Tuesday, 6 December 2016

9500/- to 5 crores - CAN WE REPLICATE THIS?


We all know the success story of shareholders who participated in IPO of Infosys in 1993.
We all admire the fact that initial investment of only Rs 9500 /- in year 1993 is worth 5 crores today , i.e. in 2016.
23 years and 9500 worth of investment is 5 crores.
If we do some calculation, it gives me a compounded (compounded annually) annual return of approximately 45 %.
This is just close to 3.75% return per month.

If we compound it monthly, it will be much lesser but will also be much more impractical. So let us stick to annual compounding only.
Now , interesting point to is , can we replicate this success. Unfortunately, we cannot go back  to 1993 and make this investment. But can we create a process , so that this kind of investment success can be replicated for next 23 or 20 or 15 years. In fact , even if we are able to make 50 % of this, still it would be an excellent return.
Let me show you some numbers. Suppose we start with investment of 1 lakh and are able to produce 3.75% per month on it. See what will be its value (we are compounding it annually).
    • 15 years from now it will be 2.63 crores
    • 20 years from now it will be 16.87 crores
    • 23 years from now it will be 51.45 crores

What if the return is not 3.75% per month ?
Let us say it is 2.5 % per month assuming some months we will get 4% and some months it will be lesser. So 1 lakh with 2.5% monthly return will be what ?
    • 15 years from now it will be 51.14 lakhs
    • 20 years from now it will be 1.90 crores
    • 23 years from now it will be 4.17 crores.
Isn’t this magical ?
But, bigger question is , is this possible ?
3 to 5 % monthly return is definitely possible through non-directional hedged strategies in OPTIONS.
In addition to this monthly return, there is a huge scope for capital appreciation of the investment. So in case of any bad months(which will also be there), one can still be on target to achieve the above numbers.
What is the difference between success of Infosys investors and you ?
Well , they got right investment at right time and were fortunate enough to reap the benefits of hard work of founding team. In this case, you need to work yourself with your money, but results achieved can be similar or even better. To achieve this,
You need two things :-
    1. Patience of being a long term investor.
    1. Knowledge to make this conservative monthly return as well as capture long term capital appreciation from same investment.
We can off course help in point number 2 only.
Join our one day online interactive workshop and acquire this knowledge. Our three month support to clear your doubts will ensure you are on the right track.
What is the guarantee ?
Nil, if you have similar or better option, please go for it and share with us also.
As rightly said,


Friday, 21 October 2016

Are you unknowingly donating money to your Bank ?

Bank is an institution for transferring money from hands of common man to big businesses.

And in the process of doing that, Bank itself makes good amount of profit.

To understand this, let me first ask you.

Have you taken any loan from bank ? It can be home loan, vehicle loan , personal loan or any type of loan. In today's so called middle class or salaried class, almost everybody has taken loan from bank. The interest rate may vary from around 10 % to 14% depending upon the type of arrangement you have with the bank.

 Although you have taken loan, still you must be having decent amount of savings , which are lying in savings account, fixed deposits or similar instruments. Best rate of interest you must be getting on these is to the tune of 4 % to 8 %.

Now in your loan and deposit , there is a decent gap of around 2 to 3% on the interest you earn (& pay 33% tax) and interest you give. In other words, bank has taken money from you at 7% and given it back to you at 10% ! The two transactions may be in same or different banks but ultimately the story for you is same.

 Also, you pay interest on interest but whereas what you get from bank is a simple interest. Does this really makes sense ?

 To some extent , yes , we need to have reserves for any kind of exigencies. This may be equivalent to two months or three months of monthly expenditure. But, it has been seen that without any consideration of loans and the interest component , we keep our surplus money very casually in fixed deposits or even in saving accounts.

This is not a great planning at all.

In fact , by doing this, we are very generously , DONATING money to banks. And that's how banks grow and pay decent perks to their employees.

That's why , there used to be a penalty in case you pre-pay your loan. Wow !, you are offering to give the loan back , but lender is interested in taking it at a later date.

Because that is how , the lender is making money.

If you are intelligent person ,you must not fall prey to this system. You must start investing in instruments which can give positive returns (after taking care of taxes + inflation). So, even if you are earning a very conservative return of say 18% on your capital, even after paying taxes and considering for inflation,still you are adding on to your wealth.

And there is no dearth of such instruments !

And you do not require to be an investment wizard for learning to take part in these instruments !

And last , you can be a passive investor also and still make the kind of returns I am talking ! Join our workshop.


Wednesday, 18 May 2016

Why Greeks are so important in Options Trading?

Markets will always move upside, downside or sideways. Now presence or absence of these movements will be responsible for profits or losses in the portfolio. As an investor or trader, we all understand this. 

When we trade in multiple hedged options, it becomes all the more important to know the effect of three different things on our portfolio. 

Three things which can affect our portfolio are: - 

- swing or movement in the market, 
- time left for expiry (options are decaying assets) and 
- changes in volatility of option contracts. 

 Let us try to understand with an example: - 

 Say Nifty is at 7850 and as a trader, you are expecting market to move up. So you purchase a call of 7900 strike price at Rs 80, so that in case market goes up, you make good profit. 

The question to be answered is, when will the market move up? Suppose market moves to 7900 in next five days. 

What will be the value of the 7900 call you had purchased in Rs 80 /-? 

Will it be profitable? 

May be, maybe not. 

Quite possible that even when the market has gone to 7900, the price of this call is Rs 60 only. So, if I had purchased this call in Rs 80, thinking market will go up, I will still lose Rs 20, although my judgement of direction of market is correct! 

My prediction of market was correct! 

My trade of buying a call was correct! 

Market has gone up! 

Still, I am losing money?? 

This may seem to be totally illogical. But, please hold on. Markets are very very efficient. There is surly a logic behind this.

The answer lies in knowing at least three Greeks - DELTA, THETA and VEGA. 

• How much the portfolio value increase or decrease with market movement?

• How much the portfolio or particular option value will increase or decrease every day? 

• What will happen if market remains there, but volatility increases? 

Knowledge of these Greeks will answer all this questions. After knowing these Greeks, we can decide whether to do adjustment in our portfolio or not. Not only this, but what adjustment to be done will also become clear with knowledge of Greeks. These are very important concepts so that you can steer your option strategies towards profits. 

Without them, its driving a car without a steering! Dangerous !

Learn about greeks in our 3 hours online workshop. Visit www.theoptionschool.in

Thursday, 28 April 2016

What are Option Spreads ?

What are Option Spreads? 

 If we want to use full power and flexibility of options trading, we must spend time in learning what are Option Spreads. 
If you are buying a call or a put option, what you are doing is, you are trading in a single contract or we can say single ‘leg’. But if you are trading in multiple contracts or multiple ‘legs’ which are related to each other, it can be termed as a spread. So buying a call option and as well as selling a call option is one kind of spread. Similarly, buying a call option and buying a put option can be another kind of spread. 

Although spread trading seems to be pretty simple in concept, but it becomes more complex in practice as we need to take care of market movements and its implications on overall spread profit and loss. One might think that how is it possible to make profit or loss when simultaneously we are buying and selling a call, since both will behave in similar fashion with move in the market. Yes, you are right but the trick lies in choosing different strike prices. 

So according to your view of market, different kinds of spreads can be created. The benefit of creating a spread vis a vis a naked buying and selling of call and put is that it reduces your risk, considerably. And in trading options, if we are able to manage risk, we can be sure of profits. So to understand spread, we have different classifications. The most simple classification of a spread can be based on the option premium involved. 

With this classification, the spreads can be classified as :- 

1. Credit Spreads – Credit spreads are spreads which will give credit to your account in terms of premium. For example, if you are selling a call and selling a put, premium of both call and put will be credited to your account and hence this is known as a credit spread. Please bear in mind that for selling a call and a put you will require margin money in your account, which obviously will get blocked. But in terms of premium of call and put, you are getting credit and hence this is known as credit spread. 

 2. Debit Spreads – As the name suggests, if you create a position which is taking money from your account (in terms of premium), it will be a debit spread. For example – if you are buying a call and buying a put, you need to pay the premiums of both call and put to the market and hence the money will flow out from your account and hence it is known as debit spread. 

Things cannot be simpler than this. So, what are the different situations in which we create credit spreads or debit spreads. Or what kind of credit and debit spreads are there. Yes, its surly a next logical question but needs more explanation before we jump into any kind of conclusive statement. 

We need to understand another classification of spreads to get the whole concept in. As per this, again we can have two kinds of spreads :- 

1. Vertical Spreads – In case you are taking two positions of call (or put) in the same month for an underlying, it is known as vertical spread. For example – you may buy an 8000 call and sell a 7900 call of Nifty creating a vertical gap between the positions. Since you will be selling and buying both the strikes at different prices, it will give a play to gain or lose money according to the movement in the market. Similar positions can be made on put side also. Again, a vertical spread can be a debit or a credit spread depending on the strike prices chosen. (more on this in next post). 

2. Horizontal Spreads – In case we are taking two position in different expires, it creates a horizontal spread. For example, if we sell 8000 call of Nifty for May month and buy 8000 call of Nifty for June month, we have created a spread with limited profit and limited loss. This kind of spread is termed as calendar spread or horizontal spread. Again, as in case of vertical spread, horizontal spread can also be a net debit or net credit spread depending on the strike prices selected for creating the spread.

 More on spreads and benefit of trading in spreads, various kinds of spreads possible and what all we need to look at, while creating spreads will be shared in our next post. Hope you enjoy reading it. If yes, please share you’re your views. That gives us encouragement to share more.


Saturday, 16 April 2016

5 reasons why you LOSE money in stock markets

Stock markets are known for their volatile moves. If there are abnormal returns, there are abnormal risks also. But in spite of all the risks involved, it is the only place which can give exceptionally good results, if handled properly. So, what are those top reasons because of which one loses money in stock markets. Experience shows that market volatility is NOT the top reason for losses in stock markets. The so called black swan event occurs once in a while but traders lose money, almost every day! Let’s see why it happens.


Talk to any new trader. What is his expectation of monthly returns from the market? If he is not an experienced trader, he will say I am happy with 25% returns per month. Now, for him this is a very very normal return because he is treating stock markets not like a business but a place to get rich, quickly. This very expectation will force him to trade in such a way that he will lose almost everything in few trading sessions! Yes, his lose is somebody else’s profit. Now even 10% per month means you are doubling your money every ten months!
Show me a business where you can do this. Show me a business where you can even get 50% returns every year. Extremely difficult. So, if we have highly abnormal expectations of profits from stock markets, we are BOUND to lose money. Because than, we will be enticed by so many SHARKS in the market promising moon with their so called research and software. Ask them, if they are able to generate such returns, why should they share their research with anybody else. Why then all the big business houses will do anything else?
So, we need to keep expectations that are achievable. And our experience shows, that if you are good with your strategies, 4 to 5 % monthly return is achievable but that doesn’t mean it will be consistently there for all 12 months! Still there will be months when you are not able to achieve this. Hence a yearly target of anything between 24% to 40% can be termed as a rational expectation. Yes, still it is very high compared to your fixed deposit in a bank.
And in the end, we will share a calculator with you which will show you, where will your initial investment reach in ten years from now, even if you achieve 24% returns per year.


There was this client who enrolled for our guidance for derivatives market. After the closing of first day of trade, this person had a loss of Rs 75 /- in his overall account of approx. 5 lakhs. He called us and was sounding really nervous. Next day morning, when markets opened, he was in a profit of around Rs 300/-. We immediately asked him to close the trades and forget about trading in stock markets for some time. This is a real life example and this same person is now (almost after three years) one of our biggest clients.
Three years back, he was a trader who will panic even at a drop of hat. Now he is a mature, experienced trader who can take nuances of stock trading in his stride.
We must know, what are we trying to do with stock trading or derivatives trading. Is this like a fixed deposit in bank account wherein my money must grow every 24 hours – whatever small is the growth?
No, this is a place, where you require lots of patience.
‘Stock market is a device to transfer money from the impatient to the patient’ –  by Warren Buffet.
Think of a business man who has started a new business. He need to set up lots of things before he gets his first penny as a revenue forget about profit. Think of all these big ecommerce guys setting up their businesses and accumulating loses for years before they make their first profits. McDonalds was there in India for almost first seven years without any profits.
But these are visionaries. They are not here for a day or a month or one year. They have long term vision for their business and they will try everything before they give up – in case they give up, ever.
I am not saying we should also keep on accumulating loses after loses! No, but we should not have such a short term horizon for making money in any business. It doesn’t work that way at all in stock markets also. That’s why many times we hear this ‘most of the weak hands are out of market in recent volatility ‘. Do not become a weak hand who can be manipulated by market makers. Have a sufficiently long vision, so that there is no psychological pressure on you – the toll used by market manipulators to throw you out!


Stock market is no more a casual occupation. We need to have a proper strategy in place to create any meaningful wealth. Strategy which is able to capture not only short term gains but also capture long term capital appreciation for your money.
If you have entered a trade without any plan on when to do any adjustment, when to book profit or when to exit the trade, this is not strategic investment. This is casual trading and when all the other traits of overall economy are becoming extremely tough, it becomes equally difficult to get positive returns from stock markets. So, trade without any strategy in place, it becomes a sure shot recipe for losing money.
Strategy as such is a word taken from military. Strategy means that I am ready to take care of my position with whatever limited resources I have. I don’t know whether the enemy will attack me from left, right, front or back but my strategic positions will take care of attack from any side.
Similarly, in stock markets, I should hedge my positions in such a strategic way that I need not panic for any kind of moves of the markets, which in case will always be there.


Glue yourself to TV screen and be rest assured, you will always lose money. A friend mine subscribed to a so called ‘insider’ for getting information about the market movements by paying a huge sum of money for one-year subscription. Now almost four months old, he is very clear about what to do with this information. At least to save his capital, he has stopped trading at all!
Every morning you have experts competing with other for your attention on different business channels. Try to follow them, you will come to know what is happening. Every other person is expert in predicting where the market will go.
 ‘If it goes by another 50 points from here, it is a bullish signal and it will touch 9000, and if it goes 77 points down from here, it is very bearish signal and it can touch 6900 !!’
Whatever happens to market, the expert is always right.
Do you think a normal retail customer will get the news before it is played out? No chance at all! Show me a person who has created any meaningful wealth by doing intra-day trading. Think about it. Who is gaining by your intra-day trading? You or some-body else!
Use whatever charts, software you want to use for predicting the direction of market, more than 50% of time, you are wrong. Why to waste your energies on something which you are sure, that it will be wrong 50 % of times?
Why should I be acting as a puppet in the hands of so called experts having opinion on each and every stock and each and every aspect of market?
No way I am denying the capability of some really genuine guys out there, who are giving fair view of overall situation, but they are very very small in number. And in the overall jungle of marketing gimmicks, difficult to identify them.


We love to give advice and we love to take advice as long as it is free. But please check out. What is the cost of free advice in stock markets?
 It is huge. Cost of free advice is the huge lose that piles up in our accounts. No one is responsible for that because it was delivered free of cost. But still, unless and until we burn our fingers severely, we keep relying on the free advice of our intelligent colleague, smart neighbour, old friend, an insider of stock markets, our brokers and the list can be pretty long.
We regularly get phone calls from people from different parts of country, saying – I have lost huge amounts of money in stock markets, I want to learn hedging techniques, I want to learn positional strategies, but I cannot afford to pay.
Is it true? It is not that we cannot afford to pay. We still do not want to invest in sharpening our own axe. We do not believe in acquiring new skills which require some effort-mental, physical and financial. We don’t know what we don’t know. The unknown unknown box is pretty big.

But then there are hardly any low hanging fruits in these markets. A very successful person shared with me – ‘I always buy and read lot of books. Even if I get one good sentence from a book, the cost of book gets recovered. This is my investment on myself.’

Monday, 4 April 2016

How to trade for RBI policy on 5th April,2016 ?

Today RBI will announce its policy at 11:00 a.m.

How can we use this event for making some profits ?

There can be two scenarios :-

First - Markets move sharply in any direction due to some sudden surprise by the policy.

Second - Markets remain range-bound as there is no surprise in the policy.

In both the cases , there is one thing which will surly happen.

Implied Volatility of options will go down after the policy.

So, best method to trade in such an event is sell options on both sides. Yes a short strangle can be a great strategy, as after the event,  prices of both call and put may go down , considerably.

More conservative traders can create an iron condor , so that even if there is a big move in any one direction, there are no / small losses

We must take some precaution while  creating such positions. Most important is , we must ensure that  we are sufficiently away from the spot levels of market so that in case of any sharp move, none of  our positions get In The Money. In case we are able to achieve this, chances are very bright that we will be able to make profit only.

Because of such events, IVs always go up and after the event, irrespective of outcome of event, IVs go down. So if IVs will go down, option writers will be benefited. Since we know that markets may not make a significant move till the policy announcement, we can always initiate our positions just before the event.

If you are relatively new with option writing, just go for paper trading to understand the scheme of things.

All the best.


Sunday, 20 March 2016

How to choose a Broker ?

We have been getting requests for recommending a broker with which subscribers can open account .

There are so many brokers and brokerage plans offered and overall there is a cut throat competition to acquire new customers.

What you should be looking for while selecting a broker.

Let us try to clarify some of the important aspects.

Broadly there are two kinds of brokers in the market.

- Normal Brokers

- Discount Brokers

Normal brokers will charge much higher brokerage as they claim to give better services , something like picking your form, picking your cheque to be deposited in your account, providing you a relationship manager etc.  So they will charge higher brokerage compared to normal. We have seen a broker charging even Rs 100 per lot of option on each leg. Now, with this kind of brokerage , it really becomes difficult for an option trader to make positive returns from the market because first you will earn something like 2 to 3 % for your broker and then you will earn anything for you.

Another set of brokers which have entered in the market since last few years are Discount Brokers. They will offer you discounted brokerage like Rs 20 per order (any number of lots), Rs 750 /- per month for unlimited number of trades  , etc etc.  Theses Discount brokers are mainly available online for all the services, such as printing of your form , trading on their online platform , sending them forms through courier and most of them operate with one or very few branches. Also, they will charge you for orders place over phone which will be over and above the brokerage charged.

Even the so called normal brokers may charge you for the orders placed by you over phone.

Now, with this kind of scenario, what should we do ?

It depends on the type of trader you are. Honestly, broker is hardly adding any value to your trade and almost all are equally safe ( as all are guided by same regulations).

If you are somebody, doing lot of trading, better to go for discount broker as it will save you lot of cash outflow on brokerage. But, if you are somebody, who doesn't trade frequently, you can stick to same broker although it may not make any prudent financial reason.

How come discount broker gives you per ORDER kind of trade ?

Here is the catch. All brokers, in addition to brokerage are charging transaction charges in the trades done by you. These charges are over and above the brokerage and taxes like STT etc. AND they vary from broker to broker.

So , broker can claim that he is giving you BROKERAGE FREE trade, but the fact of matter is , he will be charging you higher transaction charges. So, ultimately , a FREE brokerage plan can cost you more than a normal plan also.

So, a final checklist before deciding on the broker :-

A. What is the brokerage charged ? - If you are a trader with good volumes, ask for per order brokerage rather than per lot. If not per order, anything more than Rs 10 per lot is on higher side and you should try to get it reduced. EVERYTHING IS NEGOTIABLE.

B. What are the transaction charges ? Ask upfront. Ask to provide these details in writing and check with the charges charged in your contract note.

C. What is the margin blocked on positional trades , specially when you are selling options ? In Nifty, this can range from 25 K to even 60 K for one lot. Many times they will block much higher margin and hence your overall profitability ges drastically reduced. Why we broker do that ? - OK, we will discuss it next time.

D. What will be the charges if I place my order over phone ?

E. What is the process for withdrawal of my money ? Is it online or do i need to place telephonic request ? My money shoul be credited in my account within 24 hours.

OK, once you talk on these lines, rest assured , most of the things will be taken care.

Additionally, some more precautions will be shared in next post.

Feel free to comment, suggest and ask.



Tuesday, 8 March 2016

Daily View On Nifty

18.03.16 / 12:50

Intraday huge support at 7400 and some resistance at 7650. Lot of writing in puts seen even at 7500 level indicating 7500 will also provide support to the market. Off late market is getting hugly manipulated and we are observing reversal of trends in the last one hour.

Long term range now shifting to 7400 - 7700 shows upside bias. But lets wait for todays close to see what is in store for this series expiry.

Next week is a short week with Thursday and Friday being holidays, and we can see build up for expiry trades in next week trading.

Monday, 7 March 2016

Basics of Derivatives Markets - Part 2


Let us try to understand call option from our day to day to transaction. We have taken a real estate example as it makes it much easier to understand.

Call Option

Lets say today is Ist January and there is a person Mr A , who wants to buy property.

-       Mr. A goes to builder on 1st January and paid  Rs 1 lakh.
-     Booked a house worth Rs 50 lakhs to be   purchased on 30 th March by making a balance payment.

There can be different scenarios on 30 the of March.

Scenario 1 on 30th March

-       On 30th March if property is worth Rs 30 lakhs only , what will Mr A do ?


1. Pay the balance amount & buy the house.
    - This means he is Exercising his right

2. Let his 1 lakh go and buy similar house at  Rs 30 lakhs.
- This means he is not exercising his right.

Obviously, Mr A will not exercise the option as it means that he will be buying a property worth 30 lakhs in 50 lakhs. And hence he will back out from the agreement and let his 1 lakh be forfeited.

Scenario 2 on 30th March – Price of house is  70 lakhs

Mr A will pay the balance amount & buy the house.
    - Means he is Exercising his right

- Made a profit of Rs 20 lakhs.

- Builder made a loss of Rs 20 lakhs. He cannot refuse to sell as A has purchased Right to Buy.

How builder is loosing 20 lakhs ? 

    Mr. A                                                 Builder
House                                            Buyer                                                 Seller
Right                                             Buyer                                                 Seller

-          Mr. A has purchased right to buy .

-          By accepting Rs 1 lakh, Builder has sold the right.

-          Mr. A may or may not exercise the right. If it is beneficial to exercise the right only then Mr A will exercise. Otherwise he will not exercise and choose to get his 1 lakh forfeited.

Hence -
A call option is an option granting the right to the buyer of the option to buy the underlying asset on a specific day at an agreed upon price, but not the obligation to do so.

Hence call option is RIGHT TO BUY.

A call option can be bought and it can be sold.

Seller has granted this right to the buyer of the option. 

The person who has the right to buy the underlying asset is known as the “buyer of the call option”.

The price at which the buyer has the right to buy the asset is agreed upon at the time of entering the contract- known as strike price.

Since the buyer of the call option has the right (but no obligation) to buy the underlying asset, he will exercise his right to buy the underlying asset if and only if the price of the underlying asset in the market is more than the strike price on or before the expiry date of the contract.

The buyer of the call option does not have an obligation to buy if he does not want to.

For daily view on nifty visit http://theoptionschool.blogspot.in/p/view-on-nifty.html

Can you create wealth doing intra day trading ? Part 2

We had asked this questions to our subscribers and got really interesting (and witty) answers from them. Not possible to reproduce everything here but would like to share the best .

"Just like in gambling, the HOUSE never looses, similarly in intra-day , the broker never looses as he gets his cut whether you win or loose."

Do not want to go into details but would like to caution all of us , who are trying to create some fortune through intra-day trading. Odds are really against you.

Another main reason why lot of people indulge in intra-day trading is they do not have sufficient funds.Here is the catch-with small funds they get leverage from brokers only for intra-day trading, and hence do not have any choice but day trading only. Also they will be getting lot of software for trading and using stop losses so that they do not loose everything and come back next day to trade.(Stop loss is also a loss).And this cycle goes on till they loose that small amount also.

And see what we are trying to do ?

With little money, say 10 k , we are trying to make 10 k every month and that means 100% monthly returns. Possible ?? Even 50% monthly return is impossible on consistent basis. That is why, it is gambling only.

If that would have been possible, all the big businessmen would not have toiled so hard, setting their businesses.

So, what is the solution ?

Solution is , if you do not have funds, do not loose whatever you have.
Invest this money wisely in instruments like NIFTY BEES(One unit costs you one tenth of Nifty value, so if Nifty is at 7500, one unit will cost you 750/-). This way you are pretty diversified and not in for any serious capital erosion.

Once you have decent funds (say Rs 2 lakhs) , start using options for monthly returns ranging from 2% to 5%.

If you are already that stage, learn the art of trading options from experts.

Visit the following website for latest schedule for one day workshop.


Sunday, 6 March 2016

Can you create wealth doing Intra-day trading ?

Somebody asked a really interesting question on one of the forums :-

Can you create wealth doing intra-day trading ?

I am into stock markets since last 10+ years and would have loved to give affirmative answer to the question.

But I could not.

Yet to see an intra-day trader who has created any meaningful wealth , even in fairly long span of time.

Then, why is it that so many people are involved in day trading only ?

Well, there are multiple reasons for this but the main reason is that the whole system is designed in a way to lure investors for day trading. This phenomenon is not only prevalent in India but is there, worldwide.

Who is benefited most from intra day trading and at whose cost ?

I am not going to give answer and would like you to answer this. If you are able to answer it, go to next post on the topic and see if you are able to decipher it.

We have got some interesting answers from our subscribers. Would share some of those answers also in the next post.



Saturday, 5 March 2016

Basics of Derivatives Markets - 1

  •           Future and options are derivative products of any underlying.

  •   The term “derivatives” is used to refer to financial instruments which derive their value from some underlying assets.

  •    The underlying assets could be equities (shares), debt (bonds, T-bills, and notes), currencies, and even indices of these various assets, such as the Nifty 50 Index.

  •     Derivatives derive their names from their respective underlying asset. Thus if a derivative’s underlying asset is equity, it is called equity derivative and so on.

The main purpose of derivatives is to transfer the price risk from one party to another; Risk is transferred to those who are willing to take it.
For example, A rice farmer spends money and effort in procuring land, buying seeds , manure , is dependent on water supply and many other factors to produce rice.

If he spends Rs 20 per kg in producing rice , he obviously wants to sell his produce at a price higher than Rs 20 per kg.
But what if after 3 months (when finally produce will be out) price of rice is less than Rs 20/ kg ?

So today, for protection, farmer may wish to sell his harvest at a future date for a pre-determined fixed price (more than Rs 20 per kg) to eliminate the risk of change in prices by that date.
He enters into a contract for selling his produce at Rs 24 per kg, 3 months from now. Such a transaction is an example of a derivatives contract. The price of this derivative is driven by the spot price of rice which is the "underlying".

  •  Derivatives Market has two types of trading instruments.

1. Futures
2. Options

… hence the term F & O.

              Important point for futures and options :-

-          They are traded in fixed lot sizes, size fixed by exchange. Eg- Lot size for Nifty is 75 units for both futures as well as options of Nifty , Lot size for Banknifty is 30 , Lot size for Reliance industries is 500.

-           Lot size is same for an underlying, for future as well as option.

-          Options are traded at different strike prices. Eg If Nifty is at 7000 , we will have options of 6900, 6950, 7000 , 7050 , 7100, … and so on. So gap between different strike prices is of 50 points for Nifty. For a stock which is in the range of Rs 1000, generally the gap is 20 points. So for reliance  the strike prices are 1000 , 1020 , 1040 and so on.

-           Expiry is on same day i.e. last Thursday of month., which means after last Thursday of the month, contracts for current month will not exist and all the settlements will be done at closing prices on last Thursday.

-          Last Thursday is expiry day only for current month contracts. But contracts for next month, 3rd month and other quarter end months will continue to exist.