OPTION TRADING STRATEGIES

There are 3 simple option strategies .Straddle, Strangle and Gut.

1. Straddle is a volatile option strategy or what we call Market Neutral Strategy. Being market neutral means that a long Straddle profits no matter if the underlying asset goes up or down. Yes, a Long Straddle allows you to simply put on the position and then totally take your mind off the stock as you will be in profit no matter if the underlying asset goes up or down.(Example: when nifty is around 4100 buying 1 lot 4100 call and 1 lot 4100put)

2. Strangle is a volatile option trading strategy that profits when the stock goes up or down strongly. The Strangle is a cousin of the long Straddle and the Long Gut, making up a family of basic volatile options strategies. Learning the Straddle first makes the Strangle easy to understand.(Example: when nifty is around 4100 buying 1 lot 4200 call and 1 lot of 4000 put)

3. Gut Spread is a volatile option trading strategy designed to profit when the underlying stock moves strongly upwards or downwards. The Long Gut Spread is a cousin of the Long Straddle and the Long Strangle with the only difference being that in the money options are used instead. The Long Gut Spread is useful when no at the money options are available when you want to use a Straddle. In fact, since exactly at the money options are so rare, the Long Gut Spread using in the money options and the Long Strangle using out of the money options are far more commonly used than the Straddle. (Example: when nifty is around 4100 buying 1 lot 4000 call and 1 lot 4200 put)

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STOCK MARKET TIPS

The stock markets are at all time highs and just like the last time around when the market was at its previous high every one thinks that nothing can go wrong and there is just one way where the market can go which is UP. Nothing could be farther from the truth and this will be clear from the way the market behaves in the next few months. Here are a few tips that would hopefully save you from losing a lot of cash in the current frenzy.

Time and again investors have burnt their fingers in the markets and here are some tips to you so that you do not end up burning your fingers in this market.

The number one tip at this point would be to sell if you have stocks and not to buy them if you have cash. The golden principle in the markets is “Buy when everyone else sells and sell when everyone else buys”. Simple enough right? Not really.

Why? Because of peer pressure pure and simple. When everyone else around you seems to be having a ball at the markets you would feel like a fool if you didn’t participate now.

OK so you can’t resist buying at this time then at least do yourself a favor and stay away from unknown Penny Stock and hot tips that your barber gave you. True that the stock has tripled in the last fifteen days but that was before people like your barber started buying the stock. Chances are that the Promoter of the company have started buying into the stock and have spread rumors like acquisition or a big export order to fool investors and sell out to them at a later date.

Another tip that would serve useful is to value a stock based on its future growth and not its past performance. For instance many investors say that I will not buy stocks of X company because it has doubled in the last year. Well it may have doubled in the last year but that should not be the thing you should be telling yourself. Rather you should ask yourself why has this doubled in the last year and can it do so again? There should be a solid answer to your question like the launch of a new product or reduction in the prices of raw material. And indeed if the answer is in the positive then by all means go ahead and buy that stock regardless of what has happened in the last year.

Another tip would be to remember what you are buying. Quite simply investors often forget that when buying a stock they are simply buying ownership in the companies. Most of you would know that nothing spectacular would happen in the company that you work for, in a month, they are not going to double their revenues and certainly not double your salary every month. Then why expect anything different from the companies that you are investing in. Why expect the prices to double in a month or two. Give time to your investments; don’t reduce it to a gamble. Only when you invest in fundamentally sound companies and then give the investments sufficient time to grow will you see some healthy returns on your investments. Ideally a minimum horizon of one year is a good time.

Hope these tips will prove helpful and you will make a lot more in the stock markets than you have already been making.

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Trading in Futures& Options:TIPS

Futures derivatives trading
Future trading can be done on stocks as well as on Indices like bank index, Auto index, cement index etc

Stock future trading -
Let’s first understand what the meaning of futures trading is. In simple language one future contract is group of stocks (one lot) which has to be bought with certain expiry period and has to be sold (squared off) within that expiry period.
Suppose if you buy futures of Nifty of one month expiry then you have to sell it within that one month period.
Important - Future contract get expires at every last Thursday of every month.

If you buy July month expiry future contract then you have to sell it within last Thursday of July month. Likewise you can buy two months and three months expiry period future contract.
You can buy maximum of three month expiry period.
For example - suppose this is month of July then you have to buy till maximum month of September expiry and you have to sell it within last Thursday of September month. You can sell anytime between these periods.
Lot size (group of stocks in one future contract) varies from future to future contract.
For example Reliance Industries future lot size has 150 quantities of shares while a Nifty has 50 shares.
In the same manner all futures have different lot sizes decided by SEBI (Securities Exchange Board of India).

The margin (in other words price of one lot size) varies on daily basis based on its stocks closing price.
Future trading can be done on selected stocks listed under Nifty and Jr. Nifty and not on all stocks.
The price of future contract is determined by its underlying stock.
Important - You can’t buy future contract of expiry period of not more than 3 months.

Indices future trading
As you can do future trading on stocks likewise you can do trading on different indices like Nifty index, IT index, Auto index, cement index etc.

Successful trading in futures
Future or derivative trading is the process of buying or selling stock future or index future for a certain period of time and squaring off before the expiry date.
Expiry period can be of one month, two month and three month and not more then of three month.
Its not compulsion that you have to square off your positions on the expiry date or wait till the expiry period but in fact you can square off at any time even, at the same day, or you can hold as long as you want but remember to square off before expiry date.
Most of the times on 3^rd month expiry future you may see very less trading volumes.
Generally most of the traders/investors trade or invest on current month future or second month future contract and you may see very low volumes on last month means third month expiry .
But on Nifty index contract or on other index contract you may see good trading volumes even on 3^rd month expiry future also.
You can also buy and sell or sell and buy future contract on the same day of any expiry month. This is called as day trading or intraday in futures.
Selling future contract before buying is called short selling. Short selling is allowed in futures trading.


Major Advantages of Futures Trading over Stock Trading

1) Margin is available -
In future trading you get margin to buy (but can hold only up to maximum of 3 months), while in stock trading you
must have that much of amount in your account to buy.
For example - If you plan to buy stock ABC at Rs. 50 and quantity 1000 shares then you have to pay 50000
rupees (RS 50 x1000 qty). But if you plan to buy ABC future contract and that contract lot size has 1000 quantity
of shares then instead of paying 50000 rupees you have to pay just 20% to 30% of whole amount which comes to
10 thousand to 20 thousand rupees.
In short in future trading you have to pay just 20% to 30% of the whole amount what you pay if you buy stock of
that price. But limitation for this is your expiry period. Means if you bought future of one month expiry then you
have to square off within that one month likewise you can buy maximum of three months expiry.

2) Possible to do short selling -
You can short sell futures- You can sell futures without buying them which is called short selling and later buy within
your expiry period, to cover up your positions.
This is not possible in stocks. You can’t sell stocks before buying them in delivery (you can do in intraday). You can
short sell futures and can cover off within your expiry period.
For example - If expiry period of your future contract is of 1 month then you have time frame of one month to cover off
your order like wise if your future expiry period is of two months then you have time frame of two months and this
continues till three months and not more then three months.
In short selling of futures also you get margin as you get in buying of futures.

3) Brokerages are low -
Brokerages offered for future trading are less as compared to stock delivery trading.

Disadvantages of Future Trading over Stock Trading

1) Limitation on holding -
If you buy or sell a future contract then you have limitation of time frame to square off your position before expiry
date.
For example - If you buy or sell future contract of one month expiry period then you have to square off your position
before your expiry date of that month, so in this example you got one month period. So likewise if you go for two
month expiry period then you get 2 months and if you go for three month expiry then you will get 3 month expiry
period to square off your position.

2) Level of Risk -
Due to margin facility in future trading you may earn huge profit by investing fewer amounts but at the contrary side
if your trade goes wrong then you may have to suffer huge loss.

3) Limitation on stocks -
You can’t do future trading on all stocks. You can only do on listed stocks on Nifty and Jr. Nifty.

Important points to Remember while doing future trading

1) First up all you have to decide whether you want to buy stock derivatives or index derivative. After this you have to
select the expiry period. Once you buy certain expiry period then you have to sell (cover off) your order before that
period.
Its no need to wait till the expiry period, you can even square off on the same day (if you are getting profit) or
anytime whenever you feel to book profit, no compulsion to cover off your order on the last day of expiry.
2) Check out for Futures current market price.
3) Futures Lot Size (number of shares in that particular Lot).
4) Futures Lot price (this is the amount you must have in your account to buy one lot of future) also called as margin
amount.
5) Selection of expiry period - you want to trade on expiry of one month, two month or last 3^rd month.
6) No need to wait till expiry period can book profit wherever applicable.

Method of Short Selling
Short selling (selling before buying in future trading)
In future trading you can do short selling and buy (cover) later when price comes down from your selling price you can short sell stock future as well as index future. But again same restriction will apply and that is of expiry period.

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TIPS FOR DELIVERY BASED TRADING

Please study following points, carefully, and get best returns in short period of time.
Basically, Delivery based trading can be minimum one week, one month or couple of months. How long to hold your scrip’s/shares will depend on other technical indicators and averages.
How to select best scrip’s
There are thousands of shares/stocks, which one is best for
delivery trading and which one will give maximum profit
in short period of time. Please have a look following selection
criteria points.
Points to remember for fundamental screening,
1.Sector - 50% of stocks rise and fall is directly related to
the strengths and weakness of its industry group.
2.Never lose more than 1-2% of your total amount on any
one trade.
3.Promoters holding more than 40% indicate safety for
retail investors. (Promoters - who run the company).
4.FII holding minimum 20 and maximum 25 is safe for retailer, not much volatility.
More FII investment = more volatility.
5.Liquidity - buying and selling of shares minimum 1L/day

INVESTMENT TIPS FOR DELIVERY BASED TRADING

Remember following points to increase your profit and reduce losses,
¨ Buy shares of different companies
Don’t ever try to put all your money in single share. Try to get shares of multiple companies and if possible from
different sectors.
You will always get benefited by investing in companies of different sectors, because we never know which sector
will have good news and which sector will have bad news.
“Market always reacts for news.”
¨ Be Patient
When you buy shares, they may go down. In share market its general practice that shares go up and down.
If they go down than don’t panic and sell your shares
Most of the investors/traders wait till their shares come to their buying level and then sell, but generally they forget
that is the actual buying level of shares and from this level onwards the share price will start moving upwards

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TRADING RULES

These are some of the trading rules which are universally valid for stock trading. Take a print out and nail it on your desk.

Rules:
Never put more than 10% of your trading capital in a single trade.
Always use stop loss orders.
Never overtrade.
Never let a profit run into a loss.
Don't enter a trade if you are unsure of the trend.
Only trade active markets.
Distribute your risks equally among different indices.
Never limit your orders. Trade at the markets.
Never trade to scalp a profit.
Never average a loss.
Never get out of the market because you have lost patience, or get in because you are anxiously waiting to trade as it will mostly lead to losses only.
Do not cancel a stop loss after you have placed it.
Never buy or sell just because the price is low or high.
Never average a losing position.
Never change your position without a good reason.
Don't try to guess tops or bottoms of the stocks.
Don't follow a blind man's advice.
When you lose don't blame it on luck

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DAY TRADING TIPS

1.Buy near open price
If possible try to buy shares below open price, or
at open price. Don’t buy shares if price is gone
very high then open price, wait for the price to
come down near open price and then buy that
stock.

2.Check buying volumes
Before buying check out the buying and selling
quantity (volumes). If buying volume started
increasing then the stock may go up.
3.Check derivative status
If possible try to check out the derivative of the stock which you
want to buy. If derivative of that particular stock is going up with
increasing buying volumes then you can immediately grab (buy)
that share/stock.
Most of the time it is seen that if the derivative goes up, then its
stock or share also goes up.

4.Strictly maintain Stop Loss
Strictly maintain the given stop losses. This will help you to
prevent from huge loss. Suppose, for moment the share/stock
what you bought falls drastically down, then you may end up
with huge loss. So always maintain given stop loss.
“Stop Loss will reduce your loss”.
5.Down wait for huge profit in single share/stock
If you are getting some profit and if you notice that is not further
moving up (it’s called consolidation) then you have to sell your
share/stock and come out of that trade.
In this manner, you can earn small profit instead of loss then
you can do another trade and again earn small profit. Likewise
if you keep earning couple of small profits in a single day then
all your small profits will add up to huge profit amount in a
single day.
“Get satisfied in small profit and do multiple trades”

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