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When to Short Stocks Nifty or BankNifty

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One of the best ways to short stocks, nifty or banknifty is on a bad news. I am a great fan of bad news. See this chart of PNB after the news came out of the Nirav Modi scandal. The Punjab National Bank scam came to light on 14 February 2018, and since then it has been a downhill ride for the Indian Banking community especially PNB – Punjab National Bank.

See the downhill chart of PNB from the news came out:

PNB Stock Chart 13-Feb-18

The downhill continues for months for PNB:

PBN on 18-May-18

It is almost certain that a stock will fall heavily when bad news hits the company. Resignation of a top manager, employee specific scandal, tax hiding getting caught (like Satyam), any illegal activity – even a small illegal activity will take the stock down by 5%.

Remember the Axis Bank scandal during demonetization in 2016? See this how Axis Bank fell from 490 to 432 in about a month:

Axis Bank 8-Nov-16

Then it started to go up slowly.

Basically when a bad news is hit it is almost certain that a stock will fall heavily. However when a good news hits, the stock may rise approx 5% only.

Why this happens?

Because fear of losing money spreads very fast and people take out their money as soon as possible without even reading the news properly. But when a good news has come in a company, people start reading the newspapers to verify the news, try to figure out the outcomes, start seeing business channels – by this time the smart investors (HIIs and DIIs) have already bought the stock in huge quantity – they know very well the late comers (retail traders like you) will join the party at the top of the hill – this is the time they start to sell.

Who loses? Retail investors.

However if you track how a stock behaves to bad news vs good news you will see that impact of bad news is much higher than the impact of good news.

The scandal of Punjab National Bank broke out on 14 February 2018, but the stock has not yet come out of the shock of the bad news till now.

PNB stock falling since the news of scandal

So when to sell a stock?

As soon as a bad news hits the company. Read newspapers looking for bad news in any company and see if there is derivative trading allowed there. If yes do not waste time in shorting the stock. Of course this can be risky. If the management comes out with an announcement to counter allegations, then the stock may rebound within seconds of announcement. Therefore it is very important to hedge your traders to make sure that the risk is minimized.

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About the author: I started trading stock markets since 2007. However my first 3 years were losses. Then I dedicated almost 1 year on studying, researching, paper trading options and learned a lot in that time. Since 2011 I am trading Nifty options profitably. Call me if you need any help trading options on 9051143004.

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