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Read this article to know the real meaning of volatility and its importance in stock trading. Hedge fund managers and big investors buy put to protect their funds.
Before reading this article I want to clear a confusion:
A lot of traders get confused between Volatility and VIX.
The stock is very volatile means it moves a lot.
The Index VIX is stable means there is not much panic in the markets and if the index is stable. Stable does not mean the Index is not moving. It is moving but not very Volatile.
For high volatile stocks, VIX will be high.
For low volatile stocks, VIX will be low.
For traders volatility is very important.
During April-May 2017 India VIX is hovering at historically low levels. 9-11 is considered low VIX.
You can find India VIX here:
See INDIA VIX as on 18-May-2017:
Today Nifty has fallen so VIX has risen:
Over the long period stock markets and VIX are inversely proportional. If stock markets fall, there is panic in the markets and VIX increases. And if stock markets rise, there is no panic in the markets and VIX falls. Like since the last 3-4 months Nifty went from 8000 levels to 9400 levels and India VIX from 17-18 levels to 10-11 levels.
See this graph for proof. You can see that when CNX Nifty rose VIX fell and when CNX Nifty fell, VIX rose.
What hedge fund manages do when VIX is low?
This is the time when options are available at cheaper prices to hedge. For them this is a great opportunity. They start buying puts to hedge their positions in stocks against a fall. How many lots they are willing to buy depends on how much money they are managing.
Do not forget that they manage millions, some fund managers manage billions. This is when they use options to do exactly what they were meant for. To Hedge.
Of course this will not come in the media. This is their personal decision on the job, and they will not disclose it in public.
Another time they hedge their positions is when the markets become very volatile. This is to protect from volatility.
Suppose a bad news comes in, the HNI (High Net Worth Individuals) and fund managers start buying puts.
When a lot of Puts is being bought, the markets gets into fear and the VIX goes higher and markets move lower.
In simple worlds it is profit booking by most investors or put buying by fund managers.
Why do you think when markets move higher, it starts to fall from some point? There is no bad news as on 18-May-2017, but Nifty has fallen? Why?
This is pure profit booking, not a fall because of a bad news.
It is a common mistake by most retail investors. Whenever in media they say the markets are volatile, they think that stock markets are falling. This is not true.
Period from when Nifty went from 8000-9400 is also volatile, same as when Nifty went from 8800 to 8000 levels.
Volatile can be going up or going down. Unfortunately volatility is associated with stock markets going down.
Volatile means fast movement, not necessarily the stock or Index going down.
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What you should do now1. If you have still not subscribed for my free 5 days course you can do by filling the form above. You will learn a lot about option trading.
2. If you are a new option trader, not much experienced and are making losses you can do my paid course. I recommend Nifty Conservative Option Course for beginners because it is easy to understand and easy to trade. Even a 18 year old young trader or a housewife can learn it and start trading from next day. It will help you to earn consistent monthly income without any software or speculation or stress or big risk. You will learn proper hedging strategies that works in any market condition.
3. If you are banknifty weekly options trader you can do my Bank Nifty Weekly Options & Futures Strategy Course. You will learn future and option hedging strategies that works in volatile market condition.
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Course fees: Click here to know the course fees.
Here is complete process of my course1. Once you pay I will send you the course materials for studying to your email.
2. You read and ask me questions via phone/whatsapp/email to clear doubts.
3. Then you start paper trading and still can ask me questions.
4. After about one month you can start trading.
5. Since doubts can come anytime the support will be there for one year.
Within one month you can start trading on your own. No need to depend on anyone once you are on your own.
If you have any question you can contact me.
You can read about me here and my trading mistakes here.
Dilip Shaw, Founder
INCOME DISCLAIMER: Any references in this site of income made by the traders are given to me by them either through Email or WhatsApp as a Thank You message. However every trade depends on the trader and his level of risk taking capability, knowledge and experience. Moreover stock market investments and trading are subject to market risks. Therefore there is no guarantee that everyone will achieve the same or similar results. My aim is to make you a better & disciplined trader with the stock trading and investing education and strategies you get from this website. Please note that I DO NOT give tips or advisory services by SMS, Email, or WhatsApp or any other form of social media. I strictly adhere to laws of my country. I only offer education on finance, investments on stock markets in the best possible way as much as I can through this website. Still, you must consult an authorized advisor or do thorough research before investing in any stock or derivative before trading any strategy given in this website. I am not responsible for any investment decision you take after reading any article given in this website. Knowledge is the only way to get success in stock markets. I try my best to give stock market investing and trading knowledge through the articles posted in this website. Thanks for visiting my website.