New traders do not know how to trade the earnings season. This post will help you to trade the earnings season. If you do not know when the earning season comes – they fall end of fiscal quarter. This means that earnings seasons fall in January, April, July and October. Corporate earnings are released to the public during earning season – stocks move a lot during this season at least for 5 trading days after the result is out.

If you are a momentum trader you will find earning season to be a great time to enter trades. You can take the benefit of gap up and down in reaction to quarterly earnings reports. Especially the mid caps will give you great opportunity to trade. On top of that finding direction gets easy as well. If the earnings are as per expectation of the market the stock will likely go up, if the earnings are not as per expectation of the market or bad, the stock will go down. You can take trades accordingly.

There are plenty of stocks to trade so even if you miss an opportunity you will get another soon.

Why There Is Huge Volatility During Earnings Plays

Fact is that there are more speculative traders than non-speculative traders. Speculative traders take their positions much before the result is out. They just go as per the market expectation – this is the reason you will see that the stock starts moving a few days before the result is out.

Most of the speculative traders get the direction wrong and pay a price. Stops are hit and the stocks take a different direction. This is the reason sometimes stock does not go in the expected direction of the results.

Please also note that stocks gets too volatile during earnings season because everyone including long term investors, short term investors, swing traders and derivative traders gets active in a stock. Big players also enter here to make some money. Sudden volume increase makes the stock volatile.

What Strategy To Deploy To Take Benefit During Earnings Plays

Since the stock may move in either direction a long straddle may be deployed. A long straddle is when a trader buys both calls and puts to take benefit of the volatility. But note that long straddle may get risky if the stock does not move. Also a drop a VIX of the stock after the result is over may drastically drop the options premium too. This may also cause the damage. Therefore its better to hedge your positions. Still if you want to trade the long straddle then its better to reduce the lot size to take less risk.

Its better to enter stocks that are historically known to make 10% move the result week. Once the result is out these stocks will move 8-10% in one direction and then depending on the situation change the direction, stay there for some time or reverse direction. You can take benefit of this move and make some good money.

Some stocks move more than 10% – keep moving in the same direction for weeks or months. However if you are a trader you must take your profits out and exit the position and then look for another opportunity.

Earning season comes around four times a year, and usually lasts for 2-3 weeks. So you have enough time to make good money during this time.

Other Notes to Keep in Mind During Earnings Season

Part of my free newsletter dated: 24-Oct-2018

Last few days volatility has become average but India VIX is still high. By the time you check it may have changed but right now at 11.17 am on 24-10-18 it is 18.51 – down -2.78% from yesterdays close.

Below 16 is comfortable zone to trade derivatives. I feel within 10 days it should come down to near 16.

What you can do?

You can chose to trade or not. My principal of trading is very different than what you keep reading in other websites or videos. When in confusion or very volatile times go non-directional or just do not trade. Not forcing yourself to trade should also be mastered. Just trading for the sake of trading is fun not business. And business is not fun – you have to be serious.

Stock hunting (buy equity) is also a great idea when stocks are being sold at a discount. You know who are selling them? Those who bought them at peak when markets were at 11500. Its sad but this happens. It is happening since the days stocks started trading and it will happen thousands of years from now.

Why this happens?

Because when stock markets goes up very fast people who were sitting aside suddenly jump in to make some money very fast – that does not happen and they take losses very fast. Exactly opposite of what should be done.

If you do my Nifty Option course you will get sometimes name of stocks that may go up to 20% in one year time. You will get this by email only until your subscription which is one year from the date of payment.

Please note that Nifty course is one time fees only.

Here is complete process of my course:

1. Once you pay I will send you the course materials for studying to your email.

2. You read and ask me questions via phone/whatsapp/email to clear doubts.

3. Then you start paper trading and still can ask me questions.

4. After about one month you can start trading.

5. Since doubts can come anytime the support will be there for one year.

Then you can start trading on your own. No need to depend on anyone once you are on your own.

Click here to see the course fees.

Update: Part of my newsletter dated: 29-Oct-18
===================================================

Check how Nifty behaved today:

Source: money.rediff.com

And how India VIX behaved:

India VIX 29-10-18 Source: http://www.moneycontrol.com/indian-indices/india-vix-36.html

Look at the above images – India VIX is still over 20 and has risen 5.56% over last close.

This is not a good sign for the markets.

Nifty non directional strategy will work out in these situations with lower lot size – the point is when India VIX is over the danger mark its better to trade with lower risk or lot size.

Do not take any huge risk now as anything might happen in this high VIX market.

Its strange that though India VIX is inversely proportional to Nifty today both have increased.

So even you want to trade options better take do a debit spread to lower your risk.

Trading without hedge is financial destruction. I know I am saying to limit your profits and losses due to hedge – which is totally different than what you read in other websites and media. But a fact is fact – a limited profit with hedge is much better trade than naked (not-hedged trading). Rest up to you.

Note: This is text of my newsletter sent to my email subscribers on 11-Oct-2018 before the stock markets opened.

By the time this email reaches you, you will see that the damage has been done to all Future/Call long traders yesterday. I hope it is not you.

Today Nifty will gap down open by almost 300 points. Just see what the damage a gap up or down can do to a naked option or future trader.

This is the loss of a naked (UN-hedged) future trader in SINGLE LOT ONLY:

300 (points) * 75 (lot size) = Rs.22,500/-. Loss of a greedy trader trading 10 lots = Rs.2,25,000/- gone in a single day. 🙁

Yesterday (10-Oct-18) Nifty was in huge bull mode – closed up by 160 points from the previous day (09-Oct-18).

If you are a technical trader or even if not – I am sure you can easily guess that all technical indicators must have given a strong buy signal before yesterdays close. Not a single technical software or technical theories in the world must have given a sell signal indicating a sell off. This is the reason I do not believe much in technical analysis.

Stocks are not a living thing that they will respect or obey technical signals. They will move as per people trade. And its a fact that less than 99.9% of people who buy stocks don’t know technical. Then why technical will work??

Here is some proof – this is not just another blog – it is a research paper:

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2401230

Copied from above URL:

We find that individual investors who use technical analysis and trade options frequently make poor portfolio decisions, resulting in dramatically lower returns than other investors. The data on which this claim is based consists of transaction records and matched survey responses of a sample of Dutch discount brokerage clients for the period 2000-2006. Overall, our results indicate that individual investors who report using technical analysis are disproportionately prone to have speculation on short-term stock-market developments as their primary investment objective, hold more concentrated portfolios which they turn over at a higher rate, are less inclined to bet on reversals, choose risk exposures featuring a higher ratio of nonsystematic risk to total risk, engage in more options trading, and earn lower returns.

Conclusion:

Post date: 09-Oct-2018

Last one month graph of Nifty:

Sep-Oct 2018 Nifty

Last one month markets have fallen badly. I am sure your investments may have also gone down. Same with me. This is normal. Do not worry. When you own stocks be ready to hold in though times. But when stocks fall its a good news too. Treat this as a discount sale in stock markets.

What you can and should do in falling markets:

1. Look for quality stocks and buy them over a period of one or two months. For example by some on 10th, 20th and last day of the month. That way you will average out. I have yesterday emailed my nifty course subscribers name of some stocks that they can buy and keep for sometime for good returns.

2. Do not over buy stocks. Just because you are getting stocks at a bargain, it does not mean you should over shop – just like you do not buy too many clothes when a discount in going on in Big Bazaar, Pantaloons or Shopper’s Stop.

3. Be patient and wait for a rebound. It may take months – but you did not invest to make a quick buck. So wait and when you are getting a reasonable profit – exit the stock.

4. Do not trade options and futures without hedge. This is important in all kinds of markets. If you trade without hedge losses can be huge. Here is one trader who lost 40 lakhs in option trading due to greed and no hedge. And during high volatility times losses can take away years of your profits especially if you trade without hedge.

Post date: 03-Oct-2018

Take a look at India VIX today 03-Oct-2018 at 11.28 am:

India VIX 03-10-18

Update: India VIX date 04-Oct-2018 at 10.15 am:

India VIX 04-Oct-18

Source: http://www.moneycontrol.com/indian-indices/india-vix-36.html – Note India VIX changes as the trading progresses.

Stock markets are inversely proportional to India VIX. Here is the fall on Nifty on 04-Oct-2018 at 10.15 am:

NSE 04-Oct-18

Update: India VIX date 08-Oct-2018:

India VIX 08-Oct-18

Note see that intraday high was 21.76.

And NSE close on 08-Oct-2018:

Nifty close 08-Oct-18

Proof of India VIX is inversely proportional to Nifty and stock markets:

What is India VIX? India VIX is a volatility index based on the NIFTY Index Option prices. “VIX” is a trademark of Chicago Board Options Exchange, Incorporated (“CBOE”) and Standard & Poor’s has granted a license to NSE, with permission from CBOE, to use such mark in the name of the India VIX and for purposes relating to the India VIX. You can read about what is INDIA VIX and why it changes here.

Volatility Index is a measure of market’s expectation of volatility over the near term. Volatility is often described as the “rate and magnitude of changes in prices” and in finance often referred to as risk. Volatility Index is a measure, of the amount by which an underlying Index is expected to fluctuate, in the near term. In other words VIX is colloquially referred to as the fear index or the fear gauge.

So it is apparent that when VIX increases there is fear and volatility in the markets.

What happens when VIX increases?

When VIX increase it makes the option premiums costlier. This means that for the same time decay options premium will be higher if VIX increases compared to same time frame of expiry of the months when VIX was lower.

Does this effects both Calls and Puts?

Yes it effects both Calls and Puts. Both calls and puts will become costly to buy. This is the reason during these times selling of options becomes more attractive and trading volume increases. Traders who were sitting on the sidelines enter the markets seeing either huge volatility or increased option premiums.

What are the reasons for India VIX to increase?

It increases due to either bad business or political situations/news in the country.

Before the stock markets opened in India on 03-10-2018 this news had hit the markets:

1) The rupee weakened past the 73 mark against the US dollar for the first time
2) Crude oil prices surged near $85 barrel.

First one is bad news for the Indian economy as goods to be imported will get costlier from USA. Government and business both will have to pay more money for the same amount of good they used to buy when INR was 65 for USD. This is 15% increase. This increases fiscal burden for the government. To tackle this situation government increases taxes – both direct and indirect taxes to cover the extra fiscal burden. Because of worsening rupee everyone will suffer. Therefore stock markets goes down. Who will buy stocks when a bad news has hit?

Second one will make the everything made by Crude oil costlier like Gasoline (Used to fuel cars), Heating Oil (Used to heat buildings), Diesel Fuel, Jet Fuel etc. This will make transportation coslty. This in turn will make goods costly.

All of the above combined it is obvious that India VIX will increase.

What you can do as a trader?

If you are a speculative trader – a trader who trades on gut feelings – its better you do not trade when India VIX is above normal. Normal is anywhere between 12-15.

If you are taking advisory services – ignore there SMS. Stop taking tips. No one has ever become rich by taking tips.

If you are a technical trader make sure you respect your original plan of taking stop loss and profits.

Hedge your trades either its future or options. This will make sure you are in the game comfortably.

Well to start with frankly I do not like intraday trading. The reasons are plenty. Here are a few:

1. You cannot keep your legs on two boats and sail through. You are likely to fall down. What I mean is if you have a job and you trade intraday too then it gets hard to manage both job and intraday trading. If you get caught then you may lose your job. Well it has happened to me.

2. Too much brokerage. Even if you make some day profits and some day loss – the brokerage will take away 20% of your profits and increase the loss by 30%. Effectively even if you are a good intraday trader you will be left with very less money.

3. Intraday trading cannot be compounded. I read in moneycontrol a long time back that one trader traded with Rs.50,000/- intraday equity cash scalping, even today he is trading with the same amount. When asked why he is not increasing the trading amount – the answer given was obvious – FEAR. Think yourself – can you trade with 10 lakh rupees intraday? If no, then its clear intraday is not a long solution to trading.

4. Non directional trading is not possible in intraday trading. Positional trading can be directional or non-directional depending on traders skills and knowledge. But even if you want to become a non-directional day trader, it almost impossible to become a intraday non-directional day trader. So basically you have to see all the charts and choose among hundreds of stocks to figure out which stock to trade intraday and then take a call. All this while siting in your office where anytime your boss can come in your cabin and catch you trading stock markets and not doing your job.

This is the reason I always advocate trading positional with hedge trading which you can trade anytime you want and leave for the day.

However if you are doing intraday trading it is very important to keep a stop loss. But most traders do not know where to keep a stop loss.

In this article I will discuss some ideas on where to keep a stop loss. Note that if you are a trader you must give more important to stop loss than to profits. If you can limit your loss chances are high that over time you will make profits.

Here are some tips to help you decide the stop loss place:

1. For low-volatile stocks keep stop loss near and for high-volatile stocks keep stop loss at a distance.

2. If you have decided to keep stop loss at 5 points then the profit should be at 10 points i.e. doable points of stop loss.

3. If using a trading software for support or resistance – it is better to keep stops lower than support level given by the trading software or above the resistance if you have shorted the stock.

4. Do not take stops too wide or too tight. Count in terms of money what you may lose. Don’t keep a stop where you are afraid of being hit but do not keep very close either. Take a balanced view.

5. Whatever the condition never trade without a stop loss.

Bottomline to remember:

Remember this – wider stop loss will be hit less often but will take out a lot of money if it gets hit. Tighter stop loss will be hit more often but they will keep the loss smaller.

If you are a trader with a lot of money you may choose to keep wider stops, and if you are trading with less money you cannot afford to lose then trade with tighter stop loss.

A tighter stop loss will allow you to trade multiple times while a wider stop loss will allow you to trade only once a day.

Hope this article will help you to take better stop loss decisions.

If you have any questions please ask in the comments section below.

Article Date: 25-Sep-2018

Reasons can be plenty for stock markets to fall. A few of them has hit Indian market recently therefore approx 8% fall in last 30 days.

Here is Nifty fall in last one month Aug-Sep 2018:

Nifty One Month Aug-Sep-2018

If I have to describe in two words why such a sudden fall then it is – PANIC SELLING.

Here is the panic indicator in stock markets – INDIA VIX:

India VIX on 25-Sep-18

Panic selling has come due to these reasons:

Reason 1) Stock Yes Bank

Reason: RBI denying MD & CEO Rana Kapoor a term extension beyond January 31, 2019.
Why: Reserve Bank of India (RBI), found non-performing assets to have been four times as large on 31 March 2018, than was then acknowledged in audited results. If found to be true then the last financial year of profit is inflated as much as 44%. These were the assets that come under NPA (Non Performing Assets) or Bad Loans. Which means the comoany is not making a profit that it was showing to the country.

Result – Stock Tanks 39% in a few days.

Reason 2) Stock Dewan Housing Finance (DHFL)

Reason: First trigger was the news that DSP mutual fund sold Rs 300 crore worth of commercial papers of DHFL for an implied yield of about 11%. When a bond is sold for a higher yield than normal it signifies that there is a liquidity problem.

What is yield?

The yield is the income return on an investment, such as the interest or dividends received from holding a particular security. The yield is usually expressed as an annual percentage rate based on the investment’s cost, current market value or face value.

11% is high yield compared to the current 8-9%. When there is liquidity problem the person buying the security is taking a risk, so obviously they will buy at higher yield, expecting a higher return.

What is liquidity problem?

You see banking companies or loan companies give a loan at an interest rate for a profit. But from where they get that money? Bank gets from their customers savings accounts but non-banking finance companies borrow money at a lower rate and give to consumers as a loan at a higher rate. The difference is the profit they take.

But what if there are no takers? Or 30% of the loans given come out as bad loans? These companies will face a liquidity problem. Money is going away but not coming back – do not forget that they have also taken a loan that needs to be paid.

What will you do if you own a stock of such a company? Obviously sell. Who will buy? A fool – a speculative trader who is looking to make a quick buck or two. Does he make? No – he takes all the losses. He/She is gifting their hard earned money to smart educated traders.

Who is this speculative trader? Definitely not the educated DIIs and the FIIs, its the retail trader who donates his money to these educated traders and DIIs and the FIIs. I am sure at least 90% of traders who are trading DHFL stock currently do not know why this fall has taken place. All they are doing is this – trader who goes with the flow – sell DHFL, trader who goes against the flow – buy DHFL, technical traders – buy/sell depending on what their software is giving the signals. Eh really? Deepening on a software to earn a living – I would not put a rupee on bet because my software says so. God has given me a brain – I would rather use that.

What happens when there is no risk management and you lose your life time savings in stock trading? Yes this happens to some people who cannot stop their greed and keep trading on hope.

I got one email from one such now retired from job trader. Here is the transcripts from the email: (Read to know how selling good company shares at the wrong time can be painful, and its not always wrong to diversify your investments and invest in at least one real estate apart from your home of course if you can afford. Please note that this is contrary to what financial experts keep writing not to invest in real estate. If invested for more than 10 years in a prime location in real estate it will certainly give a great profit when you sell it – or if you have two kids you can gift your home to one kid and your real estate investment to your other kid. Both will be happy and money will remain in the house. Please also note that property in prime locations are vanishing fast. I do not think our next generation will find new apartments in prime location. Anyway real estate investment is not the topic here so I stop here.)

His email:

Like everyone I receive dozens of mails. I ignore most and read only a few. I read your mails in detail. You write so practical and down to earth and sensible. I have been investing in stock market since 1980 when I received my first salary. Mostly I used to apply in Initial Public Offerings (IPO). I got allotment in Hero Honda and Kinetic Honda. Unfortunately I sold Hero Honda and did not sell Kinetic Honda when it’s price peaked at Rs.150/- in 1985. Rs.15,000/- was more than my whole year’s salary. Result is there for everyone to see.

(Side note by me: Hero Honda is currently at 3280 – I am not even taking into the account the split of shares and the dividends this person must have received had he not sold. IPOs in those days did not come with a price band. Almost all IPOs were priced at 10. Some may be more or less. But in those days the IPOs were fixed at one price. If you want to read more on the history of IPOs this is a good article. My father also bought a few IPOs – so I remember.)

I stopped applying in IPOs after Garden Silk Mills Ltd. which was at 75 rupees premium in 1985/86. It’s listing price never went above 100. I stopped applying in IPOs. I started buying from market. A few very good company like Ponds and Doom Dooma but mostly faltu (useless) companies. So return on my investment was a average or below.

In the year 1992 I was having 4 Lacs in three scrips namely Reliance , Tisco (Tata Steel) and Ambuja Cements (all IPOs allotment and hence multi multibaggers).

A single BHK flat in the same building where I was temporarily staying for 4 Lacs which I did not buy. Price of that flat today is Rs. 1.50 crores. Then Harshad Mehta crash happened. I bought flat in 2000 from loan and selling investments, but I did not buy a larger flat selling most of my investment which would have come very handy today with my enlarged family. Moral of the story so far is always convert your investment in good shares and landed property.

I got retired in October 2017. I have been doing investment all my life which was spent in getting displaced from one place to another. So I thought now I can take rest and earn income sitting at home doing trading. In a matter of 10 months, I lost 30 Lacs without even realizing by trading in futures. All my life’s savings and little of my terminal benefits is gone. I thank God for whatever is left. Now I have started option trading. But I am going to be very careful and quit the market in case I loose further.

I am writing this for everyone specially new people who want to earn money and CREATE WEALTH to know this. Thanks once again for your emails which I always read with seriously and lot of interest.

– Mehta

Further to my trail mail I want your advice on the decision taken by me. I have decided to put all my terminal benefit amount in PMS of (name hidden), as I think interest earned on bank FD will actually decrease my money. I’m taking up a job. Pension plus job income will be sufficient to take care of my day today expenses. I am keeping 10-15 Lacs liquid for my son’s higher education. Please spare sometime for your advise on this. Regards. – Mehta

My reply:

Sir thank you for reading my emails that too in this age.

Everything was looking ok (mistakes do happen, no one is perfect) until I read this >> In a matter of 10 months, I lost 30 Lacs without even realizing by trading in futures. 🙁

Being an educated person how can this happen? After 10 lakh loss you should have stopped. Unfortunately in stock markets what is gone is gone. Even if you take a job and earn this money… that 30 lakh is gone 🙁

Anyway Sir, what has happened has happened, please forget.

>> PMS of (name hidden)

I had a bad experience of investing in PMS of a very popular company. So my advice is – please keep checking your value of investments every month. I think the rule says, they will have to show you the performance of the PMS you have invested.

If after 6 months its not showing a profit over 6% then you exit that PMS.

Hope that helps.

Live life peacefully.

Regards,
Dilip

His reply:

Yes 30 Lacs / life time savings is gone. Gone are dreams of foreign tours forget about buying bigger/another property for children. Beginning this month, I have started trading in options as chances of loss in an single trade are limited. I don’t know much except call and put. Taking very small small trades with the hope that earning something sizeable in due course.

Notes by me:

Note that even after lifetime savings lost this gentle man is trading naked (without hedge) and still dreaming to make it big. Read this sentence in above email – I don’t know much except call and put. How on earth someone with limited knowledge make it big in trading options?

It surprises me that just because the entry level to this business is easy and just because everywhere its written that option buy is unlimited profits – people jump in with greed – looking for unlimited profits. They forget that option buy is also a limited loss and that loss is all the money becoming ZERO.

Please note that option buy is unlimited profit is only a theory – no one has ever made unlimited money buying naked options. Even if you are a good option trader who does naked trading can you buy options worth 50 lakhs? You cannot.

Until and unless you do not hedge your option trades you cannot trade with large capital. You will be limited to a few thousands and stress.

Hope you learn a lesson from the experience of Mr Mehta.

We all want to leave our jobs and become a full time traders. This is good but there are certain things that you should keep in mind before leaving your job.

See the feelings of a person not happy in his job thinking of becoming a full time trader after doing my course:

Here are some important points that you should remember before leaving your job and becoming a full time trader:

• You cannot become a full time trader with Rs. 10,000, 15,000 or even 1 lakh. At least 10 lakh is required to become a full time trader. With this 10 lakhs you will be able to live a modest simple life.
• You must have another 10 lakh in your bank account for emergencies. For emergencies you cannot take money out from your trading account.
• Risk management is very important whether you are a full time trader or a part time trader. You must not risk more than 5% of your trading capital in one trade. For example if for one trade money blocked is 1 lakh then you cannot lose more than 5000 in this trade else your account will vanish in no time.
• If for three months you are continuously loosing then forget about becoming a full time trader.
• If seeing profit in a small account slowly increase the amount size to make it almost 10 lakh. Once you are able to trade 10 lakh account profitably for 6 months at least then only think about becoming a full time trader.
• That you have intention to become a full time trader should be known clearly to your spouse/parents if unmarried. You cannot leave your job without mental support of your spouse/parents. If she/he/they are not happy with your decision then the stress prevailing in the house will disturb your trade set ups – you will not be able to concentrate. Family support is required to become a full time trader.
• If you are making good profits in a 10 lakh account then it makes sense to increase the money in your trading account to try to make more. But you should not add 5 lakhs at one time. Increase it by 10% a month as you make profits. Add 10% more only after three months of profits.
• If a positional trader you must hedge your trades for overnight risk management.
• Keep a low profile and never boast to your friends/relatives/neighbors about your trading income. They will start asking you too many questions and will ask you for tips as well. Well my friends used to do. So a few months back I told them (a lie) that after suffering huge losses for two months I stopped trading and am freelancing here and there. They fear asking me tips now 🙂

I have given you correct and true information on when and how you should become a full time trader or take trading as a business. I am sure you must have read a lot of different stories from people in many websites but frankly this is the only truth – full time traders do not live a fancy lifestyle as advertised by tips providers. But yes we do not have a boss to order us anything – however we do have other problems like which trade to take – how much capital to invest – risk to keep etc.

The best way out is whether you are a full time or part time trader – invest in at least 5 blue chip stocks and ask collateral from your broker and trade conservative strategies on the collateral margin money. You will be relaxed as your account will grow slowly plus the dividends hitting your bank account will make you very happy. That is money that you got as a bonus just like you get a bonus in your job. There is no need to leave your job until you are absolutely confident that you can live comfortably from the trading income plus the extra cash you have saved for years for emergencies.

So give yourself time, become a good trader, prove yourself that you are good trader then leave your job and become a full time trader.

Good Luck.