Can options be part of a balanced portfolio? The answer is yes, they can be and they must be. But is it as simple as that? And the answer here is…no. that is not as simple as that. When you make a portfolio that is with some long term view. You don’t want to buy and sell daily out of that portfolio. So how to avoid the volatility and resulting risk? The answer is options. Only options can do that. You might have a very balanced portfolio mixing government securities and mutual funds and ULIPs and stocks. Still you will face the risk. In fact only government securities stand unaffected by the ever volatile share markets. But they will not make enough profit to offset the losses. So building a portfolio is easy but maintaining the risk is not. Options may create some problems because with them you have to constantly shuffle them with the price moves to make some profits. There are strategies that ask you to short and forget till the end and let it expire worthless and pocket the entire premium. But that is not easy at all. At times the same position might be in losses and if you keep it open it will ask for higher margins. Thus driving you crazy. The very basic idea of constructing a portfolio to be peaceful is lost. Nonetheless options are the only way to manage a risk-neutral portfolio. How to do it though? Suppose you already have a portfolio and you don’t want to shuffle it much. Get into options. It will keep you on your toes but it will be worth your efforts and may be even more. The bad scenario is when your chosen stocks are going down. One can say that buy them at lower prices and average out the price. But to do that you need more capital. Rather keep a little capital in cash and trade options. There is no other trading security that can outperform options when it comes to make big with small capital. Get into puts. Specially nifty puts. Stock puts are pretty rare and much more complicated. If you have been watching a particular stock options moves then puts of that stock can be easy. Otherwise get into nifty puts. Don’t have to short. Shorting involves margins. Instead go long in puts. Let the market go down. Your nifty index goes down and nifty puts will make profits. Sell them off at a higher rate and book profit. This profit should then be used to buy more of your chosen stocks at lower prices. Easy to read, isn’t it? Now comes the complicated part. Choosing the right strike. You don’t have to chose the direction. We are talking about a portfolio so remember you already have stocks and if market is going up you are already in profits. You don’t have to buy options to make more profits out of a rising market. rather keep that capital in cash and use it for the opposite time. Coming back to choosing the right strike. If in a month market doesn’t fall then your puts will money and this might eat heavily into your profits if you chose the wrong strike. And keep in mind choosing a way too deep out of the money might also not give you enough cover. Strike the balance. Stay within 150 points of nifty. If nifty is at 5000 then don’t take trades in anything less than 4800 puts. This strike is close enough to market and even then the initial outflow of premium will not be too high. In case market moves down by 100 points you will see a move of minimum 30-40 points in your strike. The lot size is 50 and that gives you a profit of upto 2000. Good enough. Use this profit to buy more of your chosen stocks. If you go long in a deeper OTM strike like 4500 then it will need a pretty strong downmove in nifty to give enough support to that strike. If you chose something like 5100 put strike then initial outflow will be very high and in case markets don’t go down then this premium will be lost. I am talking about notions here. Not exact price points. Suit your needs with your experience options. The idea is to build a portfolio once. Book profit when it goes up and above expectations and avoid risk of seeing an adverse move. To avoid the risk long put options. Preferable nifty options. To make sure that your puts cover your losses chose the right strike. One basic rule is to not go beyond 150 points from current nifty level. Your outflow is small and a strong downside move will give you enough to offset a major portion of your stock losses. Why build a portfolio that keeps making you put more and more and more money into it just to average out? Use options carefully and your capital will be safe.
Notebook
Options are easy
The way options behave is very peculiar. There is no science to understanding what is going to happen next. There is however experience to guide you through. So if you want to become an options trader in Indian markets then don’t count on how many books on options trading you have read but focus on how much you can learn while watching the live market for options. This is going to help a big deal. All the books out there are almost the same. They talk about the same basics and if you have read one good book on derivatives that is good enough for you to understand the whole basic design of options. This is for someone who wants to speculate and trade in options. If someone wants to design structured products and some high-end options strategies then one needs more specific books. But that kind of thing is not for everyone. And the rule of laziness says chose what is easiest. Jokes apart, a basic options trader doesn’t need to know how a structured product is priced.
In Indian markets options are still a new thing. Though there are newer options categories available now still an average share market investor is quite away from options. In fact the brokers themselves are not too comfortable with options. Some of them are not even aware of the difference between options and futures. You might find it difficult to believe but I don’t . I have met such brokers. They are a piece of art. Anyways, getting back to the normal options trading for a normal trader.
First thing, if you short an option you are to pay for the margin and that margin is mark-to-market. This is a complicated process in itself but not too complicated. However if you take only long positions then there is no margin needed in that case. And going long in options is good enough to give you any amount of profit that you want. Second thing , trading in stock options and index options are two different things. So beware don’t treat them alike. Previously i wrote about the differences between stock options and index options. Third thing, don’t go too high on the concepts like implied volatility and delta neutral strategies. I am not writing them off but only saying that for a starter this is not the kind of thing one should be indulging in. Fourth thing, pay special attention to how prices behave when the expiry week is on. You will easily spot some tips. Watch them for a month and you will know that certain strikes go right to the top and then fall mercilessly. One thing to remember is that an out-of-money strike is going to expire worthless. This is a key thing. If you can remember that an out-of-money strike is going to expire worthless that will give you many ideas about how to use and chose the strikes correctly.
Fifth thing, fix your timeframe. Don’t enter into a trade with an intraday timeframe and then convert it into a swing trade for three to four days. Once a timeframe is fixed, stick to it. There are no hard and fast right and wrong timeframes in options. So chose the one that suits your trading style and your capital the best. One thing is sure that if you chose your strikes well and get in at the right time then one single trade can give you almost 100 percent profit within a span of two to three days. That is not at all impossible. And that doesn’t even take a Ph.D. in finance. All it takes is some experience and a strong character.
Pay special attention to what is the brokerage you are paying on your options trades. Most brokers will give you cheap rates on cash segment but in derivatives their brokerage goes high. It is pretty common that a broker will charge as much as 100rs per lot. This is pure madness. If you are starting with a small capital then they are not going to give you the best deal. In that case make sure that you are fully aware of the charges you are paying for the brokerage. Remember to ask them if the charges are on one leg or both legs. Means the same charge is applied for buying and selling or is it applied only on buying.
Keep these simple things in mind. Watch the underlying you want to trade for a month. Pay special attention to the expiry week and how it builds up. Look out for premium behaviour in the expiry week and make a note of it. Do it for as long as you can. Even if you are not a finance wizard you can make good profit from careful options trading. And don’t subscribe to those sms tips. You don’t need that.
what does your adviser know?
I often read advisers saying that stock markets are risky and making a sound risk-free return from share markets is almost impossible. Then there are some other experts who charge you for many fancy things and then say that your investment bears the market risk. On the whole the share markets are made to look like a black hole from where an investor cannot come out with his capital intact. This is not true at all. Making a healthy 30-40% per annum is not a difficult thing. But this has to be done by experts. Those who are full time into share markets. This is not a part time job for sure. If a so called expert says that making 30-40% per annum in share market is impossible then i don’t know why he is considered an expert? Why would anybody pay an adviser a fee if he is as good as the customer only. The service provider has to be a step ahead than the customer otherwise there is no sense.
Making profits in share market is not an easy thing i agree. But this is not an impossible taks either. All it takes is practice and discipline. In one of his seminars Alexander elder talks about trading becoming “muscle memory”. That is how much practice it takes. Discipline is about your character becoming used to the environment of share market. Buying an Audi doesn’t make you a great driver. In share market it is not how much capital you have but your character that defines your success. Those who have a big enough corpus get services like PMS and other such high fashion things. Even in those services the service provider says that your investments are subject to market risk. I wonder if he can not manage the market risk then why is he charging you a fee? If he is as good as you then why pay him? Rather do it yourself. Atleast you will be saving his cost.
Making money from share market is a possibility. Only it takes some hardwork. But then making money from anywhere takes hardwork. The important thing is whether you are doing your share of hard work or not. If you do it properly then share market is right out there to give you good returns. The next time some one starts talkin about share market being highly risky and such stuff just ask them if they really know what they are doing in share market. I have met some sub-brokers who don’t even know the difference between futures and options. All it takes for you to open a sub-brokership is some capital and nothing else. They don’t even check what is your educational background. This means that people who are becoming share brokers are not even qualified enough to do this. Then they start providing tips to the customers. Customers think that the share broker knows what he is talking about and they trade on those tips. Broker ends up making money through brokerage and customer is left wondering what just happened. I particularly remember a case where one person liquidated all his real estate assets to invest in share market. He comfortably invested almost 20 lacs in his demat account. The relationship manager of the broker company started telling him things and within a year the customer was left with peanuts in his demat account. He lost almost every single rupee of his capital. And even then he was not angry because the relationship manager has cleverly convinced him that share market is one place where you might double your money or lose all of it. So keep trying unless you double your money and don’t stop if you lose all of it. Arrange more and invest again. That customer who had lost this much was still ready to liquidate more of his assets and invest it in share market.
Even those who don’t want to actively participate in share market must know that this is not a gambling place. This is not an illogical place where no one can predict what future holds. Share market is run on finance and economics. Share market is a place where some of the sharpest brains in the world meet together and compete against each other. If you enter the market and you are not trained enough those sharp people are going to rob you off everything you have. But if you are trained enough, if you have the characteristics of a trader and if you have the willingness to do the hard work then share market gives you rewards. The next time your broker or adviser tells you that there is no guarantee on share market investments you should ask him why? Ask him on what basis he gives you those trading tips? What is his educational background? Share market is not a black hole.
Know your stock.
For sometime now i have been noticing how many new ventures have started about share market investments. The most common and infact most irritating one is the tips business. You subscribe and they send you sms’s on what to trade and when to trade. On their promotional material they bring data from god know where and prove that their strategies are infact money making and you will be rich in no time. This is the biggest misconception. No matter how many good hits one sms subscription service gives you but at the end of it all you will end up losing money.
Losses are not a big part of your mentality if you are a serious trader. However to a non-serious trader one big loss is enough to set him home back packing. Serious traders ought to develop a character for trading. Serious traders ought to know their stocks. What i mean by knowing the stock is that you must watch a stock for long time to know how it moves and what is the range for the stock. Remember individuals buy and sell these stocks. The other is not occupied by some computer. Atleast not now in Indian markets. So by watching a stock for long enough you will be able to know what kind of people are generally involved in the stock. For us technical analysis people a stock represents the sum total of it’s regular buyers and sellers. It is not the financial statement or the product of the company. But who trades it and how it is done.
Each stock has some dedicated people. Technical analysis asks you not to be emotional about your stock selection but i am sure that almost every trader is sentimental about one stock or the other. He will keep coming back to that stock thinking that he has a good chance at it. What they actually do is respond to the experience of knowing that stock for long enough, with or without noticing it. When you look at a stock for long enough you will get an idea of stock’s character. Some stocks are such that they keep moving in good momentum in either direction. Some move in ranges , so there will be a move and then a long range and then another breakout. Some stocks are pretty good at the crucial support and resistance levels. The rules of technical analysis are same for all stocks it is just that some stocks follow them to the “t” and some don’t.
Make a list of stock which you want to trade. And to figure out what you want to trade without knowing any stock at all simply chose the affordability as the sole criteria. A trade who has Rs.20000 at his disposal won’t be very happy trading a stock that costs more than Rs.2000. He will be happier at stocks which cost less. So once you have a basket of the stocks which you can afford on a regular trading basis then simply start saving their intraday as well as eod charts. Do this for a month. And after that just check out how much you know that stock. If you follow a stock for a month you will be able to know the levels of the stock. How it moves on intraday timeframe and how it behaves around crucial levels. This is not an absolute thing and there are surely exceptions. Stocks always break free from all logic and analysis. Nonetheless, knowing your stock allows you to be more efficient with your trading.
INTRADAY TRADING – the basics
Intra-day trading is most exciting and most challenging way of participating in stock market.There are many ways to approach intraday trading,here I am writing the method that suits the best to me.
Each day a stock’s price touches four milestones.They are Open,High,Low,Close.On a normal look they look nothing important but you have to identify which milestone has been touched and which one is left.At open identifying the trend for the day is difficult.If you have some fundamental information on a stock that might help you in identifying the trend early.Normally at the open time it is best to let the stock decide which way it is going to go and then you jump in.Open price should always be seen in the light of previous day’s eod charts.At open a stock will tell you if yesterday’s momentum is carrying on or not.In case it is carrying on yesterday’s trend then HIGH becomes the most important level to be seen in the day.At that price stock will take the next turn.Identifying the high of a day can be done using EOD support and resistance levels.They play a big role because even a day rally is not expected to break crucial support and resistance levels.In case of a continued momentum at open of a stock you can enter a trade simply following what is happening in the market.Your ideal exit will be at the high point or if the momentum is on the downside then LOW price of the day.Both these levels will turn the trend.Suppose you go long in a stock and it is carrying on without too much retracement then your focus should be at the nearest resistance level.Pivots can help in setting up these levels.At the resistance a stock might take a small pause and then continue on its way or change the direction and start going against the running trend.It will be good to book profits at the first support or resistance level and wait for the trend to either continue or change direction.Here two approaches can be used,either you predict the market or simply follow it.I prefer following it.So at these crucial levels book your profit.If current trend is not changing direction then you can again take a similar trade,only this time your loss taking capacity will be increased because of the booked profits.This is good and this will give you confidence too.If market changes direction then also you will find yourself not trapped in a position.You will be free to start a new trade with the new direction.
Booking early profits is good because in a day a stock is least likely to give more than two trends.It will either continue the direction it chose at open or change it at some point of time.So if you get even one side of the day right you will end up in profits.Greed plays a big role than fear here.You feel greedy for a trade that is going right,you feel like keeping it open and making maximum out of it.So drop the greed and accept whatever is given.After getting comfortable with high and low the next thing is close of the day.Sometimes we see that close comes very near to the open price which means that both bulls and bears were equally strong in the day and there is no finite decision taken on stock’s next direction.If it is closing with gains then you have to find out where is the next resistance level on EOD chart.This will help in identifying following day’s trade.When a stock closes below its open price support becomes the next crucial level.Starting a trade at the support or resistance without testing them is dangerous.For example a stock opens high and keep going up and soon reaches a crucial resistance level,you enter a long trade based on its move since the open without letting it test that resistance level then you might be forced to rethink your position.It is better to stay out of the stock at it’s support and resistance level,one should wait and watch how price behaves and then follow it.Sometimes there will be only one major move in a stock right at the open time and then it will move only sideways throughout the day,in these kind of days you should avoid trading that stock because these sideways moves don’t have a direction and they are always confusing.So go on to the next stock which is trending.The sideways move can be called a channel move.For intraday traders these channel moves are not good enough they should look for a trending stock on either direction.Stop loss is a mechanical thing.It takes away your personal feeling for that stock and bring the reality into the picture.Traing intraday without using stop loss is highly risky.But don’t set these stop loss point based on the charts.They should be based on your loss taking capacity.Often a stock’s price moves in a range and if you keep your stop loss very close to that range it might get hit and you will be thrown out of the trade but it doesn’t always mean that your trade was wrong.That stock might continue on the way you thought but you are out because of your stop loss.So chose the stop loss point based on your capital and not on the chart.But never trade without a stop loss in intraday trading.Some traders use margin trading system where they are given leverage by their brokers,remember this leverage is not to serve you but to serve your broker.So don’t over leverage yourself.Often traders convert their intraday margin positions to delivery trades at day end,do this only when you are confident of the trade and when it is in profit.But never ever convert a loss making trade into delivery trade hoping that it will turn positive on following days.
In Intraday trading booking early is the key.Book profits and losses at the earliest.Maximising the profit by booking late when price is at the peak can be done only in positional trading expanding at least a few days.This should not be tried in intraday trading.An Intraday trader should follow the market,should not be greedy,should always trade with stop loss and should always be ready to accept losses and book profits.
Nifty today 16-09-08
Another gap day,but it was opposite to the gap down we had yesterday(15-09-08).Today we saw that gap was fully filled by the end of day.This shows that bulls got into driving seat.Look at the chart of today and you can see that ‘day low’ was formed within the first 10 minutes of the day.The reason behind these kind of gap days is the contradiction between external fundamental news and internal market condition.US market is still going down and thus external news was bad,but our market has been steady for last few days,except when falling US market started affecting us.Nifty is set at a good level from where going down seems a long shot,hence when market reacts to global news and goes down,bulls immediately take control and bring it back up.Some might say that this was short covering rally,but a short covering rally also suggests that bearish phase is over or expected to be over soon.Here one has to have two different point of views,positional trading and intraday trading point of view.For positional traders nifty is still in the dark and there might be some more downside.For intraday traders this was a day when they got long at the begining itself and remained long throughout.
Talking of intraday point of view lets see how the unfolded.Lowest point of the day was 3925 but market jumped back up almost to 4000,there was another fall after that till 3950.This 3950 level was the support yesterday also.Yesterday 3950 was reached after two hours of trading,today it was reached within the first hour itself,second thing to notice is that yesterday pullback started from 3950 and today the first pullback was fro 3925 and then second time it began from 3950 level.It talks about strength of the gap move.In my earlier post on gap days I said beginning of a gap depends on fundamental news but continuation of a gap is highly technical.Today technical showed that gap didn’t have much strength and market pulled back pretty early.On days like these when pull back on gap starts very soon all a trader needs is an entry point,today 3950 was the point from where holding a long call or a short put gave maximum profit.In today’s chart one more technique can be used,its top and bottom analysis.There are four horizontal black lines on chart,they show important bottoms that were formed in the uptrend.Each black line is at a higher point than its previous line.This shows that up-move has strength and it is going to last.A long position holder has nothing to worry.
Yesterday we saw a day when bulls come in very late and even then they don’t have much to gain from and today bulls were in the play from the very beginning till the very end.These bulls and bears are intraday traders.For positional traders too I think today’s chart showed a chance of a short term move to around 4150-4200 in next days.When a gap down move is filled in so effectively it means there is more power in bulls than bears.If there is not a major down-move i US market today then tomorrow we might see a day in green.Nonetheless,the lesson learnt today is about a false gap move,which gave good profit to those who dared go against the initial down-move.
Trading Nifty intraday -15-09-08
Today was the day when a carry forward position on the right side makes most sense.When there is a huge gap move options don’t move,they jump.At the open we were easily more than 100 points down,last friday when nifty closed it took support at 4200 and went marginally up.4200 was a strong support point.Today the gap down move was so strong it easily broke 4100,4050 and to some extent 4000.I was carrying a long put position of 4200 from friday which almost tripled in premium.This is the effect of gap moves on options.They are highly profitable if you catch them in time.I booked profit on 4200 put at around 10.45,it was marginally below 4000 and my view was that 4000 is too strong a support to be broken,especially since it was already too down and soon the move will be exhausted.After I booked it nifty did move upside slowly and went above 4000.This was a confirmation that my first logic was right.But soon there was another opportunity as nifty broke down below 4000.I long a put again but this time it was a small move as it went up from 3950.
Look at the chart attached with the post and you will see that market didn’t even try to break below 3950.This gives two signals.First,the selling side has taken the back seat now and gap move will slow down.Second,buying might come in and there is a good chance for profit in calls.Often it might be a case that selling takes the back seat but there won’t be much buying coming in,in these kind of times market moves sideways only.Today from 3950 it didn’t move sideways it went up.So it was a day when buying takes over as soon as selling rests.Before initiating a long call from 3950 it will be helpful to see if it goes above 4000 too.Because 4000 was a support that was broken it will now serve as a resistance.So the best time to enter a long call trade will be when 4000 is broken in the upmove and it stays above that.Move from 3950 started at 11.50 and confirmation of it came about 1.10 when it stayed comfotably above 4000.One could take a gut shot and go long right at 3950 but going long at 4000 at 1.10 is better because then risks and doubts of a false trade will be less.Market ended happily on an upside note.So a long position at 3950 or 4000 will earn good profit.
These kind of gap days do a lot of damage to the market and sentiments.On eod chart there is no support for the market once it breaks 4000,it will go all the way down to 3800.On the upside both 4100 and 4200 will be resistance.4100 is weaker resistance considering the fact that today market closed very near it and that the final momentum of price was on the upside.But 4200 will need a strong rally.If market doesn’t see a gap up moves it will be hard to break above 4200.A gap up move is highly unlikely given the conditions in USA and the fact that there is good domestic news either.
Today’s gap move is the kind when market reaches an important level and then turns opposite.Today after 3950 it turned on the upside.It gives good opportunities for both calls and puts. If you have a carry forward profiting position then it is advisable to book it as early as possible then wait for some time and see it market has reached its anchor level.If not then you can carry on with the momentum,once the anchor is reached-in today’s case 3950-all you need is one long trade.Today normally there were three very nice and easy trades.
Nifty today – 06-08-08
intraday
This is how the day went.We opened with a 100 points gap up and afterwards its all bear.The jump to touch 4615 was based primarily on external news coming from global markets.They did well so we started well.But that is not a reason to sustain the move.And that is what we saw in later hours of the day.From the beginning to 4550 -almost midday- was a straight move downside.That was the first support price had today.The move from there to touch 4600 again might be a short covering rally.People might have sqaured off their position which gave a short push to reach 4600 again.From there the sharp fall shows the strength of bear.This is the kind of day when calls and puts both lose value.In the list of traded strikes one can see there is not even a single strike that closed higher than its previous close price.This is the effect of volatility.Market moving in both direction leaves doubts on both sides.
End of Day
This is how it looks on EoD chart.I would say its a bearish sign because most of the time bears were in power and buyers couldn’t sustain the opening buying spree.Seeing the day on eod chart tells us that now 4500 is the support for the market when it opens tommorrow.In case 4500 is not broken and market end up even if in a small positive move then there is no stopping it from reaching new highs once 4600 is broken again.Another view might be that market was in the range of 4200-4500 and now that range is broken on the upside there are chances that it might take a dip because the break out might not be a very strong one.One thing to notice is that at these break-outs selling becomes very attractive.This is one of the reason why we saw a sudden sharp move downside because 4600 was a good point to sell.
These kind of days fall hard on both the buyers and sellers.Buyers feel confused because day started with a high note and then there was no upside pressure.The momentum earned in the opening is lost straight aways.Sellers are confused because there is a big move already and no one sure which way it is going.Going short at high levels is good but momentum has to be seen and momentum was in favour of buyers for the first hour.It wasn’t a sell off till 4550.I think this phase should be taken as a retracement.After a big gap open market tries to catch breath and that is when some selling happens.Some traders book profit and then re-enter.This might bring the move down but this is not a reversal.Real reversal came when market touched 4600 second time.That was in second half of the day and from there it was all selling.Market will continue tommorrow with this last momentum.And the last momentum was in favor of sellers.looking at option prices wil give a different picture altogether.Puts and calls both lost value.This indicates the confusion.On the whole this is the type of day when you have to have a carried forward open position on either side.Because then half the task is already done.You don’t have to find an entry point.You have entered already and now exit point is what you look for.Taking a position during the day has to be done with veru very short term view.One should book the profit as soon as possible.At the end of the day it is good not to carry forward a trade which is opened today.Rather close it and start afresh tommorrow.
This,to me, was a day when bears were more powerful than bulls.But one must not discount the fact that 4500 is holding support.On intraday bears ruled,on eod basis bulls are still in charge.
Trading – Gap open days
Markets opens with a gap up or down move very often and mostly intraday traders don’t feel good about it.For cash market traders its good time but for options traders gap open days are probably the most tricky ones.I think gap open moves have to be looked at with only one perspective – see what the sentiment of market is.Last year when our market was running on four cylinders full throttle we saw many gap open days and it kept moving in the same direction where gap began.But this happens when market is decisive.Currently we are not sure whether the bear phase is going on or consolidations is taking place or bulls are gaining power again.This is the time of uncertainty.And that is what makes the gap open days all the more difficult.Forget those bullish days and concentrate on what we have in our hands right now.We don’t know how long this down move will carry on and often there are opposing views on market available causing some more confusion.At this kind of sentiment market it is actually difficult to initiate a trade on a day when it starts with a gap up or down move.
Normally if the news is good from other sources that will make it open gap up and if the sentiment is good about the market then this gap up move will keep going up.So the opening move is caused by some external news and then this move is carried on by general sentiment.When sentiment is bad gap downs will carry on going lower and when sentiment is good gap up days will carry on going higher.When sentiment is gloomy or when its indecisive of the next move then gap open days start moving against the opening move very soon.This is what we have been seeing in last three months.Market gets some news and it opens with a gap move but because of indecisive nature of sentiment there is not enough force to carry the move forward and very soon the gap gets filled in.Trouble for options trader is that before they decide which side to take their positions on there is a change in the market direction which sets options price on a roller coaster .Suppose nifty showed a gap up move of some points and one thinks it is good to get long in call option,but this gap move is not sustainable and it changes direction soon those calls will lose value and they will become a bad trade to initiate.So what seemed good initially had become bad.In the same day at the same time one might not see a good move in puts because market is not sure whether this move will carry on its just reaction selling.So the ultimate scene looks like,after a gap up calls rose and then started falling and puts are falling anyways and the trader has no clues what to do.
Gap open moves can also be seen from demand and supply perspective.Suppose nifty starts with a gap up on Monday and people see it is already facing a big resistance to go higher at that point it looks attractive to sell and less attractive to buy because for every long to become profitable the market needs to carry on with the buying pressure which is already dieing because of the sudden gap up move.At this time because selling looks easier it brings the price down and hence often the gap gets filled.Remember,until a move in underlying is strong enough to sustain itself in future too it will not bring any change in its derivatives.So when there is a sudden rise or fall in index or any stock and it is not good enough you will see no real change in calls or puts values.They move up and down randomly.If one goes with the gap move and gap goes wrong then one will make inevitable losses.But how to chose whether one should go with the gap move or against it?
I prefer looking at few things before initiating a trade on gap open days.First,check out what is causing this gap open move.If the news is coming from a distance source and not directly related to our market then stay away from the move.For example if there is good move seen in foreign indices and our market responds by opening gap up that doesn’t mean things with out markets have changed and now we are going to see a bull trend.Often this kind of news can not maintain a day long buying pressure and soon people start selling.So the cause of the gap open move has to be seen closely.If its far from direct news then gap move is not good enough.Second is Sentiment.There is no measure to check what sentiment is at any point of time.Its more like gut feeling which can not be proven right on logics.So when you see that market is not decisive or in a trending market there is an opposing gap open move stay away from it.Third,when judging these two things don’t give any good signal then go for open interest data on NSE.Look at top five traded contracts.On gap up days calls must be highest traded and on gap down days puts must rule If you see any different scene than this then hold your trades.If there is a striking increase in puts open interest and they also range highly in top traded contracts in a gap up day,it means there is enough moment against the market and majority is expecting a down move now.Similarly if on gap down days you don’t see puts rising in open interest and being top traded this also means that majority is waiting for an upmove from here.These signals might be wrong too but it pays to hold the trade until there is no fog left.No hurry.Check out the source of news,sentiment and then confirmation from open interest data and if they are moving hand in hand then you should hold your hands.
Often I have seen that gap open days actually rob people of their money because we blindly jump in for further move in the same direction.This can be done so but only in very one sided markets.If there is bearishness prevailing all over then you should blindly follow the gap down days and vice versa for bullish times.But when its indecisive like at present you should move slow and if possible don’t trade at all.i advice avoiding gap open days for intraday trading.If at all one has to trade one should wait for atleast two hours after the trade and then move with market.
Intraday trading – Line chart Vs Candlestick
Line charts and candles are two most oftenly used charts by almost all types of traders.I have been using both and with around more than two year’s experience now I can write down difference in their usages for different types of trading.Present is the time for short term trading in nifty futures and options.One can not take a long term view and go ahead with it because the volatility and uncertainty of the market will eat up whatever options offer in long term view.So I will first talk about intraday trading in NSE.
Line charts show you only one thing,the closing price.Of course one can adjust and see other prices too but closing price is the best.In intraday trading a trader needs to catch the trend before it turns.Catching a turning trend is swing trading which is not very profitable in intraday time frame.An intraday trader will need the best chart to see where price is heading.If one uses candles for intraday one can chose the refresh time for those candles.Often people use 3minutes,5minutes and sometimes even 10minutes candles.Choosing 15minutes or longer candles will not give many signals and their interpretations are bound to be too delayed.The trouble with candles in intraday is that they show too much information in needless ways.There will be open,high,low and close in each candle.One only needs to know the latest price and not the other three.If one uses line charts one will only see the latest price in a single line.Interpreting a line chart is much easier than candles.See an intraday candle chart and a line chart for the same stock and you will find that there are too many candles in the same chart and often you will be stuck with patterns being formed by those charts.
Candles help in interpreting when you have more time to stay in a trade.Their patterns are good only when they stand a test of time and this is exactly what they don’t qualify in intraday trading.You only have few opportunities to start a trade and exit with a profit so you need a chart that gives you quick information.Candles have patterns and interpretation is based on these patterns but in intraday charts there are simply too many patterns.You have to discount high low and open price of a candle.If at all one wants to use the candle one can do so by using more than 15 minutes candle and trade within the time frame of one candle.Which means your trade starts when a fresh candle begins and as this candles completes its shape you will come out of the trade.This is too much of trading,not highly profitable.
Rather try to catch the trend.In options trading one can see that cash market and derivatives markets are not always related.Sometimes there is a move in cash market and you can see derivatives not moving an inch or even moving in the opposite direction to where they should have gone.This is why swing trading within intraday time frame is very risky.Not every swing will give options a perfect effect.Try using line charts with trendlines.Trendlines are also very easy to draw and interpret and often they are very accurate.Also line charts show the latest price faster than candles.And it is easily predictable too.For options traders it is of utmost importance to be able to catch the latest trend of price and in doing so nothing is as useful as line charts.Don’t rely too much on standard formations,rather follow the latest line and move with it.At best use trendlines and before using them make sure you study all things about trendlines.
Candles,however,are not simply useless.They are the best charts for medium and long term investments or day trading and swing trading.For this kind of trading one needs to know all levels of price – open,high,low and close.Line chart will only give you close price and based on this one figure good decision can’t be taken in long term.Often you will see a sudden move in price in a day,while this move is useful for intraday trading it doesn’t hold that much importance in long term trading or investment.Any move has to be substantiated by good volume too.Candles will show you these sudden moves of the price in EOD charts and you have to make sure you study them well in comparison with the overall view of the day price range.Candles have better and more true patterns in EOD charts.There you can test them with the time factor too.And standard formations yield better results.
The bottom line is – if you are an intraday trader chose line charts and if you are longer term trader (longer than intrday) then chose candlestick charts.
I WRITE 