NOTE: Part of newsletter sent to my subscribers on 01-September-2015 at 2.30 pm.
Trading should be halted when VIX reaches 30, and also read to know what should be done if Nifty is down by 10% in one month.
India VIX has crossed 30 is now near 30.28. This is a bad situation for traders.
Those who have taken my course know that I stop all trading when VIX is near 30. Since it has crossed 30 – it is considered very dangerous to trade. I request you to EXIT ALL POSITIONS except cash equity holdings.
Re-enter when markets become normal and VIX goes below 25. It won’t take too much time. Since we are hedged the loss should be small.
VIX at 30 means there is a lot of fear in the market, and options premium have exploded. More importantly during these times we just don’t know how the markets will behave for next couple of days, so its better not to trade.
Those who took the course recently – do not enter now. This is not a good time to trade either for the buyer or the seller of options.
I will send an email when you can enter.
Those who buy options, please do not buy thinking VIX will increase further. It may or may not we don’t know. But usually when VIX is over 30, it only tries to calm and come down. VIX can drop anytime and option buyers will lose money. Sellers are at even more risk as VIX at 30 means anything can happen. When anything can happen, its better to watch the markets rather than trade.
So right now watch the fun from sidelines. DO NOT TRADE.
But if you have cash one trade can be done now – the conservative stock option trade. Since the premium will be very high you will get great money on margin blocked plus good stocks are down now and chances of making a good profit are very high.
Nifty Down is A Great Opportunity
Good blue chip stocks are down. Great time for bargain hunting. Look for your favorite stocks and trade the stock option trade, or just buy the stocks in cash, or make a reasonable investment in large cap mutual fund like ICICI Prudential Focused Bluechip Equity Fund or ICICI Prudential Value Discovery Fund.
We should not let go these small opportunities whenever markets gives us such great opportunity to trade. And you should know to some extend what may happen in near future. Since the markets are down more than 10% from its recent high – there is a lot of chance it will try to go up in near future. Which means that the stocks or mutual funds that you bought can be flipped for a small profit. The cash can then be free and hopefully if everything gets back to normal, you can start trading.
There is 1% exit load though in the above mutual funds, but when you buy mutual funds your risk is lower. If you do not buy stocks and buy these mutual funds, it almost guaranteed that when Nifty will be up by 10% within say next 2-3 months, chances of which are great – you will end up making more than 10% profit on your cash.
With one or two stocks that guarantee is not there but with these funds its almost guaranteed that you will make that 10%. The risk is the 1% that they will cut when you exit the fund within 365 days – after that there is no exit load. If you exit within next 365 days they will deduct 1% and give you the rest. That’s OK as you still get to keep 9% of the profits.
Some people say mutual funds also have an expense charge that reduces the profits. Frankly when Nifty will recover 10%, usually these good funds will make 11% or more since they are managed by good fund managers, and all the expenses including the exit load will be taken care of by these extra profits.
You can also buy Nifty BeES, but the problem with Nifty BeES is that it will mimic Nifty, so it cannot beat it. However on the plus side, there is no exit load and the expenses are also very low. If you have experience with buying Nifty BeES, then buy them, else I recommend good mutual funds, especially the large caps or large and mid-cap funds.
Mutual funds has a manager who tries to beat the Index – and if you see track record of good funds you will see that they actually beat Index by a good margin. I like that. The above two funds are great choice to enter now and exit when Nifty goes up. However you may have to wait for some time before Nifty reaches levels of 8500 again.
How to Invest in These Funds?
Ask your broker. He will have a platform to buy these funds. You can then ask collateral against these funds to trade options. Some give, some don’t, so please ask your broker. Or you can invest directly by going here:
Note: If you are directly investing using the above link then choose the “direct” fund option and not the “regular”. Direct funds have no commissions to be given to anyone, so their returns are slightly higher.
If you are a registered member of ICICI mutual fund, investing in these funds will take less than 5 minutes. The day you exit, you will see the cash in your bank account the next day.
If you know what you are doing and why, then making money from stock markets is not a big deal. If you keep trading out of the urge to trade and speculations, then sooner or later you will only see losses in your account. You may have a lot of fun though with the thrill of trading.
Well trading is not fun – its a business. Those who trade for fun are the ones who are trading now and losing. Intelligent traders know there are some times when you should not trade – and that time is now.
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Dilip Shaw, Founder
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