Option Trading - Basics and Strategies

What is an Option in Stock Market?

Option is a financial instrument or security, which is used for hedging or mitigating the risk involved in investment activities in financial markets.

Basically option is a derivative product. In simple terms it is contract between two parties to exchange an asset, in future date at predefined price and quantity by collection of upfront token amount or premium

Example:  Mr. X approaches "Y" to buy a mobile at Rs. 10,000 after a month. So Mr."X" pays a token amount or premium Rs. 100 so that whatever the price of option after a month, Mr."Y" is obliged to sell the mobile at Rs. 10,000 to Mr.X.

Generally retail investors use options for trading purpose and Financial institutes use them for hedging purpose. These are high risky products, option buyers have highest chance of loosing money than option shorter(Sellers).

One should definitely understand that Futures and Options are not Investment or trading products they are hedging instruments. Understand the risk involved in trading futures and options before you transact. 

Option Basics:

Strike Price: - The stated price per share for which underlying stock may be purchased (for a call) or sold (for a put) by option holder upon exercise of the option contract.

There are three types of strike price:

1.       In the money, ITM: It is an option that would lead to positive cash flows to the holder if it was exercised immediately. A call option is ITM when spot price is greater than strike price. If the difference is huge it is called deep in the money

2.      At the money, ATM: It will lead to zero cash flow if exercised immediately. Option is at the money if strike price is equal to spot price.

3.      Out the money, OTM: It will lead no cash flow if exercised immediately. In case of call option if strike price is greater than spot price than it is OTM. Whereas in case of put option if strike price is less than spot price it is OTM

Contract Expiration Date: - The date on which option contract expires is expiration date or the maturity date. It is the last day on which option can be exercised. Active Options normally have a monthly or quarterly expiration cycle.

Option Price/Premium: - Option price is the price, which the option buyer pays to the option seller. It is also referred to as option premium. The premium depends on various factors like Strike price, Stock price, Expiration date, Volatility, Interest rate. The buyer pays premium to seller, seller has the obligation to fulfil the option terms when assigned to him.

Types of options

     1. Call Options: Buyer has the right but not the obligation to buy the underlying stock

      2. Put Options: Buyer has the right but not the obligation to sell the underlying stock

Different styles of options

1. European Style – Can be exercised only on a expiry date
2. American Style – Can be exercised any time prior to expiry date
3. Exotic – Bermudan, Asian, Binary, Barrier etc. The exoticness of the Option can depend on price or time. 

Watch our YouTube videos at https://www.youtube.com/c/MarketSecrets to learn how to trade options.

Link to download the PPT used in the option training video in our YouTube channel.

https://drive.google.com/open?id=1keomuCuIw4LIeTLZQaj8RWxShWNDXeKd

Need help in becoming a professional and an independent trader? Then, Contact us at https://t.me/MarketSecretsTeam through telegram or Email us at marketsecretsrevealed@gmail.com

Trading Management Tracker

What is the significance of Money Management in Intraday Trading (Day Trading)

Day trading as a business can be very profitable. It is probably the safest form of investing, as you are focusing on a small number of positions, you are not holding any positions overnight and you are able to enter and exit trades with pinpoint accuracy. However, many day traders find themselves losing due to poor day trading money management.

How Much Should You Risk? 

The size of your trading position, is in direct proportion to the value of your portfolio. The key to day trading success is to avoid big losers. To avoid this, you should only risk a total of 1% of your portfolio on any one trade.The minute you see that the trade is wrong, get out with small hit. Because in the end, the goal here is to see a small number of .25% or .5% losses, while your winners are in the range of 1%-3%. This is how you will win the game. Again, the 1% stop loss is for the unexpected sharp counter move, and it is not your goal to have this stop hit. You should know well before your stop is hit if you are in a bad trade.

Futures & Loans: 

Always trade in Cash, never touch Stock Futuores or Stock Options just because leverage is high or margin is low. You should master cash trading first before taking the next step.

Don't every use the emergency, investment or retirement funds for trading. Also, don't ever take loan or borrow money for trading. Traders that operate with a positive cash flow and utilize day trading money management rules, have a much higher success rate than traders that start out in the red.

Trade Log: 

Keep log of all your trades and review them periodically, which will help you avoid repeating bad trades and successfully repeat winning trades. Use our "Trading Management Tracker" for this purpose.

Positional Sizing:

This is the most important aspect when it comes to trading. We have written a separate article on this. Go through it here - Importance of Positional Sizing - https://marketsecretsrevealedforyou.blogspot.com//2018/01/positional-size-calculator.html

Take Away:

1. Money Management is considered the most important aspect when day trading.
2. If you do not implement a money management technique when trading, you will inevitably lose your money.
3. Your 1% stop loss is not meant to be hit! It is there to protect you from huge price moves.
4. Attempt to close all your losing trades before the stop loss is triggered if anything feels out of place.

Please download the Trading Management Tracker using the below link:
https://drive.google.com/open?id=1bsYOVpUxlIjN9W07-aU0chjfAGncfdx1

Need help in building an End-to-End Trading set-up? Then, Contact us https://t.me/MarketSecretsTeam through telegram or Email us at marketsecretsrevealed@gmail.com

Positional Trading Strategy using 52 Week High & Low

Positional Trading – Basics:

Positional trading is that trading style, where you are ready to carry positions as long as the trade demands for one or more days, weeks or months. The time frame is your choice for positional trading.

• A short term positional trader may carry positions for just a few days.
• A long term positional trader may carry positions for days, weeks or months.

Then, what’s the difference between positional and intraday trading?

The trading method that you use could be the same. What changes is the working capital and the risk capacity. These are generally much higher.

Thus for a basic positional trade you probably will need 50% or more working capital as margin to carry futures contracts overnight - check with your broker on specifics. That’s the first major difference.

As the positional trading ranges are much larger than the daily ranges, the stop loss risks can (though not necessarily always) higher than intraday risks. While you may use 15-20 point stop loss limits for Futures in intraday trades, you will use a stop loss of 15-50 points in short term positional trading and 40-150 or more points stop loss levels in long term positional trades.

As you can see, that the risk increases from that of intraday trades, but not necessarily above your affordability, as the risk remains unchanged during any trade, and you don’t multiply it because of additional trades as in intraday trades, as positional trades run for longer periods typically. So while you may have 15 trades in intraday trading in a week, you may have just 2-5 short term positional trades in the same period. Based on the stop loss levels, you can see, that the overall risk tolerance is probably the same and may even be lower in positional trades as compared to intraday trades. Positional trades may require lower risk tolerance as compared to intraday trades.

However, there is one major risk that gets introduced. That’s of gap up and gap down openings every day. That may seem significant and may upset the equation significantly. Well, the answer is no. Because gaps tend to follow the underlying trend about 70% of the time.

We have a simple but powerful Positional Trading Strategy for you using 52 Week High & Low data.

52 Week High Strategy For Positional Trading:

1. Find the scripts which hit 52 Week High today
2. Filter the ones which closed 1% below the 52 Week High (Fallen after making new 52 Week High)
3. These stocks are good positional shorts
4. Entry – Next day opening price (or) Enter when the stock reach back to 52 Week High
5. SL - 1% from previous day’s High
6. Target – 3-5% from entry, book as per comfort, 
7. Close the position if Target or SL is not reached even after 8 trading days

52 Week Low Strategy For Positional Trading:

1. Find the scripts which hit 52 Week Low today
2. Filter the ones which closed 1% above the 52 Week Low (Bounced after making new 52 Week Low)
3. These stocks are good positional longs
4. Entry – Next day opening price (or) Enter when the stock reach back to 52 Week Low
5. SL - 1% from previous day’s Low
6. Target – 3-5% from entry, book as per comfort, 
7. Close the position if Target or SL is not reached even after 8 trading days

Steps – Needs to be done everyday evening:

1) Go to NSE India site: Link: https://www.nseindia.com/live_market/dynaContent/live_watch/equities_stock_watch.htm
2) Select “FNO Stocks” from the dropdown & Download the data
3) Download the filtering tool from the link and copy the downloaded data to the tool.
Link: https://drive.google.com/open?id=1S0Ms5g1I-yKmp3t4I66p_ceyogLuQi-S

Updated link - contains separate sheets for 52 Week High & Low:
https://drive.google.com/open?id=1iMEMmBPDN0Rfvr8pHu_aw6LWgViS-Ujq

4) That’s all, You are set for tomorrow with the list of stocks for both Shorts/Longs positionally.!


Happy with the set-up? Still need help in building an End-to-End Trading set-up? Then, Contact us https://t.me/MarketSecretsTeam through telegram or Email us at marketsecretsrevealed@gmail.com

Intraday Trading Strategy using 52 Week High & Low

What is Intraday Trading?

Intraday trading is simply the trading style where you open trading positions after the markets open in the morning of any trading day and close them before the end of the day. In 24 hours markets, you simply close positions at the end of your trading day.

By definition, the price action in an intraday trade will be a fraction of the daily average traded range. Therefore, if the daily range is 100 points, your trades may target 20/30/50 points for example. In a positional trade, the ranges are relative to the period of interest and will be multiples of these numbers.

In daily trades, most brokers/markets permit trading with smaller exposure and higher leverage. So while trading a futures contract in an overnight trade, if you need a margin of Rs 1 Lakh, for intraday trading, the margin is around Rs 40000 or about 50-75% lower. Depending on your broker’s policies, you may be required to close all your intraday positions about 15 minutes to 30 minutes before the market close or they are auto closed. This may or may not cause a problem, based on your trading method.

The more important point to be noted though is that the working capital needed for intraday trades is generally much lower than for positional trades.

The second aspect is to consider the relative volatility of price moves. Just as you move from 1 minute to 5 minute to 15 minute or hourly charts, the intraday price movement gets "damped", the time frame that you choose to trade in becomes important. Many experts suggest combining a look forward and look back approach. Which means if you trade 5 minute charts, you may get the first signs of a new trade on a 1 minute chart and use that for entry of the trade. In the same way, the bigger picture in the 15 minute and hourly charts tells you the general market sentiment - bullish and bearish and the likelihood of the trade to continue in your chosen trade direction. A long trade in a bearish market would be the territory of a scalp trader or an aggressive trader expecting a reversal, but a high risk trade in any case. Likewise a long trade in a bullish sentiment in higher time frames is a safer trade.

Probably, the most important factor that will determine your trading choice, is the amount of time you have to trade in a day. If you are a full time trader and have a trading method that works in intraday time frames, you could consider intraday trading AFTER evaluating the risks.

What are the risks that we are talking about? 

In intraday trades for Nifty futures, for a target of 25 points, if we setup stop losses of 15 points (say) and expect to trade 3-4 times in a day. Your maximum risk is 15 x 4 = 60 points or 60 x 50 units per Nifty lot = Rs 3000 per lot. Is that affordable for you? The same risk for one lot mini nifty with 20 units = 60 x 20 = Rs 1200 per lot. Assuming that you will do 15 trades in a week with a 60% success rate or 6 losing trades, or 90 points or Rs 90 x 50 = Rs 4500 for Nifty futures. Do these numbers fall in the range of your trading risk tolerance? Multiply these numbers with number of lots (contracts) that you intend to trade per trade and you get your total risk exposure. For 2 lots its Rs 9000 for Nifty futures.

If the answers are yes, then you can consider intraday trading.

We are only evaluating, whether you should trade intraday or not. But when you should stop trading, if you are making losses. That should be handled as part of your risk management Strategy.

Next step, what will it take to succeed in intraday trading? You need a trading method which will generate better than 50% successful trades so that you have the hope of making money. Combine this with the approach to treating trading as another business or profession, and you are ready to go!

We have a simple but powerful Intraday Trading Strategy for you using 52 Week High & Low data.

52 Week High Strategy For Intraday Trading:

1. Find the scripts which hit 52 Week High today
2. Filter the ones which closed 1% below the 52 Week High (Fallen after making new 52 Week High)
3. These stocks are good positional shorts, but can be used for Intraday trading on next day as well.
4. Entry – Next day opening price (or) Enter when the stock reach back to 52 Week High
5. SL - 1% from previous day’s High
6. Target - 1-3% from entry, book as per comfort

52 Week Low Strategy For Intraday Trading:

1. Find the scripts which hit 52 Week Low today
2. Filter the ones which closed 1% above the 52 Week Low (Bounced after making new 52 Week Low)
3. These stocks are good positional longs, but can be used for Intraday trading on next day as well.
4. Entry – Next day opening price (or) Enter when the stock reach back to 52 Week Low
5. SL - 1% from previous day’s Low
6. Target - 1-3% from entry, book as per comfort

Steps – Needs to be done everyday evening:

1) Go to NSE India site:
Link: https://www.nseindia.com/live_market/dynaContent/live_watch/equities_stock_watch.htm
2) Select “FNO Stocks” from the dropdown & Download the data
3) Download the filtering tool from the link and copy the downloaded data to the tool.
Link: https://drive.google.com/open?id=1S0Ms5g1I-yKmp3t4I66p_ceyogLuQi-S

Updated link - contains separate sheets for 52 Week High & Low:
https://drive.google.com/open?id=1iMEMmBPDN0Rfvr8pHu_aw6LWgViS-Ujq

4) That’s all, You are set for tomorrow with the list of stocks for both Shorts/Longs.!


Happy with the set-up? Still need help in building an End-to-End Trading set-up? Then, Contact us through telegram at https://t.me/MarketSecretsTeam through telegram or Email us at marketsecretsrevealed@gmail.com

Importance of Positional Sizing

What is Positional Sizing?

Position sizing forms the corner stone of a trading system. A crucial element of trading success is taking the proper position size on each trade. Position size is how many shares you take on a stock trade, how many contracts you take on a futures trade, or how many lots you trade in the forex market. Position size is not randomly chosen, nor based on how convinced you are a trade will work out. Rather, position size is determined by a simple mathematical formula which helps control risk and maximize returns on the risk taken.

Traders frequently take a random position size. They may take more if they feel "really sure" about a trade, or they may take less if they feel a little leery. These are not valid ways to determine position size. A trader should also not take a set position size for all circumstances, regardless of how the trade sets up, and this style of trading will likely lead to underperformance over the long run.

Traders with small accounts have a tendency to take larger bets, which they need to avoid. Once there is big dent to the capital, the recovery of capital is much more difficult task than one can imagine. Your position size, or trade size, is more important than your entry and exit when day trading stocks. You can have the best strategy in the world, but if your trade size is too big or small you'll either take on too much or too little risk. The former scenario is more of a concern, as risking too much can evaporate a trading account quickly.

Trader’s account size and risk tolerance should be taken into account when determining appropriate position sizing. Your risk is broken down into two parts--trade risk and account risk.

There are multiple ways to decide positional sizing, I generally follow the approach based on fixed sizing for each trade.

Download the positional sizing calculator using the below link if you already don't have one.
Download Positional Sizing Calculator

Thanks.