We will discuss about the Highest Open Interest at 7000 PE and why its a great option to sell, but first some news on Nifty.
Nifty Is Back To Normal Behavior
Last few days were bad for option sellers. Even though the call options did not explode as expected (in fact they are trading at a discount compared to puts) – the put options did not go down in value the way it usually happens whenever there is a rally, and to rub salt into the wound Nifty rallied and how.
From 7000 to almost 7500 in matter of days
Naked option sellers may have lost at least three months of income. They will start selling again to “recover” lost money and in another 3-4 months again a tide will come and wipe away their entire profits. They will start selling options again to “recover” lost money … and the story will NEVER end in their entire life. 🙂
If you have done my course, this is a great time to learn what kinds of losses you can expect. This rally was that which falls under the 20% of the times when our trade loses small money. As you can see its very small compared to what you used to lose prior to doing the course.
Now everything looks fine, and we will start making profits again. We take small steps forward, a lot of them, and after a few months one small step back. Overall in a year we are in profit and that is what counts in the end.
If you have still not done my course its highly recommend you do it now. Do not waste your time and money selling naked options.
Always keep some extra cash to buy quality stocks when there is a crash
If you have cash there is no better time than buying your favorite stock when the markets crashes. This is the time when I don’t mind investing some extra money buying some great stocks. As per my risk management rules since I have spent extra last two months buying stocks, I may not bring in any money next two months to create a balance. In the end, I am still only investing what I am comfortable with investing in the stock markets. This is risk management – buy more when there is an opportunity – buy less when you speculate – but average out your investments over the year. Do not invest more than you are comfortable with.
Hey that was a very important lesson in risk management. Did you learn anything? I hope you did and henceforth will be more disciplined in your approach to money-management.
Of course I have a time horizon and most of you know that when I invest in stocks I look for 10-12% return in a year. (Well we can make more – I have discussed below). When you make that profit – get out and deposit that cash back into your bank – or increase your investing capital next year. Yes no doubt sometimes I exit in a loss in some stocks. But overall this method of regular investments (more when there is crash) has worked out very well.
Frankly there is nothing special about it – I just follow the basics of investments that is it. Most of you get swayed by emotions – I don’t. 🙂
This the reason you must have some extra cash to buy your favorite stocks whenever markets crashes.
Here is how you can make more than 10% a year
Once you buy, ask collateral against shares from your broker and trade. If you are trading well this will have a great effect.
One – you make money from the stock when it rises and,
Two – you make money from the options too. What more do you want?
Disclaimer: Here is one trade that you can do tomorrow but please trade with proper research and risk management. Please understand I do not get paid by giving these free advice so the risk in the following trade is entirely yours. I have given reasons why I think this could be a successful trade. Though most of my predictions come true, you must understand stock markets investments are subject to market risks and my advice may go wrong. So please trade after doing proper research.
Highest Open Interest
Highest Open Interest is at 7,000.00 PE both for March and April 16. Though I do not care much about open interest – this time opportunity looks very attractive.
You can see highest open interest here:
What you can trade?
Those who have done my course if you have free cash you can sell 7000 PE current or next month and hedge it with the way its written in strategy 2 of the course. You know where to take a stop loss.
Those who have not done my course sell 7000 PE at your own risk. I highly recommend hedging it with some other strike option. Since this email goes to all who have taken my course and also to who have not, I cannot reveal which strike is the best to hedge. If you like to learn do my course now.
Now here are some reasons for the 7000 PE sell:
1. Though not a big indicator or any assurances – Highest open interest lies at 7000 PE in both months. So markets expecting Nifty Not to fall below 7000 at least for the near term. And probability looks very high.
2. INDIA VIX is currently at 18.46 and is falling slowly. There is no reason for it to rise. 18.46 is good Vega to sell. VIX is not falling sharply due to the RBI news expectations next month.
3. Nifty had a great rally and is now looking stable and bullish. There is an expectation that RBI will once again ease interest rates during its policy meet next month. This expectation will ensure less fall for Nifty. Means speculators will buy stocks in expectations that it will give them profit if RBI actually eases rates – and this will stop huge fall for Nifty – which is exactly we want.
4. Nifty is still looking bullish and usually a trend does not reverse for no reason. There has to be strong reason for a trend-reversal. Right now I cannot see a strong reason. RBI policy is next month and if Nifty does not fall 7000 PE will lose its value this month itself. Current month will expire worthless and next month will lose a lot of its premium.
5. Why fear when you have bought protection? Calculated risks needs to be taken when probability looks high.
Lot size comes under risk management and it is up to you to decide how much risk you are willing to take.
Warning: If you trade naked options (whether you buy or sell it does not matter), its highly recommended that you learn how to trade conservatively. Aggressive trading makes more but losses double. Result is that your trading capital makes losses year after year. This is not why you are trading for. You are not trading to lose, you are trading to make money. If you can lose money slowly why you have a problem if you make money slowly? Think which is an better option – losing money slowly or making money slowly.
Update on 15-Mar-2016:
Book profit on 7000 PE sold on 8-Mar-16.
See this on 8th March 2016 it was going at around 26-24:
Today on 15th March 2016 it is currently below 10:
That is a profit of 16 points in 7 days or 16*75 = 1200/40000 = 0.03*100 = 3% return in 7 days.
Please remember that selling naked options is dangerous therefore you must learn hedging techniques. What if this trade went wrong? Losses could be unlimited. On top of that there was stress to close this trade in profit as soon as possible to get rid of unlimited losses. Therefore I highly recommend my course where you learn proper hedging techniques to not only limit losses but also make consistent profits month after month.
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Dilip Shaw, Founder
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