Trade for the Week - Analysis

A recap of today's market movement in our trades.

It was really good day for us and both the contracts are almost 50% up from the point of our entry. At this time it will be difficult to resist the temptation and take home some profits.

My entry point was 55 and a gain of 50% minimum is what I look forward to. 50% of 55 is 27.5 and hence my first target was (55+27.5) 82.5 which was achieved today. I sold part of the position to book the profit partially. Accordingly I reduced hedge position also. This kitty already is in the bank and gives me good leverage cushion for the remaining position. I can be more aggressive with the stop-loss and wait longer for next target... correct?

No, I do not work it that way. I will, on the contrary, move my stop-loss closer to the present price so that my already booked gains are not wiped clear by remaining position. I will rather book a modest profit in the remaining position... close this trade completely and move on to next trade. Old adage is let your winning horse run and cut the losses in other cases cannot be more true.

One more thing is I would have been happy to close the trade completely today itself and have fun for the rest of the week . This would have been completely acceptable if our target was 50% as usually the case with me. However this target cannot be a rigid thing and you have to adjust your expectations dynamically. Looking at the events in Europe where Italy is trying hard to join the party with Greece... things can get extremely messy. Present stress in the market due to Greece would feel like a bruise against a full body fracture that Italy can induce across the world markets. Hence stayed on the short side (with hedge off course... you can never be sure). However the trend is clearly downward. Have a look.

As of now US Markets are down (more than 2%)  in line with Europe and that bodes well for our trade. The chances of them coming back to positive territory are not very bright but respect your stops and targets. I will book full profits if 5200 PUT reaches 100 tomorrow.

Happy Trading.

Trade for the Week - Analysis

A recap of the day for underlying of our interest;

NIFTY was moving to our advantage until European Markets opened and then we got back into positive territory. I got into NIFTY 5200 PUT at around 55 price in the morning. Did not square off during lunch time and could not create a full hedge also in the late afternoon. I created partial hedge not because I did not get time but because I was not convinced about European Market move (You are advised not to have such single sided position till you get enough confidence and your risk capital is high).

I got two interesting e-mails about today and we will discuss that here.

First, regarding stop-loss of 5360. Query was if NIFTY reaches this level; then PUT Option of 5200 would be almost worthless and 5300 would be less than half of original Premium... So isn't the stop-loss too far away?

Here my logic is... Option trading is not like intra-day where you have to square it off on the same day. In such case you do not have time for Index to recover (or correct) in the direction you want. However in case of Options, you get some time (in days) for such move and hence if you keep stop-loss very close then there are chances that one day or even couple of hours of adverse move will trigger it and you end up squaring off at the wrong time.

Hence going by the chart in previous post, 5360 is the level indicated by trend line and also somewhat closer to 200d EMA and unless NIFTY decisively crosses them, these levels are expected to hold.

Second e-mail which I received this evening is regarding squaring off of the trade today itself. One of you bought NIFTY 5200 Put at 56 and squared off at 68 making a neat 20% profit in one day. Now this is something very good... isn't it?

No, it is not. If you ask me I will say that Option trading is a risky business and hence accordingly your reward should be higher. 20% profit in one above lot is a sum of 600 Rs and you need to look at the profit in absolute terms as well. Since your stop-loss was almost 80 NIFTY points away (where you would have risked loosing something like 1500-2000 Rs of your original 2800 Rs Premium) your target reward should have been attractive enough for this kind of risk.

Now I am not totally against booking a small profit initially and gaining confidence. However, as we move along it is important that we keep above logic in mind and decide our targets accordingly.

US Markets are showing marginal negative move as of this moment and I will say that Fundamentals of our Technical trade is still intact. More tomorrow.

Happy Trading.

Trade for the Week

As I am writing this, US markets (DJIA and S&P500) are around 0.7 to 0.8 percent down. Any drastic changes in this scenario by closing time... changes the trades below. As for tomorrow and the week I expect the market to have negative bias with many key events like Europe Meetings, Italy Vote and US Consumer Data coming in at crucial times.

Markets are already touching the upper trend line as can be seen above and the chances of a breakout from this trend line tomorrow are very rare. So in a negative downtrend what you do is simple... you buy a Put Option. As per Friday's closing prices a NIFTY Put Option with expiry of 24 Nov with Strike of 5300 (In the Money) is approximately 95 Rs and Strike 5200 (Out of Money) is roughly 59 Rs.

You can decide to buy any of this Strike. Stop loss should be at the trend line which is roughly 5360 and you can book your profits at first target (Support) of 5200 (it is possible in intra-day also). If your risk appetite is high you can continue to hold the position and take a call depending on how Europe Markets move in the afternoon.

If you decide to hold the position overnight, do not forget to create a hedge by buying a Call Option at the same Strike (Straddle) or a Strike which is Out of Money and Premium is less (Strangle). This is advisable even if you think that the risk is minimum and you can live without a hedge... it gives you peace of mind and that is something Master Card cannot buy. It is priceless.