Nifty November Range

This is NIFTY range for November series.
Huge open interest is active on both these levels. On anticipation of rate cut, Nifty is riding a strong wave and it conquered both 8200 and 8300 in a single session!!

Now, as more bears are adding weight to Nifty and bank Nifty, by end of month when these Bears will cover their shorts, Nifty will fire again!!

As of now, if RBI does not cut rates (even when Mr. Arun Jaitley has shown inclination for it) then Nifty will crack open to 8100 too swiftly. Else with rate cut on!! we will see maximum 150 points from here as this news is factored in 8300 levels.

Strategy: Buy few lots of Nifty 8100Put at 8320 and few at 8440 (if it comes)
then exit these options at decent profit levels of 8145-8120.
Once market reaches 8120, I will analyse charts and market scenario to comment on new strategy!.

It was observed that with Nifty moving from 8160 to 8330, Banks and majority participants (8000 to 8150) looked tired. So the fall will be swift enough. Only to resume it's journey to get aligned on the major trend!!

November Series trades - Chapter 2

Trading Ideas for November 1st week

Strategy 1 : When Nifty is around 8180-8210, buy Nifty Nov 8100 PE.

Strategy 2 : When Nifty is around 8090-8100, buy Nifty Nov 8400 CE.

Tip: Buy Maximum 100 quantity (4lots only). Aim for maximum 70% returns. Book half of your holdings when you get 50% returns on invested capital.

Risk analysis: If nifty closes below 8050 for 2 days then doors for 7700 will be open. If 8080 is protected, then doors for 8280-8370 will be opened.

Buy Call options close to 8100-8080 and Put near 8200 levels.

November Series Trades - Chapter1

In November series the lot size Nifty's and Stock's contracts is going to change as follows:

So when the market opens on Fri, 31st if you held 1000 of Nov TataMot (1 lot) from 30th, it will still be 1000 of Nov TataMot but 2 lots of 500. Margin again will drop proportionately.

This decreased lot size will reduce the margin required and make the entry barrier lower for those retail traders who earlier couldn’t participate in F&O due to higher margin requirements. The increased participation should help in better price discovery and also improve the market depth.

Other stock's Lot sizes remain same.

Part 2: Trading in F&O - the high risk and high reward equation!

Basics of Options trading:

1.       Trading cycle and Lot size remains same in options.

2.       The major difference in margin required and intrinsic time value.

3.       The Purchasing a futures contract requires an up front margin and normally involves a larger outflow of cash than in the case of Options, which require only the payment of premium.

4.       A futures contract carries unlimited profit and loss potential whereas the buyer of a Call or Put Option's loss is limited but the profit potential is unlimited.

5.       Futures are a favourite with speculators and arbitrageurs whereas Options are widely used by hedger.

Examples:

NIFTY 30Oct2014 CE 8000.00

34.65

Here, We are considering Nifty CALL option of October month of Strike price 8000. The spot being at 7991.35 (27^th Oct 2014). The Value of this CALL option of 8000 is trading at 34.65. So at 50 Lot size (fixed) the cost to purchase is 50X Rs.34.65 = Rs.1,732.5 (Brokerages + Taxes extra)

NIFTY 30Oct2014 PE 7700.00

1.65

Here, We are considering Nifty  PUT option of October month of Strike price 7700. The spot being at 7991.35 (27^th Oct 2014). The Value of this PUT option of 7700 is trading at 01.65. So at 50 Lot size (fixed) the cost to purchase is 50 X Rs.1.65 = Rs.82.5 (Brokerages + Taxes extra)

JSWSTEEL 30Oct2014 CE 1300.00

2.35

Here, We are considering JSWSTEEL CALL option of October month of Strike price 1300. The spot being at 1233 (27^th Oct 2014). The Value of this CALL option of 1300 is trading at 2.35. So at 250 Lot size (fixed) the cost to purchase is 250 X Rs.2.35 = Rs.587 (Brokerages + Taxes extra)

JSWSTEEL 30Oct2014 PE 1200.00

7.25

Here, We are considering JSWSTEEL  PUT option of October month of Strike price 1200. The spot being at 1233 (27^th Oct 2014). The Value of this PUT option of 1200 is trading at 7.25 So at 250 Lot size (fixed) the cost to purchase is 250 X Rs.1.65 = Rs.1812 (Brokerages + Taxes extra)

6.       You may observe that, owning a options trade costs very less compared to a futures trade.

7.       The max risk is your capital will become zero! While profit is unlimited!

8.       The percentage gain in options trade can be 0.1% to 1000% or even 10,000% in a day!

 Example on 27^th Oct, Put option of DLF of 100 strike price 

DLF 30Oct2014 PE 100.00

1.25 up by 0.55 (+78.57%)

9.       The brokerages on options trade is fixed per lot. Usually Rs.50.

10.   Thus, when you a buy a Nifty Call or Put option, your break even point (after which your profit starts) is Cost Rs.50 divided by lot size viz 50 = Rs.1. So If you buy an option at Rs.20, then as soon as it becomes Rs.21 and above, your profit starts J

11.   Thus, for higher lot size of stocks your break even point is closer. Example for JSWSTEEl, your break even point (after which your profit starts) is Cost Rs.50 divided by lot size viz 250 = Rs.0.2. So If you buy an option at Rs.20, then as soon as it becomes Rs.20.20 and above, your profit starts J

12.    The major risk in options trading is time decay!! It means when the expiry date comes closer (last Thursday of month) the value of Option (call & put both) reduce. This reduction in value is seen every day around 12pm and in last week its highly significant.

13.   Hence it is wise to sell off the Options trade position in a day or two.

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Trading in F&O - the high risk and high reward equation!

Trading in F&O is a ‘calculated risk’ game.

In this segment, a higher degree of conviction, discipline and tolerance level is required. Oh yes, the EGO should be limited too.

Basics of Futures trading:

1.     In futures the lot size of stocks and index is fixed, so you buy in LOTS.  Link to Lot size and day wise Margin

2.    The capital requirement varies from stock to stock but a healthy balance of Rs.1Lk at the least should be set aside for trading in one lot! This lot should of Rs. 30,000 to Rs.60,000 cost.

3.    This difference of 40,000 or so will act as cushion when traded contract price falls against your expectation.

4.   Trading cycle: Futures contracts have a maximum of 3-month trading cycle - the near month (one), the next month (two) and the far month (three). New contracts are introduced on the trading day following the expiry of the near month contracts. The new contracts are introduced for a three month duration. This way, at any point in time, there will be 3 contracts available for trading in the market (for each security) i.e., one near month, one mid month and one far month duration respectively.

5.   Expiry day: Futures contracts expire on the last Thursday of the expiry month. If the last Thursday is a trading holiday, the contracts expire on the previous trading day.

6.    The contract of future looks as follows

a                   a) JSWSTEEL 30Oct2014 which means, the future of stock “JSWSTEEL” will be valid till 30th Oct 2014.

b)  NIFTY 27Nov2014 which means, the future of index “NIFTY” will be valid till 27th Nov 2014.

7.    On the last day of expiry, we should “SQUARE-OFF” (sell) our positions.

8.    The position can be created in two forms viz LONG when you assume that the price will rise from current levels and SHORT when you assume that the price will fall from current levels.

9.    The current market price is known as the SPOT Price. The future price when trades above the spot level, we say “the future is trading at ** points premium to spot”. And when the future price trades lower than the spot price, we say “the future is trading at ** points discount to spot”.

10.The overall number of positions in the particular scrip (Index or stock) is called as Open interest.

11.When open interest increases to a significantly high level (80%-90%) SEBI puts a ban on trading on that scrip. Usually, HDIL easily attracts Ban level. In such case, buying is prohibited and attracts fine in addition to brokerages and taxes.

12.The changes in open interest can be read in following manner:

a.       Increase in open interest and Increase in future’s price = Long positions created.

(Bullish scenario)

b.      Increase in open interest and Decrease in future’s price = Short positions created.

(Bearish scenario)

c.       Decrease in open interest and decrease in future’s price = Long positions squared off. (Bearish scenario)

d.      Decrease in open interest and Increase in future’s price = Short positions squared off. (Bullish scenario)

    13.   For example, if trader A buys 10 futures contracts from trader B, then open interest is 10. If another trader X buys 20 futures from trader Y, then the open interest accordingly adds to 30.
But, if A unwinds his position of 10 futures, then open interest will decrease by 10, because these contracts cease to exist. Instead, if A sells these to another trader C, then the open interest remains unchanged since it is C who holds the contracts now 

Price	Open Interest	Interpretation
Rising	Rising	Market is Strong
Rising	Falling	Market is Weakening
Falling	Rising	Market is Weak
Falling	Falling	Market is Strengthening

  

      14.   Increasing open interest means that new money is flowing into the marketplace. The result will be that the present trend (up, down or sideways) will continue. 

Declining open interest means that the market is liquidating and implies that the prevailing price trend is coming to an end. A knowledge of open interest can prove useful toward the end of major market moves.
A leveling off of open interest following a sustained price advance is often an early warning of the end to an up-trending or bull market.

   15.   There are various strategies in trading in Futures segment. Which will be covered later.