Long Nifty Short

Today I would like to write about a useful but less talked about topic today. The post will talk about “trading index futures with minimal margin”. It is useful for new traders, as well as someone who is working on improving their hit ratio. Hit ratio is the percentage of trades that go in your favour as compared to the total trades that you take.

As a beginner, it is normal that one cannot take a trade in the Index futures just because the lot size is big and the losses can run huge if we keep a decent stop loss. If we keep a small stop loss, we will mostly get it hit since futures and options are highly volatile.

What if I tell you that you can trade futures and options with a lot size of your own, that is you can scale your lot size according to your stop loss. I have described in an earlier post, how to scale your lot size according to your stop loss.

However, we can only trade in Nifty and Banknifty and not other stocks listed in the futures and options segment, and we are not trading in nifty and banknifty futures but an equivalent of nifty and BankNifty futures. Let us jump into the topic right away.

The equivalent of Bank Nifty is bankbee. However, we have to follow the spot chart of the Banknifty index but buy/sell Bankbee as per the quantity of your choice. Remember to keep a stoploss as per your judgement. One can check index price and decide a stoploss in bankbee.

It is not a straightforward thing to do, but a simple suggestion is to check the time at which price had touched stoploss last time in the Index chart and check the price in Bankbee at the same time. The candle close in the 5-minute time frame in bankbee can be a decent stoploss price.

Bankbee and banknifty move in the same direction by almost the same percentage. The benefit of trading in bankbee is that we do not need to buy a full lot to take a position. Instead, we can buy a single bankbee just like buying a single stock of ITC or Reliance. The problem with buying bank Nifty futures is that even a hundred rupees stop loss a stop loss of 2500 rupees per lot.

If we make the same position in by bankbee which trades at almost 400 rupees nowadays, we can virtually take the same trade with smaller stoploss. It reduces the amount that is risked in a trade as well as the amount that can be gained in the same trade. Let me tell you how to take a trade in bankbee.

Let us look at today’s chat of bank Nifty index. We found a buying opportunity at 11:45 a.m. and the trade hits take profit at 12:45 a.m. Remember to make an entry and exit following the index chart.

We can buy bankbee at 11:45am and wait for stoploss or target. We can see that the target is hit at 12:45

Let us look at bankbee chart for the same day, and how it progressed during the same time frame.

Entry and exits are shown by blue arrows in the bankbee chart. The entry price would be near 400.29 and the exit would be at 402. For intraday trades, you get leverage of 5X in Zerodha for Bankbee and the effective buy price would drop to 80.08. You end up making 1.7 rs by buying one quantity for 80.08 rs. This turns out to be 2.1 per cent for the day which is quite good.

The equivalent of Nifty is niftybee and you can virtually trade nifty futures by making a position in Nifty bee.

One point to be noted is that the niftybee and bankbee often have a small gap in best buyer and seller price and one must use a limit order to enter and exit to the extent it is possible. Once you are confident in trading bankbee and nifty bee, you can try out nifty and banknifty futures.

What are your thoughts on this post, let us know in the comments.

One of the questions that I often come across is, “How to place a stop loss? What should be the maximum loss that I should take before closing the position in a losing trade?“

Money management is one of the most important skills that a trader should possess in order to become successful in the stock market. Stop loss is what helps us in managing our capital in an efficient way. Proper money management ensures that one can take multiple Trades without wiping of our entire capital.

You should always make sure that the maximum loss you should take in a single trade should not be more than five per cent of your capital. So if you are starting with a capital of 10000 Rupees, you should not lose more than 500 rupees in a single trade. Similarly, if your capital is 100000 rupees, you should make sure that you do not lose more than 5000 rupees in a single trade.

The initial capital will vary from person to person so would the maximum loss that a person can take. If you follow proper money management, you can take 20 trades at a time. I do not suggest you take 20 trades at a time, I am just pointing out that you should be wrong 20 times to lose your entire capital.

What if you did not follow money management with a maximum 5 % stop loss? You let your losses run huge and maybe after 4-5 wrong trades, your entire capital will be wiped out. Let us learn to place a proper stop loss and preserve our capital.

Once you have decided how much maximum loss you as a trader can take in a single trade, now you have to decide the quantity that you can buy or sell. How can you decide the quantity? Quantity would be nothing but the maximum loss you can take divided by the maximum loss per share that you have decided based on your analysis of support, resistance, EMA, 200 EMA, trend lines etc.

Suppose ITC is trading at 200 rupees and has strong support at 198 rupees. You are hopeful that ITC would not breach 198 rupees level on the downside. This can act as good support and your stop loss could be placed below 198. That would be a stop loss of 2 Rupees per share.

A person with an initial capital of 10000 can lose a maximum of 500 if 5% rule of money management is kept in mind. The trader has also noted that he can place a stop loss of 2 rupees on a buy trade in ITC. So the trader can go into the buy trade with 250 quantity.

Similarly, if a trader has an initial capital of 100000 rupees, he can go into the buy trade in ITC with 2500 quantity.

Futures and options are derivative products. The value of the derivative product is determined by an underlying asset. The underlying asset can be stock, index or commodity. We will restrict the discussion to the equity market as the aim of the blog is to give a clear understanding of options and how good is option buying. Those who have some idea of Futures and options would find this blog really helpful. If you are a beginner, and interested in learning about futures and options, I would urge you to go through these two posts and return to this post later.

1. What are options?
2. Value of options.

We would learn about options from an option buyers standpoint in this post. We would cover option selling in a later post.

When would you want to buy a stock or an index option

A. We can buy an option when we want to trade a directional move 

After some analysis, you feel nifty can show a sharp up move and you want to make some gain out of the would-be movement. What are your options? We would restrict ourselves to buying option. You know you have to but a Call option. Let’s see this chart for our test case.

Let us go for buying a call. Here we have three choices, buying deep in the money call option, buying at the market call option and buying out of the money call option. All these scenarios are analyzed and we see that all these turn profitable. We can clearly see that choosing the best strike price has the potential to affect your profitability. Although when one buys deep in the money option, he pays less for the time decay and pays mostly for the intrinsic value of the option. Small reversals do not affect the Profit and loss in such a position. You can go through this blog to understand time decay and intrinsic value.

B. We can buy an option when we want to hedge a cash Position

Let us understand this with an example. Suppose you are very bullish on ITC in long term. You have bought 3200 shares of ITC at an average price of 200₹. You sense that in short term ITC may correct by 20 per cent, and it might go to 160₹ per share. In spite of that, you don’t want to exit the cash position since there is always a chance that it might not correct much and maybe rally up.

In such a case, you can still protect your holdings against the suspected correction of 40₹. This can be done by buying at the Money put or Deep in the Money Put. Note that the Put option can be bought in multiples of lot size. Right now the lot size of ITC is 3200 and one lot of ITC put can help in hedging 3200 ITC shares. We can buy ITC Put of 200 strike price and we are protected against any downside in ITC beyond 200₹.

If the ITC closes at 170₹ at end of the contract period, you can make a gain of 96000 (minus the premium paid) in Put option. Though you will see the value of the holdings of ITC has decreased by 96000, but you have not exited the holding value and booked no loss in it. You can still close the holdings position at 170₹. In such a case you will end up making no loss as the gain in the put option is same as the loss booked in cash holdings. This way we can hedge our positions in cash segment.

C. We can buy an option when we want to hedge a Futures position

This is similar to hedging a cash position, except that we have gone long in futures and bought the Put option to hedge long position. Suppose you are very bullish on ITC and bought one lot of ITC futures. The average buy price is 200₹. You sense that the price can dip a little in the next few days. You can either exit with a predefined stop-loss or hedge the position by buying at the money or in the money put option of a suitable strike price. Any loss in futures position will be covered by put option. In case of upside, the gain would be ideally infinite. So you can make a limited loss, unlimited gain strategy using this.

D. We can buy an option when we want to hedge an option sell/short Position

We can sell options as well. You can read more about prospects of options selling here in this blog. Options selling requires good capital and money management skills. If one is not active enough, the losses can be infinite. To protect yourself against infinite loss, you can buy an option too. This will ensure that the loss is finite.

ITC has been trading rangebound for quite some time. We suspect that it cannot go any lower than 200₹. We can sell PUT option of strike price 200₹. We can track trading price live at NSE website here. Suppose 200₹ strike price PUT is trading at 1.2₹. If we sell this option, we get a credit of 3840₹. This credit amount is product of lot size and trading price.

Maximum loss in selling this option is almost 6,40,000₹ if ITC price goes to zero. if we do not want to take a risk of 640000₹ to gain 3840₹, we can buy a PUT option of lower strike price in this case. One can buy 190₹ strike price Put option and limit the losses. We can make various options strategies using buy and sell combinations. Although option selling has a higher probability of success, it comes with a risk of huge losses. We can limit these losses by buying an option.

We will be updating this section with stock for the month for swing trades. It will also explain in detail the reason for picking it and risk to reward ratio. We will also upload an excel sheet with returns and loss updated and other details, which will in a way act as a trading journal.

Monthly Pick

What is value of options? Why is it important?

Options are the derivatives of the Stocks or Index such as NIFTY or NIFTY BANK which are traded by the Stock Exchanges NSE and BSE. So, the value of the options is derived from the value of the underlying asset. The value of an option is the current market price of that option at which is being traded in the stock market. Its value depends on various factors, but more importantly there are two major factors which govern the value of an option, they are –

• Intrinsic Value
• Time Value

To understand the two terms in detail, we need to take an example in real scenario. Let us take the NIFTY 50 Index which is trading at 14,677.80 as on May 14, 2021. It is the benchmark index of NSE having the market value of the top 50 companies having highest market capitalization. Market cap means the total number of shares of the company multiplied by the share price.

The data in the green color can be found from the NSE Option Chain website (https://www.nseindia.com/option-chain) or from any brokers’ trading platform.

Intrinsic Value is the difference between the Current Value of the Underlying Stock/Index (NIFTY 50 index here) and the strike price of that option. It can never be in negative, either it is positive or zero.

Time Value is the difference between the total premium value and the intrinsic value of the option.

From the table, we can summarize,

• The intrinsic value of the option decreases as we move above the current price of the underlying asset and increases as we move below the current price.
• The time value is maximum at the current market price and it decreases on the either side.

The Time value signifies that how much time is left from the date of expiry in terms of value. As the time will pass, the time value will go on decreasing and at the end of expiry, the time value will decay down to 0 and only the intrinsic value will remain as the total premium value.

Classification of Options based on Intrinsic Value –

• ITM Option:- ITM option stands for In the Money Option. It means the strike price of the option is less than the Current Price of the underlying stock/index for a Call Option and it is more than the current price for a Put Option or in other words, the intrinsic value is not equal to zero. For Ex – If Nifty is trading at 14600, So all the call options with Strike Prices lower than 14600 are ITM options and all the Put Options of strikes higher than 14600 are ITM options.

• ATM Option:- ATM option stands for At the Money Option. It means the strike price of the option is equal to very close to the current price of the underlying stock/index for both the PE and CE options. In above example, 14600 CE and PE option will be ATM options.

• OTM  Option:- OTM option stands for Out of the Money Option. It means the strike price of the option is more then the current price for a Call option and lower than the current price for a Put Option. Again, for above example, all call options with strike prices more than 14600 are OTM and all put options with strike prices lesser than 14600 are OTM.

Nothing in the world comes for free. It has some premium!!