain are habituated to trade at that time so do not change the time.

After 50 days of continuous trading, you will know whether you can be a good options trader or not.

If you have not done my 5 days free course on options you can register your email in the form below. Your course will begin the next day.

In the year 2022, we witnessed a lot of things. End of Covid 19 in India and start of War in Ukraine. Stock markets recovered and hit an all-time high. But is your portfolio all-time high?

Next year not sure what will happen.

But one thing will remain in common for both 2022 & 2023 and beyond – 99% of traders lose money. 🙁

Do you know why this happens?

Because there is average knowledge and zero financial planning.

“Risk comes from not knowing what you’re doing.” – No not told by me, but by the greatest investor of all time – Warren Buffett. If you are losing money trading you are doing exactly this.

And it’s going to get worse.

Why?

Because of the garbage entry of knowledge via social media especially YouTube, WhatsApp & Telegram channels and Twitter.

I am sure you too watch it. Have you benefited? If not then why do you still watch? To know that magic formula to make money from stock markets? The magic formula does not exist.

Achieving success in any field takes time, hard work, knowledge and perseverance. Adding 2% a month ends up with 24% returns a year. This is what Warren Buffet has achieved – but it has been done for a very long time. Look at the below picture you will understand.

Do you know the greatest investor in the world Warren Buffett started investing at the age of 11 and made a million dollars (10 lakh dollars) at the age of 30?

So to make 10 lakhs (all of that is not profit) took him 30-11 = 19 years. This is almost 2 decades just to make a few lakh dollars. After that the growth was exponential. Warren Buffett is the seventh-wealthiest person on the planet – but he did not achieve that feat overnight, nor did it come on a silver platter. Like many of his fellow billionaires, Buffett owes his impressive net worth to years of hard work and determination.

See how his wealth increased with his age:

Can you see that more than half of his wealth came after the age of 75 – that’s the age most people never see.  And what most traders are looking for on YouTube/other social media platforms? That one trick/trade that can make them a millionaire in one day.

And I need not mention the fake screenshots you find on Twitter.

That’s the reason I am not much into social media. This is all I know, but I am sure there is more to it.

My advice is to stop listening to bad advice on social media in 2023. You will harm yourself.

Try to stick to what you know. Use the knowledge you have to trade. Keep adding small profits and you are done.

My conservative options course is enough to keep adding small profits every month, month after month. 

Do whatever, but stop learning trash knowledge in trading.

Trade sensibly, and stick to your plan in 2023.

And there is something more important than wealth – your health. At least eat healthy if you do not have time to exercise.

Wishing You A Happy & Healthy New Year 2023.

Since I started this website in 2014, the most asked question was related to the Nifty Option Chain NSE (National Stock Exchange). A lot of traders see the options chain before taking a trade. In this post, you will learn how to read, understand and interpret the option chain. I will explain the option chain of NSE available here:
https://www.nseindia.com/option-chain

In short, an option chain will show the LTP (Last Traded Price) of the options of a particular expiry of a stock/index. You can change the expiry date or the stock to see the options chain of that stock’s expiry.

There is a myth that the option chain indicates which option to buy. Please note that option chain does not give any indication of where the market is heading.

The Nifty Option Chain NSE is an indicator that shows the current price movement of the stock market. It is based on options trading and is used by traders to predict future movements of the stock market. Note that it’s used to predict the movement – it does not guarantee the move up or down.

In this post, I will discuss what exactly a trader sees in the Nifty Option Chain and decides the direction and which strikes to trade, whether to buy or sell call or put etc.

How to Trade Options with the help of the Nifty Option Chain?

Details of the Nifty Option Chain NSE

The nifty Option Chain is one of the most popular indicators among investors as well as traders. This indicator helps them to determine whether the Nifty will rise or fall. However, no indicator gives a guaranteed direction of the markets. Similarly, Nifty Option Chain also gives an indication of where the market is heading or may finish on the expiry day, however, it’s just an indication and not an assurance. Please keep this in mind while reading this post.

What Is an Options Chain?

An option chain also known as an options matrix, is a live listing of all available options contracts and their trading data for a given security. It shows all listed puts, calls, their expiration, strike prices, volume, LTP (Last Trading Price) and more information for a particular stock/index. It is available 24/7 online. When the market closed the last data is kept for traders to study. When the markets open to trade again, the data keeps changing with the move in the stocks.

An option chain has two sections: calls and puts. A call option gives the right to buy a stock while a put gives the right to sell a stock. The price of an options contract is called the premium, which is the upfront fee that an investor pays for purchasing the option. This premium is decided on various factors which you can read here.

How The Call and Put Buyers Profit?

If the price goes above the strike price, then the call buyer will profit. If the opposite happens then the loss will equal the premium paid to buy the call.

If the price goes below the strike price, then the put buyer will profit. If the opposite happens then the loss will equal the premium paid to buy the put.

Similarly,

If the price goes above the strike price, then the put seller will profit. If the opposite happens then the loss will equal the premium received to sell the put minus the premium where the trader decides to take a stop loss.

If the price goes below the strike price, then the call seller will profit. If the opposite happens then the loss will equal the premium received to sell the call minus the premium where the trader decides to take a stop loss.

Important note: Traders look at the option chain mainly to decide which option strike to buy or sell. They mostly buy/sell the strike where they see the most volume (explained below) thinking that most traders (especially HNIs who have access to better insights into the markets) are putting their bets there – so they try to copy the HNIs.

Please note that copying the HNIs does not guarantee success.

Explanation of the Data of the Nifty Option Chain (NSE)

In India, Nifty Option Chain is the most seen option chain therefore I will explain the data shown by the exchange here. You can see the Nifty Option Chain here:
https://www.nseindia.com/option-chain

Please open the above webpage in a different window (by default it will open in a different window if you click), see it then come back here.

You can see:

CALLS, PUTS, OI, Chng in OI, Volume, IV, LTP, Chng, Bid Qty, Bid, Ask, Ask Qty & Strike

Note that this is what I see as of Nov 2022. The data may change with time, however, these are important data and they will be there – some additions may happen in future.

Here is the screenshot:

Option Chain Equity Derivatives NSE

Then we can see the open interest, volume, LTP, and strike price of both call and put options which are important parameters to depict the option chain.

Option chain data is the complete picture about option strikes of a particular stock or index in a single frame. If it’s not refreshing automatically you can refresh the page to see the current data. In the Option chain frame, the strike price is at the Centre and all data pertaining to calls and puts on the same strike are presented next to each other. This is made for the clarity of the viewer. You can compare the data of the call and put of the same strike to get an idea of volume and other data of both.

OI – Open Interest:

This is the total number of trades that took place in that option but were not closed. Suppose A bought an option from B at whatever price then the OI will be counted as 1. Suppose the same option is then bought by 10 more traders then the Open Interest will be 1+10 = 11. But now suppose A sees that he is making some profit and decided to sell the option. X bought that option. So the first trade that was opened by A and B is now closed. Therefore the OI will reduce by 1. It will be 11-1 = 10.

Since in the liquid option strikes the trades happen very fast you will see open interest in thousands or even lakhs. If you refresh the page after some time you will see that the OI (open interest) changes.

In technical language, the total number of all outstanding unsettled derivative contracts of an option strike is called the Open Interest.

Open interest can be seen in Nifty Futures as well. You can see it here:
https://www.nseindia.com/market-data/equity-derivatives-watch?name=NIFTY

Is a high open interest good?

If you are an HNI (High Net Worth) trader you may look for options that have high open interest because you will want to enter and exit that trade with ease. If there is low liquidity both entry and exit will be a problem. So yes, high open interest for a particular contract is good if you want to trade with 20 or more lots.

TIP: It is very important to check open interest if you want to trade in a high number of lots otherwise you may face slippage (irrational pricing) while buying and selling the contracts. Slippage in pricing happens when there is less number of people trading. If you hit market orders you may pay a high premium while buying and get less premium while selling. Therefore if you are trading in multiple lots always trade in high open-interest contracts and always place a Limit Order.

Change in Open interest:

As said earlier open interest keeps changing with new trades opening and closing. It becomes almost zero on the last minute of the expiry day. If you see that open interest in the call options is increasing, it indicates that most traders are assuming that the market will move up and therefore money is flowing on the call side. Please note that this is just an assumption markets are unpredictable therefore you should always trade with a hedge or strict stop loss. High open interest on the call or the put side can give you an idea of the direction. It definitely increases the chances of success but does not guarantee it.

If the open interest is declining it indicates that money is moving out and the current trend may start reversing.

Volume:

Volume is another important indicator of the market. Experienced traders look at these two metrics before taking a trade. Volume is the total number of contracts traded in a given period, mostly that day. A high and increasing volume means money is flowing in that contract and the trend may continue for that day. A decreasing volume means the trend is reversing.

Volume is a good indicator for intraday or short-term trading. However, you must have a plan before entering a trade. You must be sure when you will lock in the profits and when you will exit with a stop loss.

Sometimes you will see that the volume is higher than the open interest which suggests that there was a lot of action on that option contract. It usually happens in At The Money (ATM) contracts on an event day such as results or some news on that stock.

Open interest also gives you key information regarding the liquidity of an option. If there is no open interest in an option, there is no secondary market for that option. Derivatives are traded in the secondary market. Shares are issued in the Primary Market (for example IPO), while they are traded in the secondary market.

IV – Implied Volatility:

IV is the market’s forecast decided by some formula based on the trading patterns at that time. It implies the likely future volatility of the stock/market. A high IV means that the stock/index is witnessing and may witness in the short term high volatility. During high IV the stock moves up and down in a rapid way plus the distance between the high and low for that day will be high. During a low IV period markets are calm.

Please note that IV has nothing to do with volume but usually when IV increases the volume also increases. India VIX is the IV index of NSE. You can see it here:
https://www.moneycontrol.com/indian-indices/india-vix-36.html

India VIX is inversely proportional to the movement of the Nifty. You can also read how to trade intraday with help from India VIX. High IV results in a higher premium of options and lower results in a lower premium of options. Some traders buy or sell options looking at IV. They sell when IV is high and buy when IV is low.

What is a good IV for stock options to buy and sell?

Generally speaking, short options/volatility trades become relatively more attractive when the IV rank is above 50%, whereas long options/volatility trades become relatively more attractive when the IV rank is below 50%.

You can find IV of stock options here:
https://www.nseindia.com/option-chain

A high IV in stock options means that the price of the stock will go through a significant change in the next few days. Similarly, a low IV signifies the stock will not move much over the next few days.

LTP- in Share Market

LTP means the Last Trading Price. This means the most recent price on which a trade took place. Every stock, option, future or commodity will have the LTP shown in your trading dashboard. Once your trade goes through then you will see LTP as the rate at which you had done the trade. Another trade and it will change.

Is LTP important?

Today many trading websites offer tables that show you the history of the prices at which the stock was traded most recently – the history of LTP. You can check the history of LTP and buy/short the stock for the short term. If the LTP is increasing over time you can buy and if it’s decreasing over time you can short.

Chng:

This means change. Change is the difference between the current value and the previous day’s market close. Please note that any data change does not mean a recent change – like the price change or VIX change recently. It’s the closing price of the previous day vs the current live price in the market.

Bid Qty:

You see in any market there is a bargain. Every day we bargain for the price we are willing to pay for a product/service with the merchant/vendor. The stock market is not an exception.

Bid – The term “bid” refers to the highest price a buyer will pay to buy a specified number of shares of a stock at any given time.

Bid Qty means the bid quantity – it means the price a buyer is ready to pay for any stock or option or commodity. When you open your trading dashboard to trade you can see the Bid and Ask price for any stock or derivative.

The total bid quantity means the total number of buyers in that particular stock or commodity.

Ask Qty:

It’s Ask quantity. It means the price at which the seller is ready to sell any stock or derivative or commodity.

The term “ask” refers to the lowest price at which a seller will sell the stock. The bid price will almost always be lower than the ask or “offer,” price.

An Explanation of Ask Qty in stocks:

As explained above the Ask price is the price a seller is willing to sell. However for any trade, there can be many sellers, so the stock market software shows the lowest price at that time a seller is willing to sell. The rest are not shown as no one will willingly pay more for trade. Once that trade goes through, the LTP changes and the Ask price moves to the next seller who is offering the lowest price to sell.

Note that once a trade is over the stock makes a move. Now depending on the Demand and Supply the stock can move up or down. If it moves up the sellers will move their prices up, thus the next lower price that is displayed may be higher than the previous  Ask price or lower depending on the stock move.

The difference between the bid and ask prices is called the spread. If the spread is high it means that the stock is illiquid. If you are getting into an illiquid trade make sure to trade in the Limit Price, or else you will get a very high rate if you want to buy or a low rate if you want to sell. Limit Price ensures you get the price you are willing to pay or get.

How to buy stock lower than the Ask price?

This is possible only in liquid stocks. Open your trading terminal and set a Limit Price to buy the stock. Note that you can’t set any price to buy the stock. This can lead to a false fall in the stock. For example, if a stock is at 100 and your bid to buy that stock for 90 for a huge quantity then a flash crash may happen in that stock. To overcome this SEBI has prescribed a percentage limit on which traders can ask or bid the prices. This ensures the stock price does not become too volatile.

If the stock falls you may be able to buy at the Limit Price you had bid for the stock. This way you can buy the stock lower than the current ask price.

Strike:

This term is mainly used when trading options. Suppose a stock has many options. Assuming the price of XYZ stock is 50. It may have options at strikes 50, 55, 60, 65, 45, 40, 35 etc. The strike price can be either In the Money (ITM), Out of the Money (OTM) or At The Money (ATM). The strike price determines the premium of that strike.

The strike is also the price at which the underlying security can be either bought or sold once exercised.

This article is part of my newsletter sent to my subscribers. If you do not want to miss a post you can subscribe above.

I also wrote earlier in my blog that India VIX and Nifty movement are inversely proportional. You can read that post here:
https://www.theoptioncourse.com/nifty-and-india-vix-are-inversely-proportional/

What is India VIX?

India VIX is a volatility index based on the NIFTY Index Option prices. From the best bid-ask prices of NIFTY Options contracts, a volatility figure (%) is calculated which indicates the expected market volatility over the next 30 calendar days. You can read more here:

https://www1.nseindia.com/products/content/equities/indices/india_vix.htm

So basically not just Intraday, but India VIX can help guess market direction to some extent for positional traders as well.

How India VIX and Nifty are Related

Today (12-Sep-2022), just to explain to you the movement of both I have their screenshot and pasted it below. See how India VIX is decreasing and Nifty is increasing.

This is the screenshot of India VIX on 12-Sep-2022 at around 1 pm when markets were open:

India VIX on 12-Sep-2022

Source: Google

This is the screenshot of NSE on 12-Sep-2022 at around 1.10 pm when markets were open:

NSE 12-Sep-2022

How India VIX can help you decide the market direction for intraday trades

If you are an Intraday trader India VIX can help you take a trading decision. Just go against the India VIX trend for the day. You can also go with the trend of the Index – but India VIX trend is more clear than the Index trend. You do not need any technical indicators to see the trend from your naked eyes. Just a glance will help you to guess the trend for the remaining of the day.

Can India VIX be Manipulated?

India VIX is machine-generated, so it cannot be manipulated. Though nowadays it is very hard to manipulate stock movements, if not impossible. But India VIX cannot be manipulated in any way.

Read How Illiquid Stocks are Manipulated

Illiquid (low volume) stocks are manipulated by fraudsters who login into someone’s account by somehow getting their password and short sell, for Intraday only, in huge quantities which creates real (but illegal and fake) volume. This crashes the stock. When the stock falls, they buy that in their account and wait for a reversal. When the stock reverses back to where it was – they sell and book profit. All of this is done in a few seconds. This is called a flash crash.

Can this illegal trade be reversed?

Unfortunately, unless the person in whose account the fraud was done, does not report this to NSE/BSE where the trade took place within 24 hours, it becomes a legal trade. Even if they report, they have to give proof that some fraudster had taken their password and did the fake trading to make sure the stock falls.

But even if NSE/BSE reverses the trade the damage would have already been done. The person who did the freak trade would have withdrawn all cash in his bank account. After this, the only option for the person who got cheated is to file a case in a court of law. Unfortunately, you know that in India it may take decades for a case to finish.

However, luckily nowadays due to strict surveillance by SEBI and market regulators, these things are not very common, but still, you must keep changing your Demat account password every 3-4 months and must not write it down anywhere. Just remember it as you remember your name and make sure not to give your Demat account details to anyone for whatsoever reason.

It is even more challenging to flash crash Index yet it does happen. You can check the dates here:
https://en.wikipedia.org/wiki/Stock_market_crashes_in_India

So trade safe and be safe.

Have you ever been asked about your trading password or any other details? You can write in the comments section below.

Related post:
How to guess Sensex and Nifty share price today for intraday

This article was published on Thurs, 01-Sep-2022

Traders do a lot of speculative trading in the US as well as here in India. 70% of these trades in either options or futures are intraday. I asked a few of my customers why they trade only intraday – most of them replied the same. We do not want to take the overnight risk with our money. They were afraid of gap up or down opening the next day.

Well, there is nothing wrong with being afraid of the gap opening the next day, but most traders do not know that if they hedge their trades, the gap opening will not damage the position. The hedged trade works like a sword to protect the losses from the actual trade.

Trading intraday is ok as long as your position sizing is as per your risk appetite. If you made some money in one Intraday trade, that does not make you a genius of intraday trading. This is called beginners luck. You should not double your lot size in the next trade. There is a very high chance that you will end up losing all of what you won in the last trade. This practice is followed widely by intraday traders.

If you are trading intraday you must guess the direction of the stock indices. Today there is numerous software to give you millions of data in milliseconds. But I have seen that most of them are confusing. Data is just what is happening at this moment not what may happen in future. Intraday traders study something online, or read in some book or do some course and try to read data and take action based on this data.

Technical analysis combined with a good strategy may work intraday but just technical analysis alone is not sufficient. But there is a problem and that is which technical analysis is good?

Here is a List of Names and Descriptions of Some Popular Technical Analysis Indicators:

• • Bollinger Bands – A Bollinger Band® is a technical analysis tool defined by a set of lines plotted two standard deviations (positively and negatively) away from a simple moving average (SMA) of the security’s price, but can be adjusted to user preferences. For more information visit: https://www.investopedia.com/terms/b/bollingerbands.asp
  • Fibonacci Sequence – The Fibonacci sequence is a set of steadily increasing numbers where each number is equal to the sum of the preceding two numbers. Fibonacci retracements are the most common form of technical analysis based on the Fibonacci sequence. During a trend, Fibonacci retracements can be used to determine how deep a pullback may be. For more information, you can visit: https://www.investopedia.com/terms/f/fibonaccilines.asp
  • Stochastic Oscillator – This technical analysis is used for identifying overbought and oversold levels. An overbought level is indicated when the stochastic reading is above 80. Readings below 20 indicate oversold conditions in the market. More information here:
    https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/stochastic-oscillator/
  • Moving Average Convergence Divergence (MACD) – Moving average convergence divergence (MACD) is a trend-following momentum indicator that shows the relationship between two moving averages of a security’s price. The MACD is calculated by subtracting the 26-period exponential moving average (EMA) from the 12-period EMA. For more information read this: https://www.investopedia.com/terms/m/macd.asp

    Note: Moving average is a technical indicator that I have personally experienced and seen it works 60-70% of the time. However, it only works for the short term, not the long term. Short term means 15-30 days. MACD will not help in Intraday trading. However, for swing traders and investors MACD is a good technical indicator tool.

  • Relative Strength Index (RSI) – This is a very popular technical indicator developed by J. Welles Wilder Jr. The RSI can point to overbought and oversold securities. It can also indicate securities that may be primed for a trend reversal or corrective pullback in price. It can signal when to buy and sell. Oversold securities can be bought and overbought securities can be sold.

    An RSI reading of 70 or above indicates an overbought situation. A reading of 30 or below indicates an oversold condition. A chart of closing prices is made for the last few days (mostly 14) and it is compared to historical closing prices to determine the strength or weakness of a stock or index. RSI also measures the speed and magnitude of a security’s recent price changes to evaluate overvalued or undervalued conditions in the price of that security. The RSI is most typically used on a 14-day timeframe.

    For more information visit: https://en.wikipedia.org/wiki/Relative_strength_index, and https://www.investopedia.com/terms/r/rsi.asp

    Note: Relative Strength Index (RSI) is another technical indicator I have experimented with a few times and seen that it works 70% of the time. Disclaimer: When I use technical indicators I used them in investing only, not for trading derivatives.

• On-balance Volume Indicator (OBV) – On Balance Volume (OBV) measures buying and selling pressure as a cumulative indicator that adds volume on up days and subtracts volume on down days. When the security closes higher than the previous close, all of the day’s volume is considered up-volume. For more information visit: https://www.fidelity.com/learning-center/trading-investing/technical-analysis/technical-indicator-guide/obv
• Accumulation/Distribution Line (A/D Line) – The accumulation/distribution (A/D) line gauges the supply and demand of an asset or security by looking at where the price closed within the period’s range and then multiplying that by volume. The A/D indicator is cumulative, meaning one period’s value is added or subtracted from the last. For more information visit: https://www.investopedia.com/terms/a/accumulationdistribution.asp
• Average Directional Index (ADX) – The average directional index (ADX) is a technical analysis indicator used by some traders to determine the strength of a trend. The trend can be either up or down, and this is shown by two accompanying indicators, the negative directional indicator (-DI) and the positive directional indicator (+DI). For more information visit: https://www.investopedia.com/terms/a/adx.asp
• The Aroon indicator – The Aroon indicator is a technical indicator that is used to identify trend changes in the price of an asset, as well as the strength of that trend. In essence, the indicator measures the time between highs and the time between lows over some time. For more information visit: https://www.investopedia.com/terms/a/aroon.asp
• Stochastic Oscillator – A stochastic oscillator is a momentum indicator comparing a particular closing price of a security to a range of its prices over a certain period. This is somewhat similar to RSI. For more information visit: https://www.investopedia.com/terms/s/stochasticoscillator.asp
• Head and Shoulders Technical Analysis – It is a specific chart formation that predicts a bullish-to-bearish trend reversal. The head and shoulders pattern forms when a stock’s price rises to a peak and then declines back to the base of the prior up-move. Then, the price rises above the previous peak to form the “head” and then declines back to the original base. A head and shoulders pattern—considered one of the most reliable trend reversal patterns—is a chart formation that predicts a bullish-to-bearish trend reversal. For more information visit: https://www.investopedia.com/terms/h/head-shoulders.asp

  As you can see it’s very hard to master every technical indicator given above. There may be more, but I only know the above. If you already know some indicators and it’s doing its job – great. Please do let me know in the comments section below. But if you do not know any technical indicator then it’s okay. In this article, I will reveal what is the best way to find the direction of the stock without doing any technical analysis. Just like technical indicators, this will not work 100% of the time. It will work 60-70% of the time, but this method is easier than learning a technical indicator.

  Here is a screenshot of Stock exchanges in the United States: Dow Jones Industrial Average (DJIA), Nasdaq Stock Exchange & Standard and Poor’s 500 (S&P 500) INDEX on the closing day of 31-Aug-2022:
  

  

  Dow-Jones-31-Aug-22

  

  NASDAQ 31-Aug-22

  

  S&P 500 31-Aug-22

  And now look at the screenshot of Sensex (on 01-Sep-22, when it was open for trading). Sensex is an index of 30 well-established and financially sound companies listed on the Bombay Stock Exchange (BSE) in India:

  

  Sensex 01-Sep-22

  What do you make out? Can you see the similarities in the movement of the US stock exchanges and India? Due to the time difference, US stock exchanges close much before Indian stock exchanges opened to trade the next day. Of course, if it’s the 2nd day of the month in India, you can see the closing chart of the previous day (1st of the month) of the US stock exchanges and guess the direction intraday of the Index you want to trade on that day. Of course, you will trade Nifty options or futures.

  I have seen that Indian markets follow US markets a lot the next day. This will help you to take the trading decision for that day.

  Hope this article will help you to guess the market direction intraday and trade well.

  Want to know more on how to guess the direction of the Nifty intraday? Read this article.

  For any questions on stock trading, you can contact me here or write them down below in the comments section.