Yesterday I got one of the best testimonials of my course. More testimonials here.

I want to share with you:

From: Deepak P
Sent: Thursday, July 09, 2015 3:09 PM
To: Dilip Shaw
Subject: Update on Course

Hi Dilip,

I have executed Strategy 1, 3 times after taking your course in May. It has worked all the time.

At times, it was bit boring to just watch the market without doing anything. 🙂 But, it worked eventually all the times.

Just wanted to say thank you for that wonderful course.

With Best Regards,
Deepak P

(Name edited and email deleted to hide identity – Results may vary for users)

See this is what I want to see. This person has strictly followed the strategy – not taken any undue action in between – shown some patience and it worked. If it has worked for Deepak for the last 3 times I am sure it has worked for others as well.

I agree my strategies are boring. You have nothing to do for days, still at the end of the month you make money. This is what is all that matters – the end result is important not what happens in between. People who trade for the sake of trading or fun will never make money. People who have a plan and show patience and discipline will.

Thanks Deepak. You made my day.

Why do these strategies work in almost all conditions?

Because these strategies are based on theta decay or time erosion. Over a period of time, it’s nearly impossible to beat time. You can predict direction sometimes, but you just cannot predict how long will the stock take to reach there. You may be correct in direction but most of the times you will never be able to correctly predict the timing of the move. It may happen after the expiry – but the option buyer by this time has already lost his money. Here is where we can benefit. Even if the direction of the option buyer is correct but the timing is wrong or the speed is not fast enough, the option sellers will keep making money.

And if the direction is wrong or if there is no movement the option sellers will still make money. 🙂 Can you see how much options favors the sellers just because we take unlimited risk. Yes that unlimited risk also comes sometimes and the sellers can lose a lot of money – here is where the hedge will save us. There is a lot to learn in the course.

It gives me immense pleasure to see people doing my course are making money. That was my real objective to start this website and offer a course. Yes I am also making some income but it’s not something to boast off. That’s secondary motivation to keep working on the site – but seeing that my efforts are not going in vain is a pleasure that cannot be measured.

Please keep giving feedback. It will help me to improve the service and the website.

Note: Before reading this article please read Greek Referendum Trading Tip Inside to better understand when we initiated this trade and how we are booking profits now.

The movement we wanted has come. It may not be because of the Greek crises but because of the China market crash. We are least bothered. We wanted a strong move and increase in VIX and we got it. A 1.75% increase in one day movement should make the long strangle profitable. It is just 5 days old, so not much premium is lost. VIX increased by 9.07% and closed at 17.79. Increase in VIX will make the long strangle profitable.

So those who listened to my advice and entered into a long strangle can book profits tomorrow morning before Nifty whipsaws (move in the opposite direction). Greed will now come into force and people will start investing in stocks anytime and Nifty will again resume its upward journey. This will kill VIX and take this profitable long strangle back into loss. This is what we do not want so just book profits, it does not matter even if it is small. The trade was for small profit or a small loss. Since we have made a small profit lets book it. Let not greed take over you. This small profit should be more than 10% of the blocked margin, and that is enough for us. Stick to the plan and you will become a successful trader.

Remember its about small profits more times than the small occasional losses. And you should be in profits almost every month.

Tip for traders who have subscribed my course: VIX has increased. The directional trade should be in profit. You can close it. Now its great time to trade our strategies. Nifty has fallen and the VIX has increased. It is perfect time to trade strategy 1, and if you are a bit risk taker you can straight away trade the strategy 2 on the put side.

It is also a great time to trade the conservative stock option trade. Many stocks have fallen – see if your favorite stock has fallen too. Options premium have increased. You have a chance to make almost Rs. 15,000 this expiry itself – and if there is a small loss we need not worry we have a plan to get back our money and still make the same profit.

So please don’t be lazy and take action now.

I hope you learned a lesson on how to take a decision when to trade from this Greek situation. Any major news will spike the VIX and make Nifty move. And then VIX will go back to normal. The idea is to take benefit of this situation. Markets will give you a plenty of opportunity to trade, just keep a look out for them. Listen to news or read newspapers and take action before it happens. Since we are not speculating we can take a calculated risk and you will see that most of the times these calculated risks will be profitable.

Important: The whole idea of this post was to teach you how to find opportunities to trade – how to manage risk and plan the trade, when to take the profits out and what to do if there is a loss. This was in NOT written to show that look I am a great trader. I am a 2-3% man and I look for small opportunities to make profitable trades. Most of the times I am successful, sometimes I am not and I am ok with those occasional small losses. No trader in this world can make profits in all the trades. The idea is to trade to make money to beat inflation and also beat average mutual fund returns of almost 15% a year. With conservative trades and occasional small bets like this we can easily achieve that.

Remember option trading will not make you rich in a day, a month or even a year. But in 5-6 years a lot of wealth can be accumulated.

I will definitely email my course subscribers you whenever there is a new opportunity. Ideas sent to them may or may not be uploaded in this site. Even if uploaded it will be after the opportunity is over.

You can pay the option course fees here.

I hope you know that there is a referendum (voting) in Greece this Sunday 5th of July 2015, on whether they want to remain in Euro or exit. If the country rejects the bailout then Greece becomes a defaulter and may have to exit the Euro. If accepts then it gets more into debt.

Both are bad for their economy.

However we cannot control Greece or whatever is happening there. What we can control is our trades.

So lets wait for the outcome and take our trades.

What Can You Trade?

Monday morning it will be clear what will happen to Greece and of course Nifty will also react to the news. If traders think its bad news, Nifty will fall and if they think its good, Nifty may rise. Both good for us. 🙂

People who have taken my course: I suggest keep some money for the directional trade of my course. If you do not have the cash no need to trade – we can wait for another opportunity. BUT PLEASE DO NO ADD any cash to your trading account just because I am saying this. There will be a lot of opportunities in future – you can wait for them – but please do not add any money. If you have spare cash left ONLY THEN go ahead and trade.

Remember in the directional trade we need a movement fast any direction – and I am quite sure after the news there will be some movement.

Eventually if movement comes, we can exit in profits in a few days and if not, be ready to exit with a small loss because our original plan is that this will be a quick and fast positional trade. Stick to the plan.

Since the returns in this trade is in the double digits I request you to keep the trade size small. Remember that Nifty may not move. So maximum you can stay is till this Friday, 10th of July 2015.

Even if Nifty does not move you can exit with a small profit or loss – if your Future direction is correct you should be in profit – and depending on the VIX you can be in profit even if you were wrong in your Future trade. Let luck play a small part in our trade – but we will make sure the trade is properly hedged so we are safe. Here we cannot let luck take over us.

Another trade that can be taken is the Long Strangle. However there is some risk here as both the call and the put options can lose money but since you are exiting in 5 days, not much should be lost. However if there is sudden rally, this trade will produce a fast profit very quickly.

Note for traders who have taken my course and are already in Strategy 1: You can take the Long Strangle if you do not have cash to trade the directional trade. Since not much money is required you can trade this in less number of lots.

Take you profits out at reasonable level. Do not wait till expiry. If the trade plan is to stay for the short term, then stay for the short term. Again, stick to the plan.

Hope these emails and articles are helping you. I thought just telling you the strategies are not enough, so I have started writing about the kind of trades that you can trade whenever a situation arrives.

If you are not my email subscriber please do subscribe. Lets make this a profitable journey for all of us. If you have any other idea please tell us in the comments section. Lets help each other.

Thank You.

UPDATE on 07-July-2015:

Greece referendum results of not accepting creditors loan and a possible exit from the Euro zone has not effected Nifty and it looks like investors have ignored the Grexit news. Nifty has not moved much. As traders we should accept the situation and wait for our exit plan.

Those who are in the long strangle should exit the trade by 3.15 pm, Friday 10-July-2015, at any cost. Weekends will eat more premium so we cannot leave that open in the hope something will happen in the weekend. Just stick to the trade plan and cut short the losses. On the other hand we still have time till Friday.

I will update this on Friday. In between if you make a profit please exit the trade.

That is the reason why I like the non-directional trade. It brings profit almost every month. Only if there is a fast and strong trend one side it loses a small limited money. And you feel very safe with it.

Please not that a trade may not be perfect – but the plan and the execution should be perfect.

Update on 08-July-2015:

It is just 5 days since we initiated this trade. Nifty has fallen almost 2% today and VIX increased by 9.07% and closed at 17.79. Since VIX increased it should make the directional as well as the long strangle profitable. We can book profits today in the directional trade of my course or the long strangle whichever you had taken. For full update please read this article – book your profits.

Disclaimer: I am trying to help you to trade better. Still stock market investments are subject to market risks. Please do your own research before taking a trade.

Refer my post and email dated June 29, 2015 – Greece Crisis What Should You Trade.

On that day I told you that VIX has increased considerably and it is a great time to sell out of the money options and also hedge them by buying options. People who had done that may be in good profits now.

The VIX has come considerably down and its hovering near 15.41. From 18.18 to 15.41 in 3 days. This is a drop of 15.25%. Excellent for sellers. Both the calls and puts option premiums would have shrunken and the trade can be taken off. As the small profit wherever that may be has been achieved there is no need to stay in the trade.

See its profit vs time. Even if the profit is 2% – it has come pretty fast in 3 odd days. Is there any need to be greedy and wait for the options to decrease more in value? We made a quick profit and we should exit. This is how a good trader takes his trade. The original plan was to make a quick profit – so no matter what happens we will NOT alter that plan.

Kill that devil called GREED and you will become a better trader I bet.

Situations like this can bring in quick profits. 🙂 So we must look out for such situations. Since VIX is directly related to world news and happenings we can make use of it to decide, to some extend, time to sell or buy options.

Well that does not mean we will never be wrong. We can be and there should be a plan to exit. For traders who have taken my course the plan is to go straight to Strategy 2. If you haven’t taken my course and reading this you can make your own plan – whatever it is, be a stop loss or adjustments. But you must TAKE ACTION when things go wrong.

Moreover Nifty also remained in a range – low of 8195 and currently around 8460. Those 200-300 odd points movement does not matter when VIX has decreased considerably because even if one option will lose money the other makes more than the losses. Ultimately the trade is in profit.

Conclusion:

When VIX increases take you chances. Sell options and hedge them properly, set your target profits and exit. But you must also have a Plan B if VIX does not decrease or if anything goes wrong.

Lets wait for another opportunity. 🙂

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In my pursuance to educate option traders and stock market investors especially retail trades in India who do not have much information available online here is another article to know when to buy options, when not to buy options and which strike options to buy.

Please remember I am NOT against buying options. Sometimes the results can be stellar and buying options can be used as a great hedge against selling. I am against buying options ONLY when traders start to speculate. For example buying out of the money call option of a stock just because “they think” its going to appreciate and they “start imagining” they will make a lot of money. That seldom happens. Usually these speculators are the ones who actually win their first or second trade and their journey of losing money buying options start.

That is why I keep writing against buying options while speculating. Use them as a hedge tool, speculate when there is a reason and buy with only the money you can afford. If you stop speculating I bet some good results will follow. Else you will blame yourself and your bad luck for the losses. The real reason was greed and ego which you were never able to control.

Here is one email I got yesterday that tells a story which I do not want any trader to experience when he retires:

I am 65 years old a Retired Govt. employee residing in Hyderabad. I lost 8,00,000 (eight lakhs) in options trading since 2012. Till today I have been losing in options buying.
I want to join your course.

That’s exactly why I opened this website to stop people from doing this. I will keep educating but it is your money and your decision where I have no control.

In view of the above read this article to know which strike option to buy, when to buy plus there are a few more stories of losses.

Traders make silly mistakes again and again. If you love losing money its ok. If no then why are you making such mistakes when you already know the outcome? Here is a list of mistakes I did during my initial days of trading. Please avoid these mistakes.

The worst mistake is buying option. It has an inherent attraction – that is of unlimited profits. Therefore new option traders are first attracted to buying options. They think they can buy options and make unlimited amount of money. In few months they understand that it is not the case. Greed is another reason why option buyers keep buying options. They are in the hope that one fine day they will recover their lost money. That day never comes. They keep losing money month after month, in hope of hitting the jackpot one day. When they lose a lot they stop trading.

Option buying can be compared to a Time Bomb. You are having a limited time. Within that period you have to be profitable no matter what. In other words they are running against time. How many times can you beat time?

On top of that there are so many strike prices to choose. If you buy in the money option you put too much money at risk. And if you buy far out of the money, your chances of making money is small.

So Which Strike Option To Buy? (If you insist on buying)

Don’t buy options at all. 🙂 But if you are dying to buy one – buy at the money (ATM) options. At the money option’s risk reward is much more favorable than any other strike option. You do not put too much money on risk, yet if there is a movement in your favor you make reasonable money. Needless to say why it is the most traded or liquid option strike.

Just because you bought an option and it exploded and you made good money does not mean you can repeat the process again and again. Just because you made money once does not make you a good trader. That was beginners luck. It was a fluke where you got lucky. Real world of trading is very different and difficult. There are bound to be hard times, when you will find it difficult to sail through.

Buying options will take your money everyday. You will bleed slowly. So slowly that you will never know. Even if you hedge – a loss is a loss. Here is one article I wrote a few months back why you will never make money buying options.

Here is one real example:

Someone yesterday called me and said he made 6.9 lakhs profit in one month buying options. So he did a simple math: 6.9*12 = 83 lakhs in one year. He told me that at that time he thought he will become one of the richest man in India in a few years. Poor guy. It was better had he lost his trade.

Do you know how much profits he is in right now after 3 years he made a profit of almost 7 lakhs? More than 12 lakhs loss. 🙂

That means total of 7+12 = 19 lakhs lost in 3 years. (Hey, we need to add the profits he made too because he lost that as well.) Which is also more than Rs. 52,000 loss every month. How many in India get that kind of salary? Like I told, you will bleed slowly never realizing your losses. Finally when you realize and stop, the loss will be unbearable.

When you are in profit – you tend to book profit very fast. Say 10 or 20 points. But when you lose you keep waiting for the stock to reverse, it never does and you lose the entire investment because the option expires worthless.

Tip: Take a stop loss somewhere. Say when the option has lost 25% of its value. Save the rest 75% for the next trade.

Another trader was trying to make quick money buying options because his cousin needed emergency medical help. He told me he lost big time. Well my heart goes out to him. What a gentleman. Not many people try to help their cousin when they need money. But brother you choose a wrong path to make money. In fact in a panic situation or when going through any kind or problems in your personal life you should never trade. Because you are not in the right frame of mind to trade. Don’t you take a leave from your job if you are not well or if you have an important work to do? Why do you think you can trade during those times? Imagine if his options were making huge profits at a time he was in the hospital, but by the time he remembers his trade he is losing money? I hope you get the point.

Does It Mean You Should Never Buy Options? No. There are some situations when you should take calculated risks. This is trading, you are not speculating, you are taking a chance because sometimes, just sometimes, time itself is in your favor.

When Should You Buy Options?

It’s not that you should never buy options. There are exceptions:

1. Buying out of the money options can be a great hedge when you are selling near the money options. It will save you from unlimited risks.

2. When Volatility is at historically low – its a great time to buy. When it goes below 12 – then options become quite cheap. Here you can take some chances. Unfortunately Volatility is currently at 15+ and it looks like its here to stay.

3. IMPORTANT – Timing The Buy: Like I said in my last newsletter – when any big event is going to happen – usually markets will take a trend in anticipation. Too much trading (read speculations) takes place. When this happens it increases the VIX – thus both the call and the put premiums also increase. 10 to 7 days before the event is the correct time to buy options, because you know that for sure VIX will increase. If you are trading a long strangle chances are you will come out profitable. Get out just before the results of the event is announced – whatever is your profit or loss. Say if the media is going to declare it at 11 – you should close your trade at 10 or 10.30 max. If you feel movement may continue – clear most of the lots. Leave only 1 or 2 lots to ride the trend.

Tip: It has to be a major event. Small events do not bother the markets.

Another article on when to buy options.

Risk management is also very important when you are buying options. Do NOT spend more than 10% of your money in trading account to buy options. If you are lucky you make good money, if not you can take a stop loss and still be left with enough money to trade again.

Other than the examples above its dangerous to buy options.

That’s it for today. Hope it helps and I also hope you listen and save your hard earned money. Do not speculate. PERIOD.

I will write option strategies and give you tips on trading through this website every week.

If you are first time visitor I request you to subscriber to my newsletter. You will get link to these tips directly in your email.

I also highly recommended my course. Learn some good strategies and trade. Know what you are doing – it will help.

When was the last time you lost money buying options?

I usually refrain from advising my subscribers from taking any trade for short term as I am a firm believer of non-directional trade. But today I am making an exception. In fact sometimes when the markets are showing indications of good day to trade I will give you some advice which I feel is correct.

It is quite reasonable to understand that it will help people who have taken my course more than who have not. Still it will help everyone to some extent.

Greece Crisis is no small news. A big Euro country may or may not default. We do not know. As a trader I do not speculate. My only friend is Volatility and what may happen to Volatility. Its a guess, but I take a calculated guess.

VIX today (29-June-2015) is currently at 18.18 – a 15.36% increase over previous close. Options premium have exploded. 18.18 is well above average. It is great time for option sellers.

Now let us think like a trader. Tomorrow (Tuesday, 30-June-2015) some news is expected. Once the news is out I expect the volatility to drop. If not tomorrow, within a few days, say by next week it should try to come back to normal. Options premium will also drop benefiting the sellers. This is a great time to do Strategy 1 of my course. You are getting great premium, so you can also go slightly further than whats in the course as we only target a small profit and options premium is also more. So just be safe. Nothing big to worry if something goes wrong Strategy 2 is there. Nifty will not go that far in 60 days. 🙂

Two things may happen:

One,Euro countries will try their best to make sure Greece does not default as it may damage their economy. This is a 80% chance. If the news is good VIX will drop and Nifty will make a bounce back. BOTH will happen. If it does, get out from the strategy 1 as your profits will come very fast. There is no need to wait further.

Two, if Greece defaults then the strategy 1 may or may not hit the stop loss. Remember this time you are pretty far, so if it takes too much time to hit stop loss, you still end up making money. So no need to go to strategy 2. But if there is a small loss, strategy 2 is there to recoup losses. 🙂

Tell me what else can happen?

I hope you got an idea of how I think before I trade. If you become a disciplined trader – this is how you will start thinking. It helps over the long term.

Please remember to manage risk. Just because I have asked you to trade does NOT mean you take too much risk. Only trade with what you can manage.

For those who have not taken the course you can sell options and hedge them by buying further out of the money options. Do not do this on too many lots just because I have said. I cannot elaborate further as this article will come in public domain and will not justify people who have paid for the course.

My costumers who have already traded strategy 1 need not do anything. Just follow the rules. Increasing risk is not recommended. However if you have cash left to trade a few lots you can try making another Strategy 1 in 1 or 2 lots only.

Disclaimer: In this post I have suggest my newsletter subscribers and customers a good trade and a great time to trade according to my view and experience. If you are reading this after the Greece news is out PLEASE DO NOT TAKE THIS TRADE. VIX will change and we will have to try some other strategy. Please do your own research before trying any strategy. Stock markets investments are subject to markets risks so please trade with care. Trade with the amount you can manage well. Thanks.

A lot of you might know the Iron Condor trade. However if you do exactly the opposite it becomes a Reverse Iron Condor trade.

Reverse Iron Condor is a slightly risky trade with limited profits and limited loss for the trader. This trade cannot be traded every time as the chances of this trade not making any money is more than the chances of this trade making money. Why? Because time is enemy of the this trade. If what the trade wants does not happen fast, the trade will lose money. We will shortly know why.

If you trade Reverse Iron Condor 5 times, most likely you will win 1 time out of 5. So the success rate is almost 20%. Therefore timing this trade is very important. We will discuss best time to trade Reverse Iron Condor and a lot more.

Reverse Iron Condor Explained:

Reverse Iron Condor as the name suggests is nothing but an Iron Condor traded reversed. An iron condor trade is nothing but doing a short strangle combined with long strangle. The reverse iron condor is also doing a short strangle combined with long strangle. The difference is that in an Iron Condor trade, the trader sells the strangle that is more costly and buys the one that is cheaper (essentially done to save the unlimited loss), but in the Reverse Iron Condor trade the trader buys a more costly strangle near to the money and sells a further away and cheaper strangle. This is primarily to save money buying the costlier option.

If you did not understand it is OK, we will discuss further. We will also discuss how to be successful trading the Reverse Iron Condor.

How To Trade Reverse Iron Condor:

1. Buy near the money Call options,
2. Buy near the money Put options,
3. Sell far out of the money Call options, and
4. Sell far out of the money Put options.

Note that for a perfect Reverse Iron Condor all strikes should have the same lot size and done on the same expiry and on the same stock.

When Should You Trade Reverse Iron Condor?

This is very important so please read twice: You should trade this when you expect volatility to increase or you expect one sided movement (any side) for some time due to any reason like an upcoming news or any other event on a stock or Nifty. Note that the increase in volatility does help a reverse iron condor, and a drop may hurt – but its the movement any direction that makes it profitable. An increase in volatility will also negatively effect the short options, so overall it decreases the profits. Moreover reverse iron condor is not played with at the money (ATM) strikes where the volatility increase has huge impact. Movement is what is really required to make this trade profitable.

Lets make this thing very clear – when you expect a huge movement near term in any stock or index either side you should trade reverse iron condor. Aggressive traders like to trade long strangle – a long strangle is nothing but a reverse iron condor minus the short strangle. Prime reason is to benefit fully from the movement (and make a lot more money if right). However when it does not happen a lot of money is also lost. Reverse iron condor is created to limit the losses of a long strangle. Since the losses are already limited taking the stop loss is optional. Another benefit of this trade is we will know exactly where to take profits out. That we discuss later.

Lets us Trade a Reverse Iron Condor Now:

Nifty on June 12, 2015 closed at 7983. Now taking 8000 as ATM (at the money) I will try to trade a Reverse Iron Condor.

Remember that Reverse Iron Condor should be traded closer to the money because we need movement here. Deep out of the money options will not move significantly with the move in Nifty, therefore they are not good candidate of the reverse iron condor (they are good candidate of iron condor though). Still if the movement does not come the trade will lose money.

So we trade the following:

1. Buy 8200 CE @ 23
2. Buy 7800 PE @ 36
3. Sell 8400 CE @ 6 and
4. Sell 7600 PE @ 11.

See the image below to understand the profit and loss of the reverse iron condor:

An important point here: Don’t think that just if Nifty hits any of the short strike the trade will be in profit. That may not be the case. If Nifty goes up the Call buy and Put sold makes money, but the Call sold and the Put bought will lose money. So there is no guarantee that if any short strike is struck, the trade makes money. And yes volatility also plays some role here if not a major one. If it drops there will not be any significant profit in the option bought and the whole trade can be in loss. However if the sold strikes are struck – in our case the 8400 CE or 7600 PE, the the trade can bring substantial profits.

For 8400 and the 7600 to be hit every time the chances are low, therefore its much better to trade Iron Condor than a reverse iron condor.

Now lets calculate our max loss in the trade.

23+36-6-11 = 42 points

And lets calculate the maximum profit this trade can make:

To make the maximum profit on expiry Nifty has to be above 8400 or below 7600.

If it is at 8400 on expiry day:

8200 CE will be 200: Profit: 200-23 = 177
8400 CE expires worthless: Loss: -6
7800 and 7600 both the puts expires worthless: Loss 36-11 = -25 points.

Total profit in the trade: 177-6-25 = 146 points.

The risk reward is great in the trade: 42:146. You either lose 42 points or you make anywhere between 0 to 146 points.

Read the previous line again – You either lose 42 points or you make anywhere between 0 to 146 points.

Some traders think that risk reward ratio of 42:146 means either they lose 42 points or make 146 points. This is wrong. To make the max Nifty has to be above 8400 or below 7800.

As an example if Nifty is at 8300 see what happens:

8200 CE will be 100: Profit: 100-23 = 77
8400 CE expires worthless: Loss: 6
7800 and 7600 both the puts expires worthless: Loss 36-11 = -25 points.

Total profit: 77-6-25 = 46 points.

I hope you understand how this trade makes profits or losses. It depends on where Nifty is on the expiry day.

The trade looks great right? Yes, but the same issue of option buyers will haunt you in this trade as well.
1. No movement for a long time – the option will lose premium.
2. Volatility decreasing – again the options lose premium. If volatility decreases significantly, even if a movement comes the trade will be in loss and then you will wonder why such a thing is happening.

So When does it Work Best?

Trade the reverse iron condor when you expect a major news is coming in a few days. The volatility will increase – people will either sell or buy stocks creating a movement. Both works in your favor. Just before the news is out you should also close your trade and take profits out.

Where to Book Profits?

The trade can make max profit at 8400 or above or 7800 or below. So why wait for further increase or decrease if these levels have been reached? After that you will not make any profit anyway so you should exit when these levels are breached.

Where to Book Loss?

Unfortunately there is no definite answer. You can wait till expiry and lose all points if you are comfortable with the max loss or you can take stop loss when you reach a point where you are not comfortable with more loss, or when only a few days are left for expiry and there is no news to come before expiry. Nifty will not move dramatically so you should exit.

Whatever be your stop loss strategy you should stick with it for all trades you take in life.

Whats the max loss where you should be comfortable? This depends from person to person. But for me I am not comfortable if the max loss is 30 points or more.

Points to Remember Before You Trade Reverse Iron Condor

Never trade this if you are not comfortable with the max loss. If you still want to go ahead and trade you can stick to a max loss. If there is no movement in few days just get out of trade.

In fact most professional traders take this trade for 10 days before any news is expected. If they make a considerable profit, they exit but they stick to the 10 day or before exit rule. Which means they exit if the stop loss is hit or exit when the trade hits its 10th day. Whichever comes first.

I hope this article will help those traders who love to buy both call and put option (long strangle or long straddle), and think that every time Nifty moves they will be in profit. When it does not happen they scratch their heads thinking why they did not make a profit.

Buying long straddle or strangle makes profits rarely, else we all can trade long strangle or straddle and make a lot of money. 🙂 However reverse iron condor is a better trade than long strangle because it limits the losses.

Have you ever traded this strategy? If yes please share your experiences or ask any question on reverse iron condor. I will be happy to answer.

Since the last few months Nifty is range bound and I am sure traders who have taken my course would have definitely made money. There are many strategies that are made for a range bound markets. Please read and follow your favorite strategy for such times.

Unfortunately last few months were pretty bad for option buyers because there was no clear trend expect once when Nifty fell down almost 600 points. After that the story is range bound and no real clear trend for buyers. Let me tell you that historically Indexes behaves this way only leaving little opportunity for option buyers to make money.

The Reserve Bank of India (RBI) will most likely leave its benchmark interest rate unchanged at 7.50 percent at tomorrow’s ( 7 April, 2015) policy meeting. It may also reduce it by 25 basis. We don’t know. But what we know is that Volatility will take a beating.

India VIX today is at 16.91, I can bet by the time trading ends tomorrow it should be lower than this. Remember historically the average VIX is around 15, and if no major news comes in June, I think the VIX will go back to mean.

Its going to be even more tough time for option buyers. If you are really keen in buying, then my suggestion is that wait till the news is out and let the VIX settle down. Once it does the direction will be clear and like always Nifty should move in that direction for a couple of days. But option buyers should remember that they are against time and Volatility. If what they are predicting does not come true, they should quit in couple of days.

If you are not in profits, hoping that markets will move as per your trade is not an answer. Option buyers, unlike option sellers do not have time and its for their benefit that they understand this and quit if markets do not favor them. When they favor, we all know that making 100 points is quite easy.

So lets make a trade plan for trades who love to buy Nifty Options. Note that real scenario may be different and you must make your trade plan according to your own experiences.

We are assuming a situation where the trader always buys ATM (at the money) options. I personally feel though they have the maximum time value, it is the at the money options that has the balance of being reasonably priced and appreciate quickly if the trade is favorable. OTM (out of the money) options do not move as fast as you may want them to due to low delta, and unfortunately may not make a substantial profit when you are right. Out of the money options are the ones who will bleed you to huge losses overtime. ITM (in the money) options on that other hand are very costly and though they have delta more than .5, they also lose money pretty fast if the stock goes against your view.

All in all, the At The Money options are your best candidate for buying. They are highly liquid too.

With the above in view lets chart out a plan for trader who buys options.

After a few paper trades (should be done for at least 3 months) you find that every 4th time you get lucky and make a quick 100 points profits. You are targeting 30 points a month, and you also take 4 trades a month. Note that 30 points a month is around 3% per month for seller, but for buyer its a lot of money (almost 20% we will soon see how.)

For example its 24 days to go for the June 2015 expiry (expiry is on 25th June 2015). The ATM call option (CE 8,400.00) today closed at 152.40. We take 150 as average.

If you make 30 points on this (though every time the price will change, we are assuming 150 to be average) profit is: 30 * 25 = 750. Cost to buy = 150*25 = 3750. ROI (750/3750)*100 = 20%

I hope 20% a month is good enough for any trader, even the worst of Greedy traders. 🙂 Some traders have an amazing mindset. A few days back I got a call from one such trader from Assam. When I told him my course will help him learn to make 3% a month, he said this is too less and he is not interested in my course. I then asked him the obvious – how much per month are you making now? He said he is losing money. 🙂

See the mindset. A trader losing money, but not satisfied or interested in making 3% a month. I am sure if he makes 10% a month in one of those lucky months, he will take a bigger risk the very next month to try to make 20% and lose it all. Greed never makes money. Greed has no limits. Greed is a killer.

Ok back to topic. We were making trade plan for the option buyer. 20% by the way is huge money a month, and I don’t think there are many traders who have achieved that feat over 5 years of trading.

If your target profit in a lucky trade is 100 points and your target is to make 30 points in a month, you can lose a maximum of 100-30 = 60 points in the remaining 3 trades. So in three trades you can lose 60/3 = 20 points. We got our stop loss. You take a trade and take your stop loss at 20 points max. But please note that for this to work you have to win 1 trade out of 4 and make more than 60 points to survive the game. You can also tweak your plan to make it smaller.

For example if you are taking a stop loss at 10 points then you can take your profits out at (10*3) + 30 = 60 points. For a 60 point profit for the At The Money option with delta of 0.5, Nifty has to move approx 100 points FAST – say 2-3 days. Remember after the option goes into the money, the Gamma changes the Delta and it also increases to more than .5, so a 120 point move is not required. Moreover if Volatility increases, you may not even need 100 points.

But in the above strategy, hope has no place. You will have to take a stop loss if the trade did not go according to the plan.

When should you buy options?

Traders do not know when to buy options. Well here are a few pointers:
1. Buy options when the news is out, volatility has crushed and direction is clear.
2. Buy well before (at least 7 days), when a major news is awaited. You must exit though before the news and volatility gets reduced. You may take another trade after the news. In a situation like this the long strangle works better.
3. Buy when you are absolutely sure of the direction, whatever the case may be.

When to Exit?

Exit when the target profit is achieved, or
Exit when your stop loss gets violated.

But make sure you have a plan and you are making the same points of profits and same points of losses as per your plan. Stick to your plan. Do not alter in every trade, you will then lose money.

Your plan should be based on the fact that option buyers win 1 out of 4 trades.

Remember even if you make 10 points a month as an option buyer, that is more than 6% a month and is a great return for any trader. In real world its very hard to make even 5% a month consistently for a long period of time.

Other Important Notes:

Suppose you met the target of 60 points in your first trade in the month, now is there any need to try another trade that month until some really great event is happening? If you speculate thinking you are at no risk, you will lose 10 points and take a few more trades and you end up making the same 10-20 points that month. This is foolish. The idea is to use these points as a hedge for next month’s trade. So please do not trade that month.

Like this if you have 3 months (absolutely possible) of 60 points each in a year, you will have an excellent return that year.

How to Compound This?

This is quite tricky as its very hard emotionally to buy naked options even worth Rs.50,000. At the back of his mind the trader knows that it may go to zero. Losing 50,000 in one trade is not a great idea, but hey we are taking a stop loss right? Keep that in mind – buying will get easier.

But how on earth you will get courage to buy options worth Rs.2 lakhs even with a 20 point stop loss? Yes it is very difficult, and it is the major reason why I hate buying options. In fact this is the major reason why majority of the option buyers lose money. They make a profitable trade by buying options worth 5,000 then immediately afterwords they buy options worth 50,000 and end up losing much more than the money they made in previous trades.

What Is The Way Around this?

You need to take the stairs, not the lift. For example for the next 6 months decide to buy options worth Rs. 5000. Then increase this amount to Rs. 6000 for the next 3 months. If successful take additional risk of Rs. 2000, and then after 12 months of successful trading make it Rs. 10,000/-. You got the point. Increase your risk slowly overtime.

Another way is to sell some out of the money options as a measure of hedge. Oh I love hedging. This reduces risk, but it also reduces profits when you are right. The idea here is that you need to make a plan. And this is only possible once you start paper trading or put small money on risk when you actually decide to trade with real money.

After a few trades you will know the answer to this: Should you go for naked option buy or hedge it by selling out of the money option. Only you can answer this – so go and do some trading.

Full Disclosure: This is not as easy as it sounds. For example you have to be correct in every fourth trade and get your maximum points as per the plan. You can reduce the profitable trades to from 60 to 30 points, but then the points for the stop loss trades also gets reduced and thus they do not get enough room to move and hit stop loss pretty fast.

You should therefore practice and come out with a plan of your own and just not copy what is written here. This is a guide for option buyers who speculate and lose money. Hope this article helps option buyers.

Note: In reality option traders almost always lose money. For one trade to win out of 4, your timing has to excellent and you may need some luck too with direction. In my course you will learn how to sell option and hedge it properly. You also do not have to predict the the direction of the markets. Mostly you win, and those small occasional losses can be taken care of. Click here to read more about the course.

Wishing you the Best.

Iron Butterfly is one trade that a lot of traders in India try. So this article may be help to a lot of traders.

When To Trade Iron Butterfly:

This trade can be done when there is a sudden rise in volatility and the trader expects the volatility to drop in a few days and the stock to be range bound. Both volatility drop and passage of time helps the iron butterfly trade.

How To Trade Iron Butterfly:

Four trades are involved:

1) Sell One ATM (at the money) Call Option,
2) Sell One ATM (at the money) Put Option,
3) Buy One OTM (out of the money) Call Option, &
4) Buy One OTM (out of the money) Put Option.

The OTM call option is bought to protect the unlimited loss in the sold call option. And the OTM put option is bought to protect the unlimited loss in the sold put option.

NOTE: The trade brings profits only if Volatility drops in a few days, if it does not the trader should close the trade. If not closed the trade will be in loss with even a slight increase in volatility.

Max profit is attained when on expiry day the stock is exactly at the sold option strike and all options expire worthless. See the image below to understand:

This is very important: Iron Butterfly is a Volatility play and NOT a directional or non-directional trade like what most traders think. Its results depends a lot on what happens to volatility after the trade is made. Direction of the stock within a small range will not effect much if lot of time remains for expiry. However if stock moves a lot fast, and volatility does not decrease, the trade stands to lose.

Why Iron Butterfly depends a lot on volatility?

Because ATM options have the highest time value or theta – volatility therefore has a lot of affect on these options. For example if Nifty is at exactly at 8300, then both the ATM options will have zero intrinsic value which means whatever premium they have is nothing but time value and prevailing volatility.

Assuming that both ATM call option and PUT option have a premium of 150 at the start of the month, if Nifty does not move (which is impossible), both the options will become zero on the expiry. The buyer loses everything and the seller gets to keep all the premium. This is the reason why most trading happens on ATM options.

Interestingly professionals rarely trade ATM options, they almost always trade OTM options. So who trade at the money options? Traders who love to speculate and love to lose money. You will therefore see the tips providers, especially the ones who sell intraday Nifty option tips will ask you to buy ATM options. And if you have taken any tips from them, you must have lost money. 🙂

Sellers of ATM think they will keep all the premium or most of it as the stock will not move in future because its not moving now. Buyers think exactly the opposite, that the stock will go up or down so let me take a balanced risk. They do not buy ITM (in the money) as they have to pay a lot. And they fear buying OTM (out of the money) because they know chances of winning is less. So they buy ATM options. And since the buyers usually want to make money both sides a straddle is bought. Meaning they end up buying both ATM call and put. WORST TRADE EVER!

Sellers and buyers cannot time volatility, so they both lose. Buyers exit seeing the value not appreciating and take a loss. Sellers see the stock moving, their heart beat pounds, and they exit in a small profit or huge loss. 🙂

When I get calls from traders who are stuck at this position (buy both at the money call and put options) I actually get very angry. Their point of view is that they will make money wherever the stock goes because they are trading both the directions. Little do they realize that they have traded long volatility (it has to increase) and time is running against them like a time bomb. OR the stock has to trend in one direction too much in too little time. Both of the above is impossible to time.

And due to the same reason, traders sell ATM options because they want the maximum premium. Can you now sense what’s the reason for ATM option trading? Greed. Result is that most ATM Buyers and sellers lose money. 🙂

You can now guess what I will say next. Avoid trading Iron Butterfly. You cannot time volatility, and volatility does most damage to ATM options. A 10% drop or rise in volatility is common. So if you trade Iron Butterfly, sometimes you will make good money, some times you will lose. Overall the trade will not be profitable over a long period of time. Hope those who trade Butterfly now understand why you lose money when you sell ATM options. That’s because either the stock trends too much, or volatility increases.

For ATM option buyers its even more difficult, they have to fight time, the volatility has to increase and the stock has to trend and trend fast. If volatility drops, the premium too drops and overall they lose.

Iron Butterfly – the risk and reward:

Both the risk and reward is limited.

Now let me take real premiums and try to explain Iron Butterfly.

Date: 1 May 2015. Markets closed. Spot Nifty: 8181. We treat 8200 as ATM.

Sell 100 ATM (at the money) 8200 May 2015 Call option: 174
Sell 100 ATM (at the money) 8200 May 2015 Put option: 127
Buy 100 OTM (out of the money) 8300 May 2015 Call Option: 121
Buy 100 OTM (out of the money) 8100 May 2015 Put Option: 92

Total margin blocked: 8 lots sold * 14000 = 112,000, buying comes for free.

Note: An experience trader will wait for the volatility to reduce, and he will take out his profits. Where you are satisfied with your profits is something that no body can teach, but whenever there is a reasonable profit, they quit. It is the inexperienced traders who wait for the expiry because they want to take 100% of the profits which rarely happens.

However we need to calculate the profit and loss on the expiry day to explain this trade.

On May15 series expiry if Nifty is at 8200 the trade hits is Max profit:

Lets calculate:

All options expire worthless.

8200 May 2015 Call option: 174 * 100 = +17400
8200 May 2015 Put option: 127 * 100 = +12700
8300 May 2015 Call Option: 121 * 100 = -12100
8100 May 2015 Put Option: 92 * 100 = -9200

Total profit: 17400+12700-12100-9200 = 8800

ROI: (8800/112,000) * 100 = 7.85%

On expiry day if Nifty is at 8300:

8200 May 2015 Call option will be 100: (174-100) * 100 = +7400
8200 May 2015 Put option expires worthless: 127 * 100 = +12700
8300 May 2015 Call Option expires worthless: 121 * 100 = -12100
8100 May 2015 Put Option expires worthless: 92 * 100 = -9200

Total loss: 7400+12700-12100-9200 = -1200

On expiry day if Nifty is at 8100:

8200 May 2015 Call option will expires worthless: 174 * 100 = +17400
8200 May 2015 Put option will be 100: (127-100) * 100 = +2700
8300 May 2015 Call Option expires worthless: 121 * 100 = -12100
8100 May 2015 Put Option expires worthless: 92 * 100 = -9200

Total loss: 17400+2700-12100-9200 = -1200

So the trader profits only if Nifty closes close to 8200. Even if it is 100 points away the trader loses money.

What are the chances that Nifty will close exactly where it began at the start of the series? Very low. Therefore professional iron butterfly traders trade this as a volatility game, and exit as soon as there is a drop in volatility. A slight movement will not be able to damage the iron butterfly because the sold options are hedged. The sold options’ delta is higher than bought options’ delta and theta has Max effect on ATM options, if volatility drops this trade can give 2-3% return in days. That is enough for professional traders.

Do NOT wait till expiry, your profitable position may get into trouble. Though the loss is small, it may happen every time you trade. So waiting till expiry is not recommended.

If you are waiting till expiry in any trade than it is not the strategy that will make money for you, it is your luck that will. How many times were you lucky trading?

You can wait till expiry only in the strategies that are planned that way, for others you should exit when you are making a reasonable profit.

Conclusion:

• Iron Butterfly is done by selling at the money options of both calls and puts and buying just out of the money options to protect them.
• It is a volatility trade and not a directional trade or non-directional trade. Timing of volatility is important, else the trade may lose.
• Therefore it is traded by professional who have an idea of when the volatility is skewed and may drop.
• Waiting till expiry is not recommended.
• Exit whenever you are making a reasonable profit.

Have you traded the Iron Butterfly? If yes when do you exit the trade?