Being a conservative trader I do not trade on big news days like Budget. 2015 Financial Budget is on 28-Feb-2015, a Saturday. For a conservative trader like me it is NOT an ideal situation to trade. Even though a holiday the markets will remain open for live trading. I do not care, for me big news days are trading holidays.
I think the brokers lobbied and got SEBI (Securities and Exchange Board of India) to let them do their business on a trading holiday. This is one day they make a lot of money. They didn’t want to lose a great money making opportunity this year.
Here are 7 reasons why you should not trade on Budget days:
(This holds true for any big financial news announcement days.)
1. Volatility will be very high: Nifty will move swiftly up and down as the budget speech progresses. One good news and Nifty will jump 25-50 points, one bad and it will dip 50-70 points. You can never predict the direction of the markets that day. However watching Nifty dance will be fun if you are not trading. Moreover since Nifty will move very fast it will be hard to trade.
2. Margins will be blocked more: Most brokers will not allow normal margin blocking rules on Budget days. I think for Intraday, most brokers will NOT allow MIS trading in equity cash, so 100% cash or full margin will be blocked. Which means if you select MIS to trade equity, the orders will be rejected due to margin requirements or they will block full margin if you have cash in your trading account.
In F&O & Commodities, NRML or full margins will be blocked too. Any MIS order will be outright rejected or NRML equivalent margins will be blocked.
Cover orders will not be available for trading. Cover orders are orders that enjoy even less margin requirements than MIS for Intraday because the trader has to compulsory put a stop loss in the system while placing the order. This stop cannot be changed when the order is triggered. All orders are executed at market. Since the losses are taken care by the system, the margin requirement reduces.
So why cover orders are not allowed on budget days if the stop loss is compulsory? Because stocks or index may jump and the stop loss may not get triggered and if the stop loss is a market order (not limit order), then the trader may incur huge losses. Your broker do not want this. They know if you lose a huge amount of money in a single day you will stop trading and they will lose one valuable client. Their business can get affected.
Moreover if you incur huge loss and you do not have money in your account then the brokers will have to give you a margin call. This is a cumbersome process for them. Imagine if 200 clients lose 1 lakh and they have only 50,000 in their trading account. Their total loss is 2 crore, but the money with the broker is only 200*50000 = 1 crore. This means in 2 days time the broker has to arrange Rs. 1 crore, to be given to NSE/BSE, from the clients who lost money.
What if most are unable to pay? In that case the broker will have to pay money to NSE/BSE from their own pocket. They might even lose their brokerage license because their risk management team failed to manage risk of their clients. This is a big risk for brokers, so cover orders or MIS are not allowed on budget or big news announcement days.
Which means your broker will love you if you trade but hate to give margins on Budget days.
Of course if you are not trading Intraday or taking positional trades, there will not be much of a difference.
3. Risk Reward ratio is not good: Higher margins, more risk, less reward. Risk reward ratio will not be in your favor. More money at risk, less profits is not attractive for any trading business in the world.
4. Limit vs. Margins: On that day if you hit market order you will NOT get a good price because of the jumps, and if you do a limit trade you will not get a good trade fill fast. You may have to wait longer and in frustration you will hit market just to trade. This is like forcing yourself to trade. A forced trade is sure to lose money. Not good.
5. Volatility will crash: This is good for option sellers, but delta can kill them. If the stock moves very fast against their option, volatility crash will not be of much help – delta will do the damage. Option buyers will see the option prices not moving fast enough because Volatility will drop. Therefore its not a good day to trade for both sellers and buyers.
6. You will get frustrated: End of the trading session most traders will be frustrated because things will not go as they planned.
7. Money will be lost: This is true for 90% of the traders. Because of all the factors above it is most likely you will lose money trading on the budget day. Save you money to start trading from next day.
All in all the traders’ ego gets busted, money is lost and the day is destroyed.
I suggest just watch Budget on TV and relax with your family. Do not destroy your holiday because of the budget. After the budget is out you will have some idea of where the markets will head for the next few days – you can then chose to take a conservative directional call.
I have got out of all of my F&O positions and I hope you get out too. I sincerely hope you will not trade on budget days. Lets leave greed for one day. 🙂
Remember that only 10% of the traders will make money, the rest will lose. Being my website visitor I do not want you to lose money on that day. This is my humble request. Rest its your money and decision.
Here is copy of email I wrote to my email subscribers one day before budget requesting them not to trade:
This is a reminder that please DO NOT trade tomorrow. Volatility will be very high and constantly dropping and its not good for option buyers. Sudden jump may prove dangerous for option sellers as well.
Here is one real example: On 26-Feb-15 (yesterday), Mar 9500 CE closed at 11.45 Nifty at 8685. On 27-Feb-15 (today), Nifty closed at 8845 and Mar 9500 CE closed at 14.85.
VIX dropped by 4.91%.
As you can see the danger has already started. Just a small drop of 4.91% made sure a huge 160 points jump in Nifty had very minor increase in the OTM options. Of course you can argue that ITMs have appreciated, but then the money you pay to buy will not justify the risk reward ratio.
If you insist on trading tomorrow, please at least do a credit spread. Which means buy at ATM and sell OTM. This will highly restrict your losses, of course profits will get restricted too.
Do not short naked options tomorrow. If you want to short then, short one and buy 2 OTM options.
Trade Conservatively & Be Happy.
You Can Read More On My Site
TheOptionCourse.com Copyright @ All Rights Reserved
Dilip Shaw, Founder
Copyright Infringement: Any act of copying, reproducing or distributing any content in the site or newsletters, whether wholly or in part, for any purpose without my permission is strictly prohibited and shall be deemed to be copyright infringement.
INCOME DISCLAIMER: Any references in this site of income made by the traders are given to me by them either through Email or WhatsApp as a Thank You message. However every trade depends on the trader and his level of risk taking capability, knowledge and experience. Moreover stock market investments and trading are subject to market risks. Therefore there is no guarantee that everyone will achieve the same or similar results. My aim is to make you a better & disciplined trader with the stock trading and investing education and strategies you get from this website.
DISCLAIMER: I am NOT an Investment Adviser (IA). I am an Authorized Person (AP) of a Stock Broker. In other words I am a sub-broker. I DO NOT give tips or advisory services by SMS, Email, or WhatsApp or any other forms of social media. I strictly adhere to laws of my country. I only offer education for free on finance, risk management & investments in stock markets through the articles in this website. You must consult an authorized Investment Adviser (IA) or do thorough research before investing in any stock or derivative using any strategy given in this website. I am not responsible for any investment decision you take after reading any article in this website. Click here to read the disclaimer in full.