Straddles & Strangles : For High Volatile Markets

So as the volatility is too high in the markets at the moment and traders are spending a hell lot of time on their charting software's to detect the right stoploses for their trades, I was trying to figure out a trading strategy that could best suit all my trader friends out there.Here i also have to admit that most of them when trade to others conclusions mostly find themselves not having the proper account balance to trade with the recommendations that the analysts provide.During the years i have seen so many people coming to stock markets very enthusiastically only to last for some couple of trades and gone.

What happened?

Why the lasted only for such a short span of time?

This could be you and many more else.Were there expectations wrong? or Are markets not able to fulfil their expectations?Certainly the later one is not right as we have seen over the years a lot of people maintaining a luxury lifestyle only trading the same markets.The Million Dollar question is why they succeeded and others not.But to analyse this we will have to see the different approach the successful traders adopted.Of course they were not trading with Rs. 20000 account.Although we have heard that Mr. Rakesh Jhunjunwala traded with Rs 5000 as capital.But we will have to remember that it was way back in 1980's when even Rs 5000 was a big amount and also he didn't went for day trading or swing trading where we will make a position only for a couple of days.Actually he remained invested for months in his first trade itself.The growth that had happened  and the possibilities that were around those days are out of question these days.

So, the question remains same that can we survive with Rs 20000 or 30000 account that most middle class people opens in our country?Can we make a living out of it as sometimes youth tries to do with no job?.I think I may say yes to first and no to later.

Yes certainly i said yes to earlier.I think most of the investors will say that it will be risky coz you cannot do much to hedge your position with such little money.Coz you cannot take your position overnight with Rs 20000 in your account if you will even trade in nifty( The margin for nifty is less then individual stocks).The question of hedging and securing the position is not possible by any means.With India vix at 25 at present you will be living on the edge if you will not care about securing your account in such a trade.

Then what is the answer?Do we have to forget about trading or wait for till we have some hefty amount in our bank?No definitely not, I will help you here.Today i will tell you how to play these volatile markets with small account as low as Rs 10000 or even lesser than that and still create a position properly hedged.And the important thing is that not only we will be safe but our profit potential will be unlimited.But remember this trade should only be done by active traders and in volatile markets.In flat markets this trade will be unprofitable.

Delta Neutral Trading

The people who will be hearing this type of trade for the first time will be wondering that what is this Delta Neutral thing?So to help them understand this, Delta is the term mostly implied to options and is gauged between 0 to 1.This is sometimes also expressed in percentage.The option that will have 50% delta will move by Rs 0.5 when the underlying stock will move by Rs 1.The Delta of the option depend upon how far the option strike price is from the underlying price.This way the in the money options will have the maximum Delta closer to 1 while at the money options have 0.5 delta and out of the money options have the minimum delta.The Delta of the call options is calculated +ve where as the put options have the -ve Delta value.
The Delta of a long stock is always +ve 1 and short stock is -ve 1.

The common examples of the Delta Neutral trading is Straddles,Strangles and Iron condors.All of these trades depend upon persons view about the markets and also the amount he is able to put in trade.Since Iron condors involves option selling and it needs margin,we will not discuss it here and leave it for some other post in future.All these strategies can be played short also and it again needs to be entertained with high margins.We will only discuss long strategies here.

Long Straddle

Long Straddle is played when you expect the markets to be volatile.It is constructed by buying both call and put options which are at the money.Since the Delta of at the money options is about 0.5 and has +ve value for calls and -ve value for puts.So if we buy both at the money calls and puts the net Delta of the trade will be zero.In straddle we are completely playing the volatility and does not care about the direction of the markets which is a very difficult task for new traders.All we want is the movement in the underlying asset.As the underlying will move one option will come in the money and the other will go out of money.We all know that the in the money options move more quickly as the Delta gets increasing with every Rs 1 move further into the money whereas the out of the money tends to loose less value as they cannot take the time premium out of question anyway.In brief in these type of positions the winning leg of the trade wins more amount then the loosing leg looses.Moreover in Straddles you need not to wait till expiry to get out of position.You can dilute your position anytime before expiry as well.After every hour or after every day just calculate your calculations and see if you are in profits among the trade.If you get a decent profit in couple of days come out of trade and switch to new one.You can also make the trade again Delta Neutral by just capturing the gains already made and still go on for more profits.

Long Strangle

When the Straddle is played with out of the money options it is called strangle.Since out of the money options are purchased strangle is often very cheap compared to Straddle but you need the underlying to make more violent move to profit from Strangle.In general if you are expecting underlying to make a big move and also you have less amount in your trading account, you should go for Strangle.All the else is same in both the strategies.

So with the markets so volatile Straddle and Strangles are your best friends these days.Keep trading them happily and extract most profits.This is the option expiration week in India.In next series i will be posting some live trades here in this blog for everyone to benefit and analyse this type of trades.Till then wish you Happy Trading.

Regards,
Sanjeev Parmar.

< >

Is it the right time for Bottom Fishing

With the yield of a 10 year government paper touching 9.48% in the bond markets on Wednesday the worst for the Indian equity markets may not be over yet .This is the highest yield for the 10 year bond in India since 2001.The yield has risen considerably in the last few days after quoting 7.46% in the middle of June.As a result we have seen a good dent coming in equity markets in the same time.Panic seems to prevail in the markets as the big players are shorting at every available price.Both the major benchmark indices have come down more then 13%  from their recent highs.India vix has risen more then 70% since 25th of July to yesterday's close.

Except for metals all the sectors have been seen underperforming.The biggest fall has been seen in banks and the banking index of nifty hit its 19 month low since January last year.

Now the biggest problem is weather we should stay with cash or try some bottom-fishing at these levels.Since the markets are still expected to loose 5%  to 10% from here their should be two approaches i think that a trader can execute in this scenario.The first one is i think advised all the day on all TV channels and Newspapers to enter the markets with part payments.This way you would divide your trading capital into four or five parts and buy only with the first part and keep all the cash left as a buffer in your account.But this strategy is very much flawed i think and i will never recommend due to two reasons.Firstly when the markets bottom out they are generally tend to be too volatile, moving zig-zag and hitting all the stoplosses in the markets.So if you will have positions you are more likely to be stopped out then gaining anything from them.Secondly if the markets have eventually bottomed out you would not be able to make good profits as the maximum money in your account will be in cash and not been used in any sort of position.

There is no point leaving cash in the account vacant if the markets have really bottomed out.I believe you should rather have a hedged position in these type of markets then part investments.The purpose of safety is fully fulfilled by the hedged position and at the same time you could also enjoy the benefits of trading with full account.

So for trading in these type of markets i would recommend you to use options for hedging your stock positions.I will give you an example of stock of  Hero Motors Ltd.

The stockprice of  Heromotoco on 2nd August on NSE was Rs.1802 and the closing price of the 1820 in the money put was Rs.74.60.The trade goes like this

Bought Heromotoco stock(Market lot 125 shares)@ 1802 * 125 = 225250
Bought Heromotoco in the money put 1820 one lot@74.60 * 125 = 9325
Total trade cost                                                        225250 + 9325 = 234575
Guaranted exit from Heromotoco at the end of contract is at the price of 1820.
Total risk of the trade                     1802 + 74.60 = 1876.6 - 1820 = 56.6 * 125 = 7075

For a total investment of  234575 the reletive risk of trade is 3.01% for keeping the position all month.Now even if the stock price of  Heromotoco plunges like the stock of  Satyam computors did way back in 2009 you can only loose 3.01 %. So did you like this type of stoploss or you still want to play with conventional stoplosses only to see the markets rising after hitting your stoplosses.

Coming back to trade the stock of  Heromotoco was at 1985 on 16 August.The price of put was 8.

Stock profit           1985 - 1802 = 183 * 125 = 22875
Put loss                  74.60 - 8 = 66.6 * 125 = 8325

Total profit for the trade = 22875 - 8325 = 14550 or 6.20%  in just 16 days.

You can also trade on margins in futures for these type of trades.But i will not recomend and also the risk amount as well as profits could be much higher in margins trading.

That it form my side in this blog.Happy trading....

Regards,
Sanjeev Parmar.

The 24 Carat Gold Trading Strategy

Gold is one of the most favourite investment instrument in the world.People from all communities,all countries and all social classes have shown interests in gold investments.Although as a trader we just see gold as a another trading instrument, women have various emotional values attached to it.India is the biggest importer of gold.Gold is majorly bought in India in marriages & festivals.Even wearing the gold jewellery is a status symbol in India.As a result we have seen people accumulating gold at every available price and reluctant to sell even if the prices go down.This has been a very common trait in middle-class families where gold is sometimes the only investments they have.The gold hasn't deceived them either.See the price rise of gold in India in last 42 years.

In the trading world Gold is always seen as a secured investment.The trend of buying gold by families has majorly been taken over these days by The Central Banks from various countries.This shift in buying interest of Large Fund Houses and Banks is more ignited by the recession in the equity markets in the last few years.With the stock prices becoming more and more volatile and the economic conditions getting worse day by day,the fund houses are buying gold as a safe investment and this trend is here to stay for a long time.

As a trader i think Gold is one commodity that should always be in every body's portfolio.This would not only diversify your portfolio but also hedge you against stockmarket crashes.In stockmarket crashes the money that comes out of stocks generally tend to go in gold and the prices of gold surges up.So even if the stocks will come down your portfolio will be stable.You can buy gold in different ways.You can buy gold in physical form and put it in your bank locker or you can buy Gold ETF's.One can also buy e-gold if he or she doesn't feel uncomfortable without delivery of goods on your paid amount.You can buy gold futures on MCX and NCDEX in India.With futures you have the benefits of trading on margins.You can easily rollover your positions from the current month to the far month in futures.The most important benefit that you get in gold futures over other type of gold investments is that you can short a future if you are bearish about gold.Whereas in conventional markets you can take profits only when the prices rise after your buying.

Now that we know Gold is a relatively safe investment as compared to stocks and it has also provided the buyers with some good capital gains over the years, the question comes when should one buy gold.The important thing to notice here is........ What is the time horizon of the investor?

If the investor is going to hold his investment for two to three years he could just buy the gold at any time of the calender year he or she is comfortable with. He could either buy a Gold ETF or he can buy it in the physical market also.But if the buyer is a trader and doesn't want to hold his investment for long, here is a little research i have provided in the enclosed excel.The data here in the excel can provide the holy grail of gold trading to the Gold traders.This excel describes the monthly end of the day settlement price of gold on Comex for the last 10 years.I have also added here the quarterly and half yearly returns of gold in the excel. Here in these calculations you can see that the average returns of gold on comex in first calender half
is only 1.89% whereas the average returns of gold for the second half is 10.25% every year.I think this study of averages has given the smart traders the idea of trading gold for maximum profits in as less a time as possible.So next time you wish to trade gold you should be buying it on 1st July and selling it back on 31 December.

10yeargoldata

That's it from my side in this post.........wish you happy trading in gold.....

Regards,
Sanjeev Parmar.

TAKING GUARD

Hi friends,this is my first try to write a blog and since i am not a writer infect never ever written any sort of experiences anywhere before so to be very frank i am a little confused over how to start with.I think its always easy to continue the already going thread.But i believe if it is not now ,pretty soon it will turn to a long thread.

Since i have already introduced myself as a longtime trader so it is obvious this thread will go along a lot of trading styles and techniques that you may be familiar with or may be not.I usually trade with technicals instead of fundamentals. So in this blog you will mostly find the strategies and recomendations based on technicals more than fundamentals.Although different peoples have different tempraments,different risk taking abilities,different time involvements and different trading capitals,it is very difficult to write the best possible strategies for all in one go.But one thing i can assure if you will go through my blogs, i will try my best that you should not be exposed to the risks involved in excessive volatile markets we r having these days.

Excessive volatality:- Your friend or enemy

Volatality is your best friend in markets.The converse is also true.You will profit from stocks only when they move and you will loose your money also when they move(against you).A lot of newbies when enters the markets for the first time are allured towords stocks that have excessively high volatality.They will buy a portfolio of stocks that will all be high beta.Sometimes it results too good.When the markets favour your analysis you are able to make some quick money.But these results are vica-versa.The problem comes when the markets go against you.Your portfolio takes the same amount of acceleration in the reverse direction and the amount of leverages that broking companies are offering to their clients these days, one is seen left stranded out of the markets.So my belief is you should always understand first what amount of risk and ofcourse leverage you will accept going into the markets and develop your trading styles and strategies that fits your need.
The best portfolio will always be the one that will be adverse to unexpected swings up and down.It should be well divesified into different sectors and different stocks so that you should not be over exposed to a single company.You should always be aware of stoplosses and profit taking points of different stocks in your portfolio.LAST and most important it should always be hedged in some way so that if the markets makes a sudden change against you ,the protection should be there.
Always remember the cardinal rule of trading.........

Never loose money, you will always get a next chance in markets.And also don't rush on a trade.

I think it is enough for my first blog....see you....and i wish togather it will be a happy trading journey for all of us...

Regards,
Sanjeev Parmar