Note: This is edited part of newsletter sent to my subscribers on 20th of August 2015.

Today I got an interesting email from one trader who took my course.

This was his Nifty Future trade – the directional strategy – it can make money even if the Future trade loses money because of the options hedge. Of course, I will not reveal the hedge part of the trade as its only for paid subscribers of my course. 🙂

On 16th of July 2015, he had bought Nifty Future @ 8626, and on 28th of July he sold it @ 8350.

If it was a naked Future trade (a trade without hedge) he would have lost 8350-8626 = (-)276 points – that’s a lot of points. But overall when he closed it, he was in 50 points profit – which comes to around 5% of margin blocked in 12 days. Yet he was NOT happy.

This was his question:

After doing calculation in this trade getting 50 point minus charges around 30 point so only saving is 20 point even nifty future moved 276 point.

This is what I call GREED. You take courses for 15,000 or more and when you trade them you make losses or find out that the strategy cannot be traded in live markets.

Now you took a course for much less – your trade went horribly wrong – you still made 5% profit in 12 days, but you are cribbing on why this strategy did not make more? Isn’t this Greed?

My reply was simple: There is nothing to see. You were wrong – the trade still made a profit. Why crib? Just be happy. 🙂

I cannot understand where this greed ends? I mean tell any experienced stock trader that you took a Future trade and lost 276 points but still ended up with a 5% profit on margin blocked in under 12 days. I swear he will first stand and ask “What exactly did you do?”.

And this guy is complaining why the strategy did not make more? How much more you want Mr. Jha? Please tell me. I am sure he will NOT be satisfied even if he makes 10% on that trade.

You made money when you were WRONG – that’s it be happy – do not look at how much. The directional strategy is meant for that. If you are right its obvious you will make money, if you are wrong you can still make money – but it does not promise how much. You can lose money if the stock is in very narrow range and is going against the Future, however the loss will be limited. Since the whole thing is totally hedged by options you can always wait for the Future to reverse direction and hit the target. That’s the benefit of the hedged trades.

Therefore I strongly recommended hedging all your Future and Options trade. Read this article to know how to hedge a Future trade.

I feel hedging is better than stop loss. But that’s my opinion. I have written about it here and here.

I would be happy to take no loss when wrong in a Future trade. Dude, my prediction went horribly wrong – yet I am getting out in break even – hell I should be happy right?

If you really want to be a happy trader its very important that you be happy with even a small profit of 1% especially if that has come under 15 days because that converts to 2% a month. That’s more that enough if you can consistently make them and restrict the losses.

The best way to avoid being unhappy is NOT to look back at the trade on the expiry day and think what would have happened had you left the trade till the expiry day. The trade is over and looking back will only be painful, of course it can bring joys if it would have lost more. But it does not make any sense.

As you can see these things are a waste of time unless you are researching a strategy. The problem is these emotions can alter the way you trade. For example if you see that a trade that you closed in loss would have made huge profits had you left it till expiry will change your plan for the next trade. Unfortunately next time you may leave it as it is and not take a stop loss only to see it made huge losses on the expiry day.

Therefore once I have experimented and researched a strategy, I never look back and see what may have happened had I left the strategy till expiry day. For me once the trade is over I move on. But if the trade taught me something I will write it down, where I write results of all the trades so that I do not repeat the same mistake again.

To end this is my advice – control you losses (by hedging or stop loss) and be happy with the profits – even if small. Just don’t let greed overcome you – else you will never be a happy trader.

Its highly recommended that you do not trade Futures without hedging, however if you trade naked positional Futures you should take this course. It will help you a lot.

Note: This is part of newsletter sent to this website’s subscribers on 13th of August, 2015. Its partly edited for public viewing. Signing up for newsletter is free. You can find the sign-up box at the end of the post.

Nifty is at 8391 and VIX at 17.02. Its a great time for option sellers. If you have taken my course then you can directly trade Strategy 2 or enter Strategy 1 now. You will get good premiums. I also bet VIX will go down soon, since no major news is coming in short term. We can exit in quick profits.

Nifty fell because of China, it will rise because of India or some other country – who cares – when we are making money. 🙂

The more Nifty goes nowhere, the more non-directional strategies make. 🙂

Important: When you are trading options, do not forget the hedges. I get quite a lot of messages from people who have taken my course, saying why hedge when they can make more? Their rationale is that the trade produces an excellent return of 5% a month – it may vary though every month. Please remember that accidents don’t come telling in advance, they can come any day. You should be well insured for it. You will know the value of insurance that day and will be smiling all the way.

Ask yourself is making 2-3% a month worse than losing money every month in search for looking strategies that make 10% a month? They do not exist by the way. Even after 100 years you will not find that one strategy that makes 10% a month. (Most people who call me want to give them a strategy that makes 10% a month – how to tell them that options were not made to make 10% a month.)

Or, spending money on the course, looks like too much while a loss of 10,000 while trading is ok?

Money is money. Either it should return more money, or a thing that you need or knowledge. Otherwise money that has gone just went down the drain.

Update: Edited part of newsletter send to my subscribers the very next day, i.e. 14th of August 2015:

Refer my email yesterday where I asked my course subscribers to trade Strategy 2.

Nifty today is already up by more than 100 points and VIX too dropped by 5.11% to 16.15 from 17. This is big drop in options premium. Option sellers must be in good profits, so close your trade. Like I told Nifty went down because of China – it will go up because of India, and option VIX is poised to go down as well. It happened and result? We win. 🙂

Note that Nifty on that day rose almost 2%.

For those who think why every time I predict and the prediction comes true: (Another example was the Greece crises trade in month of July 2015.)

1. I don’t do any technical analysis because its based on very short term movement. I don’t care for short term movements. I take a call on probability in the next 30 days.

2. This is pure experience – the fact is that markets overreact – we should take benefit of this overreaction. Easiest way is to find out why there was a drop or rise? If the scale of drop or rise does not justify the news there is a 95% chance the stock will reverse direction within 2-3 days. Of course if the news is big, you should wait for things to settle down before you start trading again.

3. I can be wrong but I do not fear because I buy insurance first and then trade the original trade. You should practice this as well – buy protection first, then do the real trade. Make sure both trades are completed within 5 minutes. That makes sure if I am wrong its ok, all I lose is a few points. If there is protection, a big accident for naked traders, will be a small accident for you. After all the insurance guys will give you your money back. Probably you only pay 20% for the treatment (loss) + brokerage – rest the insurance trade will pay. That’s my thinking before I trade, so insurance comes first.

4. If VIX drops it tries to go up, and if it goes up it tries to go down – that’s just inbuilt – that will not change. Same for Nifty. Only exception is a major news that can change future. At those times just do not trade.

5. Its not important to be in markets every second or every day. People who can identify an opportunity – get in and get out are the ones who make money.

If you keep the above in mind two great things will happen. One – because of the protection you will not fear trading. Tow – because of the protection the losses if any will be small and you can be in the game for long and for better. One loss will not kick you out of the game forever. Hope the above helps in shaping you as a better trader.

Note that the above trade was done for a quick profit. When actually the profits came too quickly, there is no point in waiting for more. Why? Because that was the original plan. Moreover, you should always compare profits vs time. Frankly, I am a 2-3% a month man. Now when I am getting 1% or more profit in one day that too in a trade we took as volatility play, for me the return is equivalent to 30% a month because I got 1% in a day. In that view, we must exit as the trade did its job. This is how I control greed. 🙂

If you listened to my advice and traded too may lots – get out of a few, probably 50% of lots – rest when more profits come.

This is how you should trade. When you are in quick profit you should take some profits out. Your thinking should not be like, “I will take every inch because I am correct”. My dear buddy in half an hour things can dramatically change in stock markets. When the plan was volatility play to make quick profits then stick to the plan.

Those who are stuck in Strategy 1 – just stick to what is written in the course.

Just Enjoy the Profits that’s what I want.

Update: Edited part of newsletter sent to my subscribers on 17th of August 2015:

Clarification: Because of my Nifty prediction on Thursday that it will go up, I received quite a few emails and congratulatory messages. Fact is, no one can predict the markets but one can always take a calculated call. Now it does not matter it goes up on Friday or next Friday. For me it was a good situation to take a calculated risk and I informed you. That was the idea. Yes markets going up the very next day was a surprise and a welcome move.

When you are protected you know it does not matter even if Nifty goes a bit further down – this feeling of protection takes the Fear factor out. I am sure a lot of speculators bought Puts that day because of the falling markets – the very next day they must have stopped out with huge losses.

For example, I receive quite a few newsletters from a lot of websites and all of them recommended to be short on markets, with most saying short term trend remains down so be short. This is technical analysis – it cannot predict an overreaction. There must be thousand of followers and all of them lost. I pity especially the Future trades. 160 points loss – that’s a lot. I am not saying they are wrong and I am right, I am only saying predicting Nifty or any stock’s direction on a daily basis is waste of time and a Futile exercise. But taking a calculated risk for the next 15-30 days on what might happen is perfectly OK. It needs no software – it only needs common sense.

And everyone has it. 🙂

My Best Wishes.

You must file your taxes every year.

Remember that last day of filing tax for financial year 2014-15 is August 31, 2015. You can file after that too, but you may have to pay a fine which should be avoided to save money.

If you are not a tax expert you should outsource this to a tax professional.

Even though you outsource, as a stock trader its always good to know some basic rules of Income tax.

So here are some very basic rules:

1. Trading Profits treated as Business Income – All profits made in derivatives (Future and Options) and Intraday trading (day trading) are treated as business income. Business income is added to your total income from all sources including salary or other businesses.

2. Trading Losses are carried froward and can be adjusted against the profits made from any business (not just stocks) for eight years. Losses cannot be adjusted against salary income. Intraday losses cannot be adjusted against business profits or salary income, they can be adjusted against any Intraday or speculative losses for the next 4 years.

Important Note: If you do not file your IT return by the last date you cannot carry forward the losses incurred in this financial year. In case you make a profit trading next year, you will have to file taxes on those and you will not be able offset the profits by adjusting against the losses you made trading this year. So please file you taxes before 31 August 2015.

3. Long Term Capital Gains – Any stock or “equity” mutual funds bought from a legal stock exchange or fund house held for more than 365 days (1 year) is treated as long term capital gain and is 100% exempted from tax, even if profits runs into lakhs of rupees. All dividends are also exempted from tax.

NOTE: If you are doing a SIP (systematic investment plan) on a mutual fund then for profits on investments made in last one year will be treated as short term capital gains.

4. Short Term Capital Gains – If you sell a stock or “equity” mutual fund before 365 days then it falls under the short term capital gains. Here you will have to pay 15% of the profits made as tax.

5. Debt Mutual Funds – If sold within 3 years profits are added to total income and taxed accordingly. If sold after 3 years profits to be calculated after indexation and the remaining profit to be taxed at 20%. No need to show any profits “without” indexation since you have already shown after indexation.

Note that every year government declares a percentage to calculate indexation. After this is deducted, a major chunk of profits from the mutual funds will be out of tax preview and the holder only needs to pay a small amount as tax essentially making the entire profit tax free.

6. Fix Deposits – All profits made from fixed deposits are added to your total income and taxed accordingly. It does not matter if the FD was done for 1, 5 or 10 years. Therefore its highly recommended that you keep excess cash in debt “income” mutual funds rather than Bank Fixed Deposits. Debt “income” mutual funds give an average return of almost 10% which is better than current FD rates. On top of that if you can hold them for more than 3 years, you need not pay taxes on profits made. If you bring into inflation – FDs give ZERO or NIL returns.

If your total profits from F&O trading + salary or business income is less that 2.5 lakhs in a financial year there is no need to file income tax return. But I strongly advise you fill because it helps in improving credit and taking loans.

Disclaimer: I am not a tax expert but this is something that I think everyone should know. These rules may change from time to time and I will write a new page for the next financial year or edit this one. Filing taxes is not as easy as it looks out to be. So please consult a tax professional. I outsource my taxes to a highly qualified tax consultant. This saves my time for financial calculations and to pay taxes, plus he makes sure there are no errors and I pay my taxes on time.

How to get a tax adviser who charges reasonable rates?

One of the best ways is to ask your friends to recommend one. Or search your FaceBook friends or their friends – I am sure there are plenty of tax professionals in India and you should get a good one.

You can also Google – just type your place name + tax professional. Search the same in FaceBook – I am sure you will get one.

Most of them charge anywhere from Rs. 2000 to Rs. 10,000/- for calculating your income, making a P&L statement and filing taxes depending on how complex your financial statements are.

Tip: These statements are big so I recommend not to keep a hard copy, as within years it gets huge and tracking gets difficult. You can always ask them to give you a soft copy. Open an account in DropBox and keep all the files there. DropBox will give you 2 GB storage free for life. This is enough for your whole life. Create folders for every year – keep soft copies of your bank statements, P&L statements created by Taxman, and income tax return files. Everything can be kept in a pdf format. Later on if required retrieving them will be easy and it saves a lot of time.

Again, please file you taxes on or before August 31, 2015 for FY 2014-15. DO NOT get lazy. There is plenty of time – get all papers (soft copy only) by the end of this week and hand over to the tax professional by 17th of August 2015 (Monday). Tell them to calculate and fill the tax returns before end of this month. Save the money you will have to pay as late fee by filling taxes this month itself. Please do not miss the deadline.

IMP: Please just do not rely on this post. It has very basic information. Filing taxes is complex and better done by a tax professional so please consult a tax professional.

If you are a tax adviser or professional please leave your thoughts in the comments section. This will help stock and option traders looking for information on filling taxes in India.

Many Thanks.

In this article we will learn how to best hedge a future trade, what is a bad hedge and where hedging is not required.

Yesterday one of my subscribers mailed me this:

I need your help in one of the future transaction which was done prior to my subscription to your course.

I have purchased one lot of LUPIN – (AUG 2015 Future) at a price of Rs. 1751/- without hedging. Although for last 3 – 4 days it is showing up movement, I intend to cover it by selling 3 to 4 lots of PUT Strike price of Rs.1600/- presuming that it will not go below 1600/-.

May I request your help in the matter.

See the trade. This trader is in profit. Now he wants to make “even more” by selling not one but 3 to 4 lots of Puts on a strike where he feels the stock may not go.

Obviously my reply was: If Lupin falls – you lose money in BOTH Future AND Puts sold. Can you tell why are you doing this?

I am looking for some kind of answer like – I think Lupin will not go there (and I can make more money).

Hey you may be the best technical analysis guy out there or you may have a great sixth sense of the stock markets but there is no place for “I think”, “I feel” or “I hope” in the stock markets.

What if some regulatory news comes in and the Stock opens gap 15% down tomorrow? He loses a lot of money in both Futures and Puts sold.

This is the kind of trades people do and lose money. They do anything that they feel will happen or will not happen and when they lose money they complain that stock markets are nothing but scam where no one can make money. If you let greed and other emotions rule over over trading decisions then you deserve to lose. Do not blame the stock markets, blame yourself.

Best Hedge For Future

The best and very simple hedge for a Future trade is this:

Buy Future, Buy ATM (at the money) Put, or,
Sell Future, Buy ATM (at the money) Call

Both on the same stock and expiring the same day.

Of course there is a much better way to hedge futures in my course – there the hedge can sometimes overcome the losses in the Future trade and actually make a profit in the trade. If possible a hedge should have such capabilities.

Can you now see the grave mistake by this trader? You cannot have a trade where both positions either make money or loses money. A hedge is a trade that works exact opposite to the original trade. Like in the above example if Future makes money the option loses and if the Future loses money the options make. The loss in any case is limited.

The worst case scenario is when a trader actually ends up making a profit in such a dangerous trade and then doubles or triples the number of lots in the very next trade because he feels he has a great sixth sense to predict stock movements. This time the stock does not behave the way he wanted and he loses double the profits he made in the last trade. Should he then blame the stock? Unfortunately this keep happening for years. Why? Because hope has no end.

The trader then tries some other strategy – makes a profit, then makes a loss, changes strategy, makes profit, makes loss – the cycle continues. The trader keeps jumping from one strategy to another to find that one “golden” strategy that works. Years pass and nothing happens. Traders keep blaming their luck. Ultimately after years of trading their account show a huge loss.

Almost all phone calls I get have the same story.

In my view people who trade naked Futures (trading Futures with NO hedge) are the greediest traders. Tell me what does it costs to buy at least one at the money option for protection? If you think buying at the money is costly at least go for an option half the cost of the at the money. At least the trade will get some protection from unlimited loss.

What is a Real Hedge?

A real hedge is a hedge which makes sure the losses are limited and small.

For example if you buy a future and sell a call – and think you have done a great hedge – its wrong. Selling a call has a limited profit. After that the losses can be unlimited. So in my book that’s not real hedge.

Some people think selling a put is a great hedge against selling a call and vice-versa. When I asked this trader where is the hedge in this? This person was very excited to declare that since when one loses money, the other side makes – its a great hedge.

Its not because one can lose unlimited money while the other will only give a limited profit. Where is the hedge for the unlimited loss?

If you are selling an option you should buy another cheaper option to hedge.

I am Technical Analyst and I don’t need to Hedge

Real story: Four Gujarati brothers living in Chennai (yes Gujaratis live in Chennai too. 🙂 ) trade for a living. Each brother is given a certain amount to trade. This certain amount is not small. Each brother’s account is around Rs.75 lakhs. They have a WAR room (a room where all planning is done and strategic decisions are made) with latest computers, many trading terminals, large screen where stock movement can be seen, a highly paid software that gives signals to buy and sell to trade. In short the (unnecessary) accessories to trade must be worth 50 lakhs. Not to mention the monthly bills for trading software and other equipments plus the office space which again is not required. When I heard this obviously the first question I asked was how much profit he was making this year. For the first 6 months of this year his 75 lakhs account was down to 72 lakhs.

When I asked him what trades they take (though I knew what was coming) – he said they traded naked Futures.

Frankly trading Futures with no hedge and the account going down by just 4% in 6 months is a great achievement. He is lucky not to see a 50% drop which is quite common.

If you too trade Futures without hedge think about it. These brother have a world class infrastructure, latest trading software and computers which automatically generates trading signals – still they are unable to make even 1% profit in 6 months. How on earth are you going to make huge profits?

I told him one simple thing – why don’t you hedge? He was like – well what is that? I told him go back and track had you bought one Put for every Future buy and bought one Call for every lot Future sold then what would be the results today.

Unfortunately since they have done thousands of trades in the last six months it was virtually impossible to track all trades. However I can tell with guarantee the results would have been much better – possibly some profit. Because he lost only 3 lakhs, which means if the hedge was in place it would have severely reduced the losses while the profits would have been more or less the same.

So even if you are the best technical analyst in the world, you cannot do great without hedge.

Note: People who think buying costly trading software and other systems can bring great profits, think again. It is not the system that makes profit – it is what that has been fed in that system that makes profit. In other words system generates signals based on the algorithms made by the trader. If the traders’ thinking has flaws, the system will generate only flawed signals and you will never make money. And good traders don’t need machines. 🙂

Automated Trading is Getting Popular – Do They Too Hedge?

I don’t have much knowledge about automated trading, but I really don’t think they hedge. Here is the reason – most automated trading is intraday (day trading). In day trading it is the strategy and the discipline that takes precedence over hedging. Since hedging also involves paying for more brokerage, an automated system where human interaction is next to nil and does multiples of trades in a day, they do not hedge the trades. Automated trading is a system based day trading and highly disciplined trading with zero emotions – so hedging is not required.

Also please do not have the misconception that all Automated trading is the same. Its not. An automated trading works on the software controlling it. Company A may be trading in Futures with different set of rules while Company B may be trading in options with a different set of rules.

In the US even retailers can do automated trading. In India for retailer’s automated trading its banned. Some institutional investors do automated trading.

Verdict on automated trading is yet to come out, I am really apprehensive on this kind of a system.

In automated systems the trades are in and out in seconds, sometimes milliseconds. When you are in and out of a trade in seconds its scalping and not trading. Scalping is an art which is beyond the scope of this article but I will write on it some day.

Note that some people in India calls Scalping as Scrapping. Well Scalping is the correct word.

By the way, if you can practice and master the art of scalping, you can really make good money in stock markets day trading (intraday). 🙂

Conclusion

Yesterday someone gave me a call from the US after reading this article on my site – how to make crores from the stock markets.

He wanted me to find out super stocks that will perform like WIPRO in 30 years. 🙂 He wanted to invest 10,000 now in 6-7 stocks and wanted me to find these stocks. You can imagine he wanted to invest only 10,000, so what kind of paycheck he was looking to offer me. 🙂

Really? Dude I am not GOD that I can predict what will happen in next 35 years.

Hell even WIPRO owner Azim Premji did not know his company’s stock will create such huge wealth for its share holders in 35 years time. How can anyone else know?

But if you look closely the growth of WIPRO was just over 50% YOY – year on year for 35 years, that’s amazing. It was getting compounded at over 50% per year for 35 years.

Note: There is no guarantee that the same stock will keep performing like this for ever. Please do your own research before investing in this stock. This is what happened, NOT what may happen.

Now the question is are you really looking for 800+ crores in 30 years? NO.

For most of us 10 crores in 30 years should be more than enough.

Let see how long does 1 lakh takes to become 10 crores at 30% a year?

You can use this compound calculator to find out:

Its just 17.5 years.

And making some 30% odd a year is highly possible in conservative trading (results may vary for users). You just need to make over 2% a month to make 30% a year. Remember even monthly returns are compounded so you do not have to divide 30 by 12 which is 2.5% anyways.

You may or may not find a golden stock that performs like a WIPRO or a ITC. And you will know only after 30 years whether they made money for you. Moreover I do not think a single investor held the shares for so long – most would have sold when they doubled their money. In other words you will also do the same.

Urging to sell hugely profitable share is an emotion hard to suppress. Almost everyone will sell once they double or triple their money in a stock. Which means there is next to nil chance that anyone will ever become a Warren Buffett again.

With trading things are under your control – unlike shares where you do not have any control over their prices. You can only hope. I am not saying that you should never invest in stocks. You should have a portfolio of some good stocks for long term in your trading account, but you should also know some conservative trading strategies to make money slowly over time.

Who knows you end up making great profits from both the long term investments as well as conservative option trading? Frankly there is a very high chance.

Your risk is the course fee, but you reward is unlimited income till you retire.

I am determined for your success as a trader and will go all out to help.

But its you who have to decide you want to learn conservative trading or keep losing money trading aggressively.

Click here to read testimonials.

Click here to pay for the course.

I bet, you wont regret taking this course.

You can Call or WhatsApp me on 90511 43004 if you need to know anything about the course.

If you have a large trading account and fear that your broker will run away with your money or do trading on your account without your knowledge then you need not fear. The rules by SEBI (Securities and Exchange Board of India) are so strict that the brokers actually fear trading without your permission in your account. The rules governing management of money in brokers account are even stricter.

Small Note: If you are a Future & Option trader you must trade with a discount broker to save money on brokerage. If interested you can click the link below and check if their rates are something you are comfortable with (its only Rs.20/- per order NOT lot – so even for 50 lots order you pay only Rs.20/-). Then you can register yourself:

https://zerodha.com/brokerage-calculator?c=ZMPDIL

You can register here:

https://zerodha.com/open-account?c=ZMPDIL

According to a recent rule any money that is not used in a Demat account needs to be returned to the client. Earlier if you remember the brokers used to keep the money in your trading account. You could have used that money any time you want or leave it idle. But now rules have changed. The money that is not blocked or used for a certain time needs to be returned to the client’s bank account. This is to ensure in case you had left a lot of money with your broker and God-forbid some thing happens to you, all the money that is unused will be refunded.

In many cases family members do not know how much money the bread-winner has kept in the trading account. In earlier cases the whole money was kept with the broker and returned only when the nominee closed the account. The brokers used to keep the interest received on that money and return only the principal. Today they cannot.

In the US the money is not returned but the client gets interest on the money equivalent to a debt mutual fund of US (anywhere from 1-3% in a year). I do not understand why SEBI does not enforce this rule here instead of returning the money. Here in India debt mutual funds make almost 9% in a year. If enforced the money lying idle in Demat account will make more than money in our savings account.

SEBI knows how many clients a broker has, their PAN and other details like which bank account your account is linked to etc. They can find out all transactions done on you account through the broker, like cash deposits and withdrawals. So there is almost NIL chance that any broker can run away with your money.

According to the terms and conditions of SEBI no broker can buy or sell against your wish in any stock or derivative. They may call you, they can ask you to buy a stock because they feel its headed up, but I don’t think if you deny they can go against your wish and buy that stock. It is a totally different story that you allow your broker to trade on your behalf, in that case if there is a loss they will remind you that they had taken your permission.

However I am talking about the popular and big brokers. I have no experience and idea of small brokers who run business from their homes with a couple of computers. These brokers are popular in remote areas, suburbs, village and small towns. My father-in-law had account with one such broker running business from home with one computer, but I never heard of him saying they ever traded against their wish.

If there was a miss-communication, misunderstanding on phone, or a trade done by mistake then that’s a different issue altogether. But as far as I know brokers rarely trade against the wish of their clients. Its a serious issue. SEBI takes it very seriously. If SEBI comes to know of it through complains, their license will be canceled – so they actually fear trading without your permission.

There is a plain logic to it as well. See brokers need a lot of trading to make reasonable money. So if they need to cheat they will trade one everybody’s account. Trading in one or two account against the wish of the client is not going to make them any money. And if they trade against the wish of all of their clients someone might definitely report to SEBI or consumer courts. A few complaints – investigation – and gone – the broker is out of business. So they will fear doing any trade without the knowledge of their client.

In this case I am sure some kind of miss-communication took place. Or probably the trader was not clearly told the risks involved in Futures trading. He might have only told that if you buy a Future you make a lot of money if Nifty goes up. Probably he was never told that if it falls, he will have to pay for the losses.

Remember brokers will never deny a trade. If you ask them, “shall I buy SBI now?” They will never say No. They will always say, “yes buy its a great stock, it will go up very fast.” In 95% of the cases the client gives their consent and the trade is done.

When any broker applies for brokering license they have to a sign terms and conditions under which they keep a lot of money as security with SEBI – on top of that every trade is monitored by NSE, BSE, MCX or any other exchange where the trade takes place. Its near impossible for any broker to fudge accounts or run away with their clients money.

A broking company may declare bankruptcy, refund their customers and close business but the conditions are so difficult that they cannot run away with their clients money. For example no broker accepts cash – you have to do an online transfer or pay by check. Similarly they do not pay you by cash. So 100% transactions are accounted for and all records can be produced when demanded.

Sometimes some broker may close business but they may either close your account or shift your shares to some other broker and you become their clients. Of course the F&O trades needs to be closed. I think they cannot be shifted.

Still you should do your research before opening an account with a stock broker. For example you can find complaints against any broker in the Arbitration Status page of the NSE. You can also read reviews online about the broker. Read what their clients are saying. At least you get some idea.

Your bank also is a stock broker but its their by-product so I would advise to open an account with a company that specializes in stock brokering. That should be their main business. If that’s not their main business they will not be able to give kind of support you may need.

Discount Broker Benefits:

At least your F&O account should be with a discount broker. This is because if you are paying Rs. 50/- per lot then you are paying too much to your broker. The discount brokers charge per trade (not per lot). Most discount brokers in India charge are Rs. 20/- or less per trade.

Some of the good discount brokers in India are: Zerodha (Rs. 20 per trade), RKSV (5 free trades, per month then Rs. 20/- per trade) SASOnline (Rs. 9/- per trade.)

Why Two Trading Accounts?

You must have 2 trading accounts. One should always be used for long term stock investments. For example make a list of companies that you think will be multi-baggers in a few years and start a SIP (systematic investment plan) in them. Let say you invest 3000 every month in rotation on the 1st of every month in 5-10 companies of your choice. Lets say at an average return compounded annually these companies return 15% CAGR (some stocks return more), then in 31 years you will have more than 2 crores in your kitty. More than enough for your retirement from one account itself for a small investment of just Rs. 3000/- per month. Remember you can make much more if one of the stocks behaves like ITC or a Wipro.

The other account should be for F&O trading purposes only. Now here is some magic. Lets say you start with 2 lakh only and do not add a single paisa to that account ever. Now lets assume you make just 24% CAGR (Compound Annual Growth Rate – only 2% a month) which is entirely possible if you trade conservatively. In 20 years you will have almost 2 crores. Not to forget you have another trading account that’s also helping you grow your money.

If you are wiling to learn, have patience and discipline its entirety possible.

One of my regular blog readers in USA asked a great question in the article hedging vs stop loss which is better: In simple language he asked if one can buy an Index Future and hedge it with buying Puts in its ETF?

In India that question converts to if you can buy Nifty Future and hedge it with buying put of any electronic trading fund that mimics Nifty like Nifty BeES.

Unfortunately we don’t have options trading on ETFs here in India. Even if it was done it does not make sense to hedge Nifty Future with and option of a Fund.

There is one major reason for it and that is one unit (or lot) of the ETF fund will never match one lot size of Nifty in terms of cash. It will almost always be very small in size in terms of total value in Rupees.

ETFs usually have very small cash size. There is a reason for it – so that even those with not much money to invest in stock markets may be able to participate in its growth. Like in most equity mutual funds in India you can start a SIP for Rs. 500 per month.

In the Goldman Sachs Nifty ETS Fund (an electronic trading scheme fund that mimics Nifty a.k.a Nifty BeES) the minimum investment is Rs. 10000/- and any additional investment thereof is Rs. 1000/- only. If options is allowed here the ticket size will be too small to hedge anything against Nifty.

According to NSE website: Nifty BeES trades on the Capital Market segment of NSE. Each Nifty BeES unit is 1/10th of the S&P CNX Nifty Index value. Nifty BeES units are traded and settled in dematerialised form like any other share in the rolling settlement.

So essentially if you hedge you are only hedging 1/10th of your trade. In simple language its not technically a hedge to hedge Nifty Futures with Nifty BeES.

I wrote the same reply to Michael:

Hope the article helps you trade profitably there in the USA.

To answer your question I am not comfortable hedging one instrument with another instrument even if they are related. That’s not real hedging. I also see that there is a huge difference between dollar value of one contract of NQ and dollar value of one contract of ETF. In fact there is BIG difference – the ratio of NQ:QQQ stands at 1:800 approx.

There is no way you can hedge it with buying cheaper puts of QQQ. Please remember whenever you hedge the dollar value of both contracts should be same. Agreed ETFs are cheaper but they will be helpless in case there is a crash. The kind of money you make from puts will be negligible.

If you really want to save money, then buy slightly out of the money puts. They will also give a great protection – but it starts only after some loss is taken. ATM options are costly but they start protecting from day 1. You lose some, you gain some – that’s the puzzle you need to solve.

In the US if you don’t know that volumes are so huge that even ETFs have options, commodities like Gold, Silver, Crude have options. There is LEAP that is options expiring after years – even they are highly traded.

From https://en.wikipedia.org/wiki/LEAPS_(finance):

In finance, LEAPS (an acronym for Long Term Equity AnticiPation Security) are options of longer term until expiry than other, more common, options. LEAPS are available on approximately 2500 equities and 20 indexes. As with traditional short term options, LEAPS are available in two forms, calls and puts.

LEAPS were created relatively recently and typically extend for terms of 2 years out. Equity LEAPS always expire in January. For example, if today were November 2014, one could buy a Microsoft January call option that would expire in 2015, 2016, or 2017. The latter two are LEAPS.

In fact in US option spreads are traded as one single trade for the difference between them unlike in India where we have to trade two different legs and we are not sure exactly what points we are going get.

Trades are asking SEBI to at least block as margin the max loss that is possible in a debit or a credit spread, but for reasons better known to them they are still blocking full margin.

Update: Oct 30, 2019 – SEBI may lower margin requirements for hedged trades in F&O segment. Read more here – this is a good news if you have done my course:

https://www.moneycontrol.com/news/business/sebi-may-lower-margin-requirements-for-hedged-trades-in-fo-segment-4586591.html

For example if you buy an option for 10 and sell another OTM option for 5. In the US only 5+brokerage will be blocked as margin whereas here in India the brokers will ignore the buy and block full margin for the option sold.

SEBI’s reasoning is volumes. They say if any option goes deep in the money and there are less traders and the ask bid price has too much gap, the losses can be more than the max blocked. Unfortunately until this exists we have to trade whatever is given to us.

But once the rule changes we can trade many more lots with the same cash in our account. In that case the returns from the hedged trades will be even more. People who have taken my course can then make even more. 🙂

In my last article how to control greed as a trader, I had written two plans to make sure any speculation you do in your trades is properly managed by a trading plan so that one big loss does not wipe your entire account.

For traders restricting losses is very important. Only those who expertise in managing losses end up making money.

See I am not giving emphasis on profits. What I am actually giving emphasis is on restricting losses through a proper risk management plan. Once that is in place the profits will come.

I think every trader knows that there are two ways to restrict losses – one is to take a stop loss (get out of the trade when a per-determined loss is reached) or hedge the trade with an exact opposite trade (so that if the original trade is losing money the hedge trade makes money).

Note: In my course all strategies are properly hedged.

Now the biggest issue with many traders is what risk management plan to chose – stop loss or hedging?
Frankly it mostly depends on your comfort level with the kind of trades you take. Most of the traders I have met or seen take the stop loss plan. Well I have my own apprehensions with the stop loss plan.

In my view and experience the hedge plan is better than a stop loss plan especially for the positional trades.

For Intraday Future or Option trades the stop loss plan is better because on the day the trade is making money – the trailing stop loss method will work much better than the hedge method because it will make amazing money in a single day. However had you done a hedge strategy it would severely restrict the profits. And in trades that makes the loss, the stop loss will ensure a small loss. Benefits of the stop loss method ends here.

For the positional trades the hedging method far surpasses the stop loss method. It saves you from overnight exposure of the open trades.

In the US there is something called the GTC order. It’s known as Good Till Canceled Order. A GTC order is valid until it’s executed by the system, or is canceled by the trader. If kept open and not triggered, it gets canceled by the system on the expiry day. Which means it stays active overnight even during holidays when the markets are closed. So if next day the stock gaps against a Future or option when the markets open and if the GTC order is within the trigger range – it will get triggered by the system and stop your losses the next day or any day before the expiry as soon as the stock reaches the trigger level. It is another story that it has its own problems, but that’s beyond this subject.

Unfortunately in India we don’t have the GTC order. I sincerely hope they introduce it as soon as possible. This will tremendously benefit traders. Since there is no GTC, the only option to stop a huge loss is to hedge a position. You may have a stop loss in mind – but what if the stock gaps 20% below your last closing and you had a Future buy? Gone – months of profits gone!

Hey by the way, a GTC is also helpless here as the range will get triggered and the stop loss will hit with the stock being down 20% against the trade. That’s the reason why many traders even in the US do not usually put the GTC. They do it every day when the markets open and close it when it closes.

In India the only option to stop yourself from unlimited loss overnight is to take the hedging position. Not only can you sleep better at night thinking an insurance is there to save you from unlimited losses but also you have enough time to think to take the next action.

Consider this scenario – two traders take Future buy positional trade in the same stock and leave it overnight. One will take a stop loss if the stock goes down 5%, the other has hedged it by buying a ATM Put. There is a very bad news on the company after market closes and next morning the stock crashes and opens gap down 10%. The trader with the naked position was not only able to sleep well in night but had already decided to take the stop loss as soon as markets open at 9.15 am in the morning.

The trader with the hedge position will sleep well in night because he knows the protection is there to save him from huge loss and the max loss he will face will be a few points he paid to buy the protection. Within an hour or two the stock may reverse decreasing his losses by a huge margin or may get back into profits, who knows?

This the hedge trader clearly knows that the stock may reverse and he is in his liberty to take the stop loss any day before expiry. In fact, if comfortable with max loss, he can leave the trade till the expiry day. Well let me tell out of experience that a lot of times the stock actually reverses and takes the loss trade into a profitable one by the time the expiry arrives – sometimes much before that. 🙂

For the stop loss trader the game was over long back.

Can you now see the beauty of hedging vs stop loss? Hedging also does the same thing i.e stop your losses but it does it in a much better way. I am still confused why Indian traders DO NOT hedge their positions especially if they leave it open overnight.

I agree that the upfront cost to hedge your trades seems a bit too much, but whats wrong in paying a small price now than paying a much bigger price when the accident actually happens?

If you are a trader who falls into the taking the stop loss when time comes, please think of hedging your positions. Practice with half of your trades and after three months compare the profit and loss of both the risk management methods. I bet you will switch over to the hedging risk management method once you see the benefits.

Before I finish let me tell you options were invented as a hedging tool and not as a trading tool. Its a different thing that today traders all over the world use it as a trading tool. Well nothing wrong with that. But even if trading options why not hedge them with options?

To conclude my experience says the hedge plan is better than the stop loss plan. Please let me know your views.

In this article you will learn how you to control greed while trading. Your biggest enemy as a stock trader is nobody else but your own greed and fear. Today lets learn to control greed.

In one of my recent articles http://www.theoptioncourse.com/making-use-of-vix-volatility/ I got an interesting comment from one of my regular website visitor Mr. G Allen. I quote his question with minor editions:

Keep such timely articles coming – it only adds to the strength of the trades that we take as per what has been taught in your options course.

Today, I want to touch upon the often repeated maxim, “Ride your winners and cut your losses”.

Indeed, I know that greed has to be under control as you have very rightly stressed above – there is no denying that, but say for example, if one has cut his losing trade immediately, but is riding (carrying) his winning trade as should be the case. In such a scenario, where does one draw the line as far as greed is concerned. Would carrying the winning trade tantamount or be inferred as greed? And should the person get out even as the going is good? Or does the maxim apply more to Investment rather than Trading?

In simple terms how does one stick to the above discipline, and yet not be labeled greedy?

Well first of all a Big Thank You Allen for this question. After all we all are trading to make money. One can easily say we all are greedy so we should not trade. And if do not get greedy we do not make money. 🙂 So where to draw that line where we do not greedy and lose too much money?

In this article I will try to clear the dilemma (confusion) what I mean when I say do not be Greedy when trading. Its just not me – all the experts and experienced professionals say that all over the world to traders, the same thing – just don’t be Greedy.

Well this is the most important and very difficult emotion to control. Greed is one of the main reason why people lose money trading. Not just share trading – it is one of the biggest reason why companies fail, people lose a lot of money trading real estate and taking a pure gamble in any field to make money fast without working hard or speculating.

Since I cannot talk about other fields let me confine myself to where to draw the line on greed when it comes to share trading and F&O trading.

Well first lets discuss how you can control greed in share trading:

Lets suppose your friend made good return on investment in an IPO (Initial public offering) and told it to you. Or maybe you read stories on people making huge money on listing day of an IPO. Now you also start dreaming. You start reading newspapers for the next IPO. You start imagining that in the next IPO (whichever company it is does not matter) you will invest 1 lakh and make 1.10 lakhs on listing day and will inform about it to your friends. Here greed is taking control of your emotions.

You see even if correct you will end up making only 10k or even less. You have already decided that you will exit the stock on the listing day itself and you are “sure” that you will make a profit because your friend or someone made it. You are not even thinking that 10,000 will not change your life anyway but you still want to be in the club of people making money on the listing day. How strange is that?

You don’t want to do any research on the next IPO. The greedy in you thinks that every IPO is same where you can make money fast. You don’t want to be left behind. You also want to be a small part of the success story that you usually read in the newspapers.

Well what you don’t know is that nobody cares if you made money in an IPO – not even your family members. No press or magazine will cover your measly 10 thousand profit even if you make that money. (There is a 90% chance that you will lose money but that is a different story.)

But you want to live in that moment of glory and you take a chance with one lakh rupees. Well do you know why SEBI restricted limited shares in IPOs for individuals (and even for institutional investors)? If you don’t know the real reason was to restrict retailers to lose a lot of money in IPOs. When this rule was not in place, after one win they used to put all their money into their next IPO only to lose more than they made. SEBI had to safeguard its investors and since it cannot control the greed in us, it controlled our access to shares we can get through IPOs. 🙂

Same can be said for shares. When we see a stock falling 10% we buy it thinking within days it will bounce back – only to find it going even further down. This clearly was greed which you should learn to control.

How to Control Greed Buying Shares and Profit?

Lets say you have decided to invest 30,000 in a share for the short term for a quick profit. You wait for a correction and it has arrived. You should invest only 15,000 in that share.

Now two things can happen.

1. The stock falls 10%. At this stage exit with Rs. 1500 loss. Its worth to note that had you invested all 30000 at that stage you could have lost 3,000.
2. The stock gains 10%. Now buy stock worth 5000 more with your stop loss at the price you entered the stock. If that happens your loss is only 500. But if the stock moves up 10% more buy more worth 5000. Now your stop loss is 10% below it. If it goes there you exit with a profit of Rs. 1000. Now if it goes up another 10% add some extra. Now if it goes below 10% you exit with a 3000 profit. In fact you can continue it as long as you want.

Can you see how mathematically you are riding your profits WITHOUT greed and cutting your losses? Had you entered the stock with 30k – you could have either made a profit of 3k or loss of 3k. So if you are 50% of the times right – you break even. But in the above strategy you can make amazing profits if you are correct even 50% of the times. See how you controlled greed still made amazing profits.

Now coming to F&O trading. Most of people reading this fall under this category.

The real problem here is speculation. How many times we have seen an option worth 10 goes on to become 100 in a few days? Many times. Whenever that happens we start thinking – oh I missed this opportunity, but next time for sure I won’t.

When that person makes money in his first trade probably played with one lot – he increases the trade amount by 5 times thinking he can make windfall profits every time he plays – that unfortunately never happens. And that’s how the series of losses starts.

And here is the worst part. When you see an option priced 10 becoming 100 your brain thinks that had you invested ALL the amount you had in your bank account it would have multiplied 10 times in only few days. It doesn’t stop here – you tend to dream that you can then double or triple that amount every month and become very rich very fast. In quest of doubling or tripping our money very fast we actually become poorer and poorer in every trade and every month passing by. Unfortunately that hope never dies.

There is another thing. Fear is another destructive emotion. How many times you bought an option for 30 – 40 odd points and sold it at 50 or 60? When you got an opportunity to actually double your money in that trade – you decided to book profit thinking even this small profit may get into losses because of fear.

What I am trying to say is that your one trade that you were looking for all your life – that one trade that will cover all your losses and turn your account into huge profit will never ever come. Its not that those trades are not there – they are there every month – the problem is you do not have a plan – the only emotions ruling you are greed and fear – and they are the main cause why you are unable to make profits in the options game.

So How to Control Greed (and Fear) While Trading Future & Options?

Lets go back to Allen’s maxim: Ride your winners and cut your losses. You know what that is? Its a PLAN. Its just a plan that you need to plan.

Lets take an example.

Future trading.

I have had a customer who was sitting at one crore loss trading Futures. Too many lots shorted naked and averaging them whenever Nifty rose 100 points. Unfortunately from 6000 to 9000 – the rally did not stop. His life’s savings gone. Isn’t greed to be blamed?

What if he had a plan like taking a stop loss at one lakh or even 5 lakhs. What if every time is shorted a Future he also bought a ATM Call option? Today he would be left with 95 lakh to trade and get back that money and make a profit. Instead he was pleading me to teach how to make 2% a month because he said he has now learned a lesson that making even 2% a month is much better than losing 1 crore in less than 1 year.

When I asked him why he kept shorting – his answer was he was sure that like 2008 this was also a bubble and he can make a lot of money. Well that was speculation and not a plan.

So what is a plan?

Plan can be of two types.

1. The stop loss plan: This is mostly done by the Future traders. If they take a 100 point loss – they take a 200 points profit. Loss to profit ratio for most is 1:2. That’s a plan. Its a different story that they may lose in all the trades. But at least on paper the plan is good. Because to be in profit they have to be 50% of the time correct. Test yourself and see if you are good at predicting the markets even 50% of the times then this plan will work for you. If its working stick to it for life. Do not change just because you think some other plan will bring more profits. You may have lost money to prefect this plan now do not switch because you will need more time and money to perfect another plan.

(I am not good at predicting the direction so I stick to the second plan):

2. The hedging plan: Mostly done by option traders. In simple terms if you buy one option – just sell one option further away. Similarly if you are seller of option just buy options further away. Its simple and straight forward. It cannot do damage to your account whatsoever happens. With Futures too if you are selling you can buy calls and if you are buying you can buy puts. Agreed some profits will be eaten away but when wrong you will be safe. A few trades will not take you out of the game forever.

In my view the hedge plan is better than the stop loss plan.

So “Ride your winners and cut your losses is only this” – when you are making profits you should know where to stop. If you do not know where to stop then you have fallen for greed and will never make money.

And if you are one of those traders who want to ride the markets for as long as possible then you should have a stop loss in the system which you should keep increasing with every few points move up with the indices. This “few” points is better known to you. That’s known as the trailing stop loss plan – but its only possible if you are trading full time. And again this is possible if you are trading intraday. How do you know what will happen to the markets the next day? If you don’t know and are leaving you trade naked, then again you have fallen for greed and not having a plan. Next day your 100 points profit can go into a 10 point loss or more. So if you are trading with trailing stop loss make sure to close the trade the same day at 3.15 pm and be happy with whatever profits you have made. If you think there is more to the rally – just hedge your profitable trade at 3.15 pm – that is a good plan.

Remember this – share market is a serious business and only those who are willing to put some effort will make money. Just like any other business you need to plan it properly. You also need to get some education on options and futures on how they work and how you can use them as an arsenal to make money trading.

There is no short cut to success. Similarly there is no short cut here. You got to work your way up – just like in your job. Those who are smart, those who can control these two emotions greed and fear and those who have a plan will almost always succeed in the stock market business.

Thanks for the question Mr. Allen, and I hope I have answered what you wanted to know.

Please ask questions I will gladly help.