Date of Posting: Monday, 08-July-2024

Note: This is a copy of the newsletter I send to my subscribers almost daily. If you also want to read please subscribe above.

I am sure by now you must have read or heard that the founder of India’s first discount broker Mr. Nithin Kamath (Nithin Kamath is the Co-founder and Chief Executive Officer (CEO) of Zerodha, the largest stock brokerage firm in India, headquartered in Bangalore, Karnataka) saying in social media platform X post, that they may need to reconsider their zero brokerage model or potentially raise brokerage fees for F&O (futures and options).

This after SEBI issued a circular mandating that all market infrastructure institutions, including stock exchanges, adhere strictly to their fee-charging practices.

I will explain what that circular is later but as of now if you trade derivatives should you worry?

NO.

Right now it’s a wait-and-watch situation. Don’t unnecessarily panic. Even if there is an increase in brokerages buying stocks, I think most will start with a Rs.10 increase, which is almost as good no increase.

Suppose you make a profit of Rs.1000/-. Right now you get 1000 – STT – Current Brokerage. After the increase in brokerage, you will get 1000 – STT – Current Brokerage-10-10. Just think what difference will it make to your life. Not much.

What exactly was the SEBI circular that may have led to an increase in brokerages across all brokers?

In its bid to create parity among market participants, concerning turnover charges, the Securities and Exchange Board of India (Sebi) on Monday, July 01, 2024, issued a directive to market infrastructure institutions (MIIs or the brokers) to levy a uniform fee, irrespective of the size of the market participants, essentially stock brokers.

Here is the circular:

https://www.sebi.gov.in/legal/circulars/jul-2024/charges-levied-by-market-infrastructure-institutions-true-to-label_84506.html

Stock exchanges charge a transaction fee based on the overall turnover contributed by a broker in a month. The more turnover, the lesser the transaction fee. You can see the latest slab-wise transaction charge charged by NSE here. The difference between what the brokers charge the customer and what the exchange charges the broker at the end of the month is a rebate. Such rebates are common across the major markets in the world.

Zerodha earns about 10% of its revenue from these rebates. This could range between 10% and 50% of the revenue for other brokers. With the new circular brokers will no longer earn these rebates.

So they have no option but to increase the brokerages.

But please do not worry especially if you are not an Intraday trader. For Intraday traders, this can be a problem.

You can do my course and become a non-directional positional trader and save on brokerages and taxes.

Many times I have written about why you should not take a loan to trade. But it’s been very long since I have written a post on personal finance. This post was written on JULY 18, 2017.

https://www.theoptioncourse.com/do-not-take-a-loan-to-trade/

Do read especially if you have taken a loan to trade or wish to take one.

One of the most important rules of personal finance management is never to take a loan to trade or invest in stock markets.

Even if you are a good trader, most of the profits will be taken away by the loan interest and you will be left with almost 8-10% a year or less which is equivalent to investing in good stocks or mutual funds.

And if you lose that money then you will be in deep trouble.

Another important personal finance management try to avoid personal loans. They come at a very high rate – at almost 12% a year.  If you cannot survive without a personal loan then take at most up to 1 lakh not more and try to repay it as soon as possible.

Today access to credit is easy. Do not fall for the trap. Some loan apps are fraud. Try to avail loan from a well-known bank. If possible walk to your nearest bank and talk about loans. Many look-alike apps can fool you, take your personal data and sell to third parties.

I have not installed any banking app on my mobile to avoid online fraud. If required I access them online from my laptop. The chances of my mobile getting lost are bigger than my laptop getting lost. You don’t know who will get your mobile when lost and what they will do. So to avoid the stress I do not install banking apps at all.

This rule I leave to you, but it is better to uninstall any banking apps from your mobile to be safe.

Of course, we need to buy items/services online and offline so keeping payment apps is ok as long as you have kept them secured with a phone screen lock pattern, PIN, password or fingerprint.

Even if a hacker gets access to your mobile phone they may not be able to open the app. The same goes for banking apps but still, it is better not to have them on your mobile phone at all as checking your bank account periodically can be done easily on your laptop.

As far as home loans is concerned do not hurry to buy a home. Take your time, research well and buy a good home so that you do not need to buy another home after a few years. By taking more time you will have saved enough to buy a good home and take a home loan as little as possible. There is no penalty to prepay your home loan so try to prepay as soon as possible.

The same is the case with a car loan. You should not take a car loan if possible. To avoid taking a car loan downgrade your choice to what you can afford. But if your love for a particular car is very high then take a car loan and pre-pay it as soon as possible.

Car in any case is a liability plus if you take a car loan, the liability will increase.

Have one term insurance equivalent to ten years of your take-home salary and one family health insurance of at least 10 lakh.

Your savings should be invested well in stocks, bonds and mutual funds and do not break them to let the compounding do their job. Of course, you will need money from time to time in that case just redeem whatever is required at that moment but do not stop your investments.

If you follow the above personal finance management tips then you will live a stress-free life as far as your finances are concerned.

NSE – National Stock Exchange of India Ltd –  Has gone from 8,083.80 on 03-Apr-2020 (Covid Era) to 23,851.35 today (26-Jun-24):

What’s the increase?

It is an increase of 195.05%. All this in just four years.

In the last year from June 23 to Jun 24, it has given a return of 27.63%.

An experienced investor will understand that this will NOT sustain.

In the future two things may happen to the Indian Stock Markets.

• It may fall by a minimum 5% to max 10%, or
• It will be range-bound for another 12 months.

From where the money is coming?

It is the Mutual Funds.

The assets managed by domestic mutual funds (MFs) rose by 34 per cent during 2023-24 (FY24) — the most since 2016-17 — propelled by a sharp rally in the equity market and robust inflows.

For the three months ended March 2024 (Q4FY24), the average assets under management (AUM) stood at Rs 54.1 trillion compared to Rs 40.5 trillion in Q4 of 2022-23 (FY23), according to data from the Association of Mutual Funds in India.

Source: https://www.business-standard.com/markets/news/domestic-mutual-fund-assets-jump-34-in-fy24-the-most-in-seven-years-124040400938_1.html

So nothing looks suspicious now, but these kinds of returns cannot be sustained for long.

Why the stock markets can get stagnate or fall?

Most of this influx is from short-term investors. Once they start booking profits the markets will fall.

Or they will stop their SIP investments, and then the markets will get stagnant.

You see for the markets to keep rising money has to keep coming. But we need money to live a life right? One day or the other in the near term that day will come when we will see a fall or an elongated and very boring stagnancy in the markets.

When the markets start falling the non-directional options traders have nothing to lose. But most of the directional trades especially those who will be long in the markets will suffer.

You can do my conservative option course and learn non-directional option strategies and make approx 3% a month.

When a trader thinks that a stock will go up they can:

1. Buy the stock, or
2. Buy its Call Option, or
3. Buy its future. Or
4. Sell its Put Option

Similarly, when a trader thinks that a stock will go down they can:

1. Short the stock (shorting the stock is possible intraday only), or
2. Buy its Put Option, or
3. Sell its future. Or
4. Sell its Call Option

In this article, I will discuss when you should buy a call or a put option. I have explained in my blog that buying an option means you are racing against time. It doesn’t matter if you are buying a call or a put option. Once you buy an option, you are racing against time.

Read below to know when you should buy a call option.

The expiry should be at least 30 days away.

This is very important. If the expiry is very near, then the option’s premiums will start decreasing very fast. The premium decay will be so fast that you will not be able to exit the trade quickly or exit the trade with a profit unless, during that last period, the stock moves rapidly up. Usually, it will not happen because during the last couple of days before expiry all the buyers and sellers create liquidity. The liquidity is so much that the demand and supply remain the same, leading the stock to move down or remain in the same position.

When the expiry is 30 days away, at least for the next 10 days, the time premium value, a.k.a. theta, does not erode too much. So try to exit at least 20 days before expiry if you bought an option.

If the INDIA VIX is below 15 the option premium will be less than average, if it is between 15-20 then the option premiums will be average and if the INDIA VIX is above 20 then the option premiums will be above average and will keep increasing with the increase of INDIA VIX. So decide accordingly.

The benefit of a low VIX is that you will get options at a low cost so the risk will be less, but if the VIX is high you have to pay a high premium to buy an option on the other hand, it will lower the risk as a high VIX will indicate huge movement which may lead to a profit.

However, in most cases, you will know why INDIA VIX has increased. It will be mainly due to an upcoming political event like elections an economic event like budget or geo-political events like a likely war or an attack by another country.

Once the event is over there will be a sudden drop of the INDIA VIX within 2-3 working days. You must exit the bought options before the event ends, or else you may suffer a huge loss as the option premium will erode quickly. In such cases even if you are right in direction the premium erosion will eventually negate the delta increase so you may not get the desired profit or suffer a loss.

Do not buy ITM options, ATM options or Very Far OTM options:

In The Money (ITM) options are very costly. They behave like Futures. If right in direction they will make a good profit for you, but if wrong in direction the loss will be huge.

At The Money (ATM) Options have the most time value and therefore face the fastest premium decay.
Very Far Out of The Money options are cheap but most of them expire worthless as the stock never reaches there. In ten times you will make a profit one time. They are very tempting to buy for their low price – but rarely do they give profit. So better avoid them.

Therefore buy slightly Out Of The Money (OTM) options – 2-3% far. They are not costly and they give good profits when right in direction, and less loss when wrong in direction.

Find intrinsic value to know if the option is overpriced or underpriced – then do this:

Earlier it was difficult to find the intrinsic value of an option as a lot of calculations are involved in the Black & Scholes model formula to know its intrinsic value, but nowadays your broker will display an option’s intrinsic value.

If the price of the option is above the intrinsic value then it is overpriced and needs to be sold. If the price is below the intrinsic value it is underpriced and needs to be bought. This is an important factor when deciding whether to buy or sell options.

However, depending on just the intrinsic value is not an ideal way to buy or sell options.

There is no need to bother about single-day gains or losses in the stock markets. A single-day stock market loss or gain has no impact on long-term returns. Read below to understand better.

This is what happened on Tuesday, 4th of June 2024 – the day the General Election Results 2024 were being declared and the ruling party (BJP) was not able to garner seats as per their expectations. The markets had a great run before the results day because almost every exit poll in the country gave a clear majority to the current government.

But when things did not go as expected mayhem followed due to panic selling. This is what happened on that day:

Why it happened?

Because 70-80% of the investors (not real data but my assumption based on my experience over 20 years of investing and trading) are short-term investors (people who invest in a stock for a few days to make quick money), these are the people who panic and start selling. Then what happens is called the hyperbole effect. Media comes in and starts shouting on top of their voices – markets are tanking and investors are losing lakhs and crores. The novice investor sees this and in a panic sells his stocks.

Tip: Do not see live business news on TV or YouTube. I have stopped seeing it for years. Instead, read business news in newspapers online or offline. They have limited space and therefore cannot exaggerate news. Plus reading doesn’t make you panic, seeing live news does. Moreover, newspapers report the news the next day – by that time you have already avoided a situation which could have made you panic and take the wrong trade.

Most Important Advice: Do not sell a stock because everyone is selling based on news even if you by chance see it live on TV. Sell a stock only when you want to book profit or the company’s fundamentals have changed and it looks like it will take a very long time for the company to correct its fundamentals.

On that day (4th of June, 2024) this happened in terms of money:

The All India Market Capitalization index, tracked on the Bombay Stock Index, lost over 31.06 trillion rupees, or about $371 billion on Tuesday, June 4, 2024 alone. The losses meant the Sensex index erased all its gains this year in a single day, going from a 5.85% year-to-date gain on Monday to a 0.22% loss position on the next day.
Source: https://www.cnbc.com/2024/06/05/india-stocks-erase-over-371-billion-after-bjp-disappoints-in-elections.html

But who lost? Only those who sold their holdings in loss, not those who sold in profit. So please do not look at these numbers. These numbers are calculated based on overall index market capitalization (03-Jun-2024 close minus 04-Jun-2024 close multiplied by total market capitalization). This is not the total loss got by adding all the losses in each demat account. This is simply not possible but that data is very interesting and important. The real loss of investors will be much smaller than what is shown in the media.

Similarly, the markets gained by many trillion rupees the next day which does not mean that everyone who holds stocks in Indian markets made a lot of money.

Unfortunately, gains are never highlighted by the media – only the losses are blown out of proportion which gets them TRP (Television Rating Point) which in turn gets them more advertising revenues i.e. money. When this happens the business channels on TV and vloggers on YouTube make money – the investors who listen to them lose heavily.

Therefore I repeat the advice I gave above – Do not see live business news on TV or YouTube. It’s noise and it is better ignored.

Here is proof of why a single day’s gains or losses in the stock markets must be ignored. As of writing this post Nifty 50 has given a return of 6.67% from 01-Jan-2024 to 07-Jun-2024:

Nifty 50 returns from 01-Jan-24 to 07-Jun-24

Therefore you should ignore stock markets’ single-day losses or gains. It does not impact the long-term investors. The best way to avoid making panic trades or investing decisions is to stop seeing live stock market news on TV news channels and YouTube.

This is a copy of my newsletter sent to my subscribers on 01-June-2024. This was when General Elections 2024 were being held and the counting of the results was done on Tuesday – 4^th of June 2024.

It is bizarre that India VIX ended at at 24.60 on Friday – 31st May 2024, and is likely to cross 25 on Monday – 3^rd of June 2024 – but still, it is strange that the kind of volatility Nifty/Sensex should show is missing.

Nevertheless, you should be careful.

Here are a few things I have been telling you for the last few days which I am writing again to remind you so that you take action and save yourself from big trouble:

• Book partial profits in the stocks that are in good profit. you can of course re-entre after the 10^th of June 2024.
• Reduce the lot size of your trading in options and futures.
• Put a stop loss in the system to manage the volatility. This broker allows for keeping a target or stopping loss in the trading system. Once one gets hit, the other gets cancelled automatically. Also, they do not charge any brokerage to buy or sell stocks.
• Do not over-trade the next week i.e. from the 3^rd to the 7^th of June 2024. Stock markets are known to be volatile for a few days after the results.
• Do not buy any stock if you see them going up – the lure of buying a stock when they are shooting up due to a speculative rally may backfire. They will soon come down when the people who bought early start selling and booking profits.

General Election Results will be declared on Tuesday, June-04-2024. On that day the markets will witness huge swings up and down. I have already given you a trick to trade on results day. It takes the benefit of huge swings up and down.

But that was for option traders. What about investors if they see their stock value plunging by 20% or more?

Here is what they should do:

Do not panic. Historically the stock markets have swung back to their original position in a few months after a crash. The Indian markets reacted negatively just after the 2004 election results, but as time passed, the negative returns turned positive. If a crash happens after the results, it will not be any different this time. So do not sell your holdings in a panic. But if you know that you may panic and your stocks are in good profit then book partial profits and keep the money safe.

If your motive was short-term profits then book profit, and wait to reenter.

General elections will happen every five years so there is no point in taking out a microscope and keep reading news related to your stocks – it won’t help.

The market is full of investors and traders who trade based on predictions and speculations and on the results day it will double. This means those who trade rarely will also jump into markets to make some money.

The best way to avoid all this is to ignore all the noise. Just like nature – after a few months/years a storm comes and destroys nature. We then reassemble ourselves and start living a normal life again.

Bottom line:

Invest in equities only for the long term. Long-term is more than 5 years. Stick with your investment plan and do not alter it because of short-term market movements, like the elections or any other event.

Do not try to time the market it will lead to losses.

Of late, I have been getting a lot of WhatsApp messages and emails on what to trade on the expiry day. I can understand the eagerness to make money, that’s good but no one is looking at the other side of the coin.

The Risk Involved!!!

One thing is certain you will not make 1 lakh profit on the election result day, not even 50k, even 25k looks impossible… probably 2k to 3k is what you will be able to make. Is that justified against a huge risk of all the margins blocked for the trade?

I mean on that day (General Election Results Day – 4th of June 2024) – the real joy is watching the Television News Channels showing the voting numbers, analysis, chat shows, winners and losers candidates etc, not trading to make or lose 2k.

I do not see any fun even for a man desperately needing money to trade on the results day. Some days the risk factor is so high that it’s better not to trade.

You can easily guess the risk factor by looking at INDIA VIX which is currently at 22.86, well above normal (17 or below).

The higher the INDIA VIX the higher the risk.

What to Trade on General Election Result Day 2024?

Here is one trade that can be done if you cannot stop the urge to trade on Tuesday, 4th of June 2024 – General Election Result Day 2024.

Make sure it is Intraday only as INDIA VIX will most probably fall more than 10% intraday which will in turn crush the theta (time value) of the options by more than 10%, however, the delta will still be there so a small risk can be taken.

Here is the trade:

Buy a 5% up Call Option and a 5% down Put Option of any volatile stock or Index not expiring in the same week. This means the options you buy should expire only after 4+7 = 11th of June 2024. Keeping a few days in hand will ensure that theta decay will not do too much damage if there is no movement.

For your information, theta (time) decay is most of the options that expire first from the day you are trading.

Do not sell options or trade futures on the result day. The movement will be hard to manage.

What to do next?

Book profit on the side that gives 20% return then wait for a bounce back or keep an SL (Stop-Loss Order) for that side of double the profit you made. For example, if you made 2k on the call side, then kept an SL of 4k on the put side or exit at cost to cost.

Do not try to make a profit on the side which is open. Just exit at the cost you bought the option.

Do it early in the day else you may miss the profit on one side which will make the trade difficult.

So with this trade, you either make 2000 or lose 2000. That’s it – no extraordinary effort is required. Let me guarantee you one thing if you try to be smart on that day using any technicals, you will end up losing money.

Some days are just not meant to be traded. Even the best technical analysis will not be able to give you any high-probability signal to trade. If you still want to trade on the results day then I have given you a good idea. Please do not mess with the idea given above. Just try it and be happy with the outcome.

Hope that helps.

Disclaimer: The above is not an advisory service. It’s just a trade idea with low risk. 

You can also read:
Should you stop investing when the stock markets are all-time high