IITian Trader Presents OPTION TRADING HA RETA) i. ‘i Me A ~h Saurabh Maurya IIT-BHUContent 1) What is Stock Market? 2) How to Buy & Sell Stocks? 3) What is F & O? 4) Technical Analysis 5) Candlestick Pattern 6) Famous Chart Patterns 7) Options 8) Why Trade Option? 9) Day Trading vs Swing Trading 10) Scalping 11) Retail vs Institutional Traders 12) Risk Management 13) Trading Psychology 14) How to build your Trading watchlist 15) F & O trading strategy 16) Trade Management based on price action 12 15 16 30 37 40 43 45 48 53 57 63 8317) Trading Indicators 18) India Vix 19) Develop Trading skills, Not strategy 20) Don't change a day trade to a swing trade 21) Building a trading journal 22) How to recover when trade goes against you 23) Importance of Investing 24) Fil / Dil 25) Trading Strategies 26) Conclusion 87 97 100 104 106 m ng 121 125 1381. What is Stock Market? The stock market refers to public markets that exist for issuing, buying, and selling of stocks that trade on a stock exchange or over-the-counter. Stocks, also known as_ equities, represent fractional ownership in a company, asset, or security, and so the stock market is a place where investors can buy and sell ownership of such investable assets. An efficiently functioning stock market is critical to economic development, as it gives companies the ability to quickly access capital from the public. IITIAN Trader by Saurabh Maurya 42. How to Buy & Sell Stocks? To buy stocks, you'll typically need the assistance of a stockbroker, since you cannot simply call up a stock exchange and ask to buy stocks directly. When you use a stockbroker, whether a human being or an online platform, you can choose the investment that you wish to buy or sell and how the trade should be handled. ib IITIAN Trader by Saurabh Maurya 53. What is F & O? Future and Option are two derivative instruments where the traders buy or sell an underlying asset at a pre-determined price. The trader makes profit if the price rises in case, he has a buy position and if he has a sell position, fall in price is beneficial for him. Options are a derivative form of investment. They may be offers to buy or to sell shares but don't represent actual ownership of the underlying investments until the agreement is finalized. The date specified in the options contract is known as the expiration date, the exercise date, the strike date or the maturity. Options can be of two types: 1) A call option allows you to buy the underlying asset at an agreed-upon price at a specific date. 2)A put option allows you to sell the asset at a specified price on a specific date. IITIAN Trader by Saurabh Maurya 6Types of option contracts: e US Option contracts: US options can be exercised at any point of time prior to the expiration date. ¢ European Option contracts: European options can be exercised only on the expiration date. IITIAN Trader by Saurabh Maurya 7Assume a stock is trading at Rs.67/- today. You are given a right today to buy the same one month later, at say Rs. 75/-, but only if the share price on that day is more than Rs. 75, would you buy it? Obviously you would, as this means to say that after 1 month even if the share is trading at 85, you can still get to buy it at Rs.75! In order to get this right you are required to pay a small amount today, say Rs.5.0/-. If the share price moves above Rs. 75, you can exercise your right and buy the shares at Rs. 75/-. If the share price stays at or below Rs. 75/- you do not exercise your right and you do not need to buy the shares. All you lose is Rs. 5/- in this case. An arrangement of this sort is called Option Contract, a ‘Call Option’ to be precise. IITIAN Trader by Saurabh Maurya 8After you get into this agreement, there are only three possibilities that can occur. And they are: ¢ The stock price can go up, say Rs.85/- ¢ The stock price can go down, say Rs.65/- ¢ The stock price can stay at Rs.75/- Case 1 - If the stock price goes up, then it would make sense in exercising your right and buy the stock at Rs.75/-. The P&L would look like this — Price at which stock is bought = Rs.75 Premium paid =Rs. 5 Expense incurred = Rs.80 Current Market Price = Rs.85 Profit = 85 — 80 = Rs.5/- Case 2 - If the stock price goes down to say Rs.65/- obviously it does not makes sense to buy it at Rs.75/- as effectively you would spending Rs.80/- (75+5) for a stock that’s available at Rs.65/- in the open market. Case 3 - Likewise if the stock stays flat at Rs.75/- it simply means you are spending Rs.80/- to buy a stock which is available at Rs.75/-, hence you would not invoke your right to buy the stock at Rs.75/-. IITIAN Trader by Saurabh Maurya 9A futures contract is the obligation to sell or buy an asset at a later date at an agreed-upon price. Futures contracts are a true hedge investment and are most understandable when considered in terms of commodities like corn or oil. IITIAN Trader by Saurabh Maurya 10Futures are fundamentally uniform with the same set of rules for buyers and sellers. For example, if someone wants to buy a September crude oil futures contract. So they make a futures contract that they will buy 200 barrels of oil from the agreed price as of September expiration whatever the market price at that time. The seller also agrees to sell those 200 barrels of oil at the agreed price. Now both the buyer and seller are obligated to buy or sell these 200 barrels of oil unless they trade with other buyers or sellers. Traders can also buy futures of stock, index funds, foreign currency exchanges, etc. IITIAN Trader by Saurabh Maurya a4. Technical Analysis Technical analysis is a tool, or method, used to predict the probable future price movement of a security — such as stock — based on market data. The theory behind the validity of technical analysis is the notion that the collective actions — buying and selling — of all the participants in the market accurately reflect all relevant information pertaining to a traded security, and therefore, continually assign a fair market value to the security through price action. Technical traders believe that current or past price action in the market is the most reliable indicator of future price action. ("! IITIAN Trader by Saurabh Maurya 12A support is a price level where buyers entered the trade or short sellers covered their shorts with enough force to keep prices from going any lower. A resistance is a price level where sellers entered the market or old buyers dumped their shares with enough force to keep prices from going any higher. It is at these levels that the balance of power between the buyers and the sellers will usually shift. For example, if the buyers are aggressively bidding up and causing prices to rise, and all of a sudden many traders are willing to aggressively sell for less than the last price, thereby causing an immediate price reversal, the price level at which the market stopped is now a resistance level. Bai Resistance flipped’ to support IITIAN Trader by Saurabh Maurya 13Finding Support and Resistance Levels: There are two ways to find trading levels. The first category is comprised of the preexisting and predetermined levels that will often be plotted automatically by trading platforms. There is no judgment involved in finding those patterns. The second category is comprised of the discretionary levels that traders need to find themselves. Important predetermined levels are: Previous day close Yesterday’s low and high Two days ago low and high All-time high and all-time low 52-week high and 52-week low eoceene Examples of discretionary levels are: « Extreme price levels on a daily chart ¢ Moving averages on daily and 5-minute charts Important pre-market levels IITIAN Trader by Saurabh Maurya 145. CandleStick Patterns Technical analysis using candlestick patterns, which are formed by either a single candlestick or by a succession of two or three candlesticks, are some of the most widely used technical indicators for identifying potential market reversals or trend changes Candlestick has three basic features: * The body, which represents the open-to-close range *° The wick, or shadow, intraday high and low indicates the e¢ The colour, which reveals the direction of market movement - a green (or white) body indicates a price increase, while a red (or black) body shows a price decrease Bearish Candle High Upper Open shadow Body Close Lower shadow Low IITIAN Trader by Saurabh Maurya High Close Open Low 156. Famous Chart Patterns Hammer: The hammer candlestick pattern is formed of a short body with a long lower wick, and is found at the bottom of a downward trend. A hammer shows that although there were selling pressures during the day, ultimately a strong buying pressure drove the price back up. Downtrend Paetitty wel —__ Bullish Hammer IITIAN Trader by Saurabh Maurya 16Inverse Hammer: A similarly bullish pattern is the inverted hammer. The only difference being that the upper wick is long, while the lower wick is short. It indicates a buying pressure, followed by a selling pressure that was not strong enough to drive the market price down. hy Vagal Mal ullish Inverted Hammer IITIAN Trader by Saurabh Maurya 7Bullish engulfing: The bullish engulfing pattern is formed of two candlesticks. The first candle is a short red body that is completely engulfed by a larger green candle. Though the second day opens lower than the first, the bullish market pushes the price up. Engulfing Pattern “ye IITIAN Trader by Saurabh Maurya 18Piercing line: The piercing line is also a two-stick pattern, made up of a long red candle, followed by a long green candle. There is usually a significant gap down between the first candlestick’s closing price, and the green candlestick’s opening. It indicates a strong buying pressure, as the price is pushed up to or above the mid-price of the previous day. Strong red body on 1st bar -- ---55+--> The close onthe 2nd bar must be more than half-way up the body of the 1st bar Reversal signal after a down-trend IITIAN Trader by Saurabh Maurya 19Morning star: The morning star candlestick pattern is considered a sign of hope in a bleak market downtrend. It is a three-stick pattern: one short- bodied candle between a long red and long green. Traditionally, the ‘star’ will have no overlap with the longer bodies, as the market gaps both open and close. It signals that the selling pressure of the first day is subsiding, and a bull market is on the horizon. "" i eon n ns ae Th : A direction IITIAN Trader by Saurabh Maurya 20Three white soldiers: The three white soldiers pattern occurs over three days. It consists of consecutive long green (or white) candles with small wicks, which open and close progressively higher than the previous day. It is a very strong bullish signal that occurs after a downtrend and shows a steady advance of buying pressure. Three White Soldiers eo My Three White Soldiers IITIAN Trader by Saurabh Maurya 21Hanging man: The hanging man is the bearish equivalent of a hammer; it has the same shape but forms at the end of an uptrend. It indicates that there was a significant sell-off during the day, but that buyers were able to push the price up again. The large sell-off is often seen as an indication that the bulls are losing control of the market. a Hanging Man Pattern IITIAN Trader by Saurabh Maurya 22Shooting star: The shooting star is the same shape as the inverted hammer, but is formed in an uptrend: it has a small lower body and a long upper wick. Usually, the market will gap slightly higher on opening and rally to an intra-day high before closing at a price just above the open - like a star falling to the ground. Potential direction IITIAN Trader by Saurabh Maurya 23Bearish engulfing: A bearish engulfing pattern occurs at the end of an uptrend. The first candle has a small green body that is engulfed by a subsequent long red candle. It signifies a peak or slowdown of price movement and is a sign of an impending market downturn. The lower the second candle goes, the more significant the trend is likely to be. IITIAN Trader by Saurabh Maurya 24Evening star: The evening star is a three-candlestick pattern that is the equivalent of the bullish morning star. It is formed of a short candle sandwiched between a long green candle and a large red candlestick. It indicates the reversal of an uptrend and is particularly strong when the third candlestick erases the gains of the first candle. ‘\ i ~ \ Potential ‘ i direction i ‘\ i J en IITIAN Trader by Saurabh Maurya 25Three black crows: The three black crows candlestick pattern comprises of three consecutive long red candles with short or non-existent wicks. Each session opens at a similar price to the previous day, but selling pressures push the price lower and lower with each close. Traders interpret this pattern as the start of a bearish downtrend, as the sellers have overtaken the buyers during three successive trading days. / ‘, / \ A \ 1 . + ! | Potential ' i direction 1 I \ \ i v \ N a NY a IITIAN Trader by Saurabh Maurya 26Dark cloud cover: The dark cloud cover candlestick pattern indicates a bearish reversal - a black cloud over the previous day's optimism. It comprises two candlesticks: a red candlestick which opens above the previous green body and closes below its midpoint. It signals that the bears have taken over the session, pushing the price sharply lower. If the wicks of the candles are short it suggests that the downtrend was extremely decisive. anoon- Opening price The highest price of the day ------. Closing price ----- air Confirmation Opening price ----- The lowest price for the day -----~. IITIAN Trader by Saurabh Maurya 27Doji: When a market's open and close are almost at the same price point, the candlestick resembles a cross or plus sign — traders should look out for a short to non-existent body, with wicks of varying length. This doji’s pattern conveys a struggle between buyers and sellers that results in no net gain for either side. Alone a doji is neutral signal, but it can be found in reversal patterns such as the bullish morning star and bearish evening star. Potential direction IITIAN Trader by Saurabh Maurya 28HEAD AND SHOULDERS: The Head and Shoulders chart pattern is a price reversal pattern that helps traders identify when a reversal may be underway after a trend has exhausted itself. This reversal signals the end of an uptrend. It has a distinctive appearance resembling its namesake which includes a distinct ‘left shoulder’, ‘head’, ‘right shoulder’ and ‘neckline’ formation It is considered one of the most reliable trend reversal patterns that predicts a_bullish-to- bearish trend reversal. An inverse head and shoulders pattern predicts a bearish-to-bullish trend. HEAD RIGHT SHOULDER Uy iy! ' "ny LEFT SHOULDER ot ata! i! wt | ul ‘Wy | NECKLINE I IITIAN Trader by Saurabh Maurya 297. Options 7.1 Option Chain: An Option Chain Chart is a listing of Call and Put Options available for an underlying for a specific expiration period. The listing includes information on premium, volume, Open Interest etc., for different strike prices. Option chains are probably the most natural form of presenting information for retail investors. Strike price: It is the price at which you as a buyer and seller of the Option agreed to exercise the contract. IV: It is an abbreviation for Implied Volatility. It tells us about what the market thinks on the price movement of the underlying. A higher IV means the potential for high swings in prices and low IV means no or fewer swings. Volume: It tells us about the total number of contracts of an Option for a particular strike price are traded in the market. It is calculated on a daily basis. IITIAN Trader by Saurabh Maurya 30for Last Traded Price of ion t 1a the abbrevi is an Option. It i LTP. 19.85 ala Ba «| tat tat 8 ot 31 IITIAN Trader by Saurabh Maurya7.2 Open Interest: Open interest is the number of active contracts. It's one of the data fields on most option quote displays, along with bid price, ask price, volume, and implied volatility. When you buy or sell an option, the transaction is entered as either an opening or a closing transaction. If you buy 10 calls from XYZ, you are buying the calls to open. That purchase will add 10 to the open interest figure. If you wanted to get out of the position, you would sell those same options to close. Open interest would then fall by 10. Long build up happens when Price and OI both increase Short build up happens when Price decreases but Ol increases. Long Unwinding: Close out Position of Long, i.e Selling the stocks to exit the long position. Short Covering: Close out Position of Short, i.e Buying back the stocks to exit the short position. IITIAN Trader by Saurabh Maurya 321 MBX ssoqo00 amuaas 223272 ee ee 2 M30 sssr70 muss 272 parsons es 22 sons nes ae I! soo uma os 50 EID 622 suns neo oe GEER oe mo oo 57S soos nen oe? EI somo nemo os na 68 sons ne et TT GH eos es oe aaa ner aura somo mes ww es BULLISH SCENARIO CHANGE INO! | CHANGEINPRICE | INTERPRETATION [Longs are building the LONG BUILD UP | INCREASE INCREASE position in expectation of market to rise The longs are LONG | unwinding their position UNWINDING | DECREASE DECREASE in order to book their profits |Shorts are covering SHORT their position to aianhaily DECREASE INCREASE t aaa ome losses BEARISH SCENARIO CHANGE IN OI | CHANGE IN PRICE | INTERPRETATION sORT [Shorts are building the a te LL INCREASE DECREASE _[position in expectation lof market to fall The longs are Lome | unwinding their position UNWINDING | DECREASE DECREASE _ inorder to losses |Shorts are covering aceua DECREASE INCREASE their position to book their profits IITIAN Trader by Saurabh Maurya 337.3 Option Premium: The option premium is the total amount that investors pay for an option. The intrinsic value of an option is the amount of money investors would get if they exercised the option immediately. 7.4 Option Moneyness: 1. In The Money (ITM): If the option contract is ITM, then it has an intrinsic value. A call option is ITM if the stock price is higher than the strike price. On the other hand, a put option is ITM, if the stock price is lesser than the strike price. IITIAN Trader by Saurabh Maurya 342. At The Money (ATM): If the options contract strike price is the same as the stock price then it is said to be ATM. The same rule applies to both call options as well as put options. 3. Out of The Money (OTM): If an option contract is OTM, then it does not have intrinsic value. A call option is OTM if the stock price is lower than the strike price. On the other hand, a put option is OTM, if the stock price is more than the strike price. IITIAN Trader by Saurabh Maurya 357.5 Option Greeks: An option’s "Greeks" describes its various risk parameters. Delta: is a measure of the change in an option's price resulting from a change in the underlying security. Gamma: This can help you estimate how much Delta might change if the stock price changes. Theta: This can help you measure how much value an option might lose each day as it approaches expiration. Vega: This can help you understand how sensitive an option might be to large price swings in the underlying stock. Rho: This can help you simulate the effect of interest rate changes on an option. IITIAN Trader by Saurabh Maurya 368. Why Trade Options? The first reason for that, is to protect and manage your risk. If you are taking a huge risk, options trading is the way to protect yourself so that you don't lose all of your money. It gives you complete control over how and where your money is going. But one thing you should remember, is that options trading should not be done with closed eyes. You will have to constantly watch the market. And if you do not, it can backfire on you. Hedging and Speculation are the first two things that you should learn before you invest a single penny in options trading. This is what will get you going and how you should approach options trading. Hedging is the way to insure your investment in case the prices start to fall. In other words, hedging is your shield against losing a lot of money. Hedging is used by both, large corporations and retail investors to protect themselves. IITIAN Trader by Saurabh Maurya 37Next is Speculation. But it is quite risky. Speculation can be done by studying and examining the market. This involves determining and predicting the trends and figuring out where the market will go from the current point. This can be a huge advantage if you are familiar with the market and have deep knowledge about the underlying asset. Advantages and Disadvantages of Options Trading: It is actually cheaper to invest in options than investing in the actual asset. Plus, you would have less leverage if you invest in the asset directly. In short, through options trading, you are actually having access to way more resources than you would originally have. An investor can actually earn more profits per actual invested rupee compared to directly investing in the asset. Also, with options, an investor can only lose a set amount of money, which is basically the premium that he/she has paid. IITIAN Trader by Saurabh Maurya 38And unlike other types of day trading, options trading is a short-term investment only. This means that even if you make an _ incorrect prediction, you will lose money within a couple of months rather than waiting for years to lose money because of that mistake. Taxes are a disadvantage when it comes to options trading. Yes, you will have to pay taxes on everything you do, except some rare circumstances. So do make sure that you fill out your IRA form to make sure you're keeping tabs on taxes before start investing. IITIAN Trader by Saurabh Maurya 39It is a bit scary when you are investing into something that you know nothing about. This is the reason why most investors make sure that they have in-depth, accurate knowledge of the things they are investing in. 9. Day Trading vs Swing Trading Day traders open and close multiple positions within a single day. In contrast, Swing Traders take trades that last multiple days, weeks, or even months. Day trading attracts traders looking for rapid compounding of returns. The term "day trading" comes from the fact that traders typically buy and sell securities within the same day. Swing trading is a strategy that involves making trades over the course of more than a few days, weeks, or months. The goal is to capture short- to medium-term profits as trends change in a market. IITIAN Trader by Saurabh Maurya 40Swing trading can take much less active trading time. For example, if you're swing trading off a daily chart, you could find new trades and update orders on current positions in about 45 minutes per night. These activities might not even be required on a nightly basis. IITIAN Trader by Saurabh Maurya 4lWhich Is Right for You? One trading style isn't better than the other; they suit different needs and styles. Day trading has more profit potential given the higher frequency of trading. With that said, swing traders still have plenty of potential for profit. Capital requirements can vary across the different markets and trading styles. Day trading requires more time than swing trading, while both take a great deal of practice to gain consistency. Day trading makes the best option for action lovers. Those seeking a lower-stress and less time- intensive option might do better swing trading. IITIAN Trader by Saurabh Maurya 4210. Scalping Scalping is the shortest-term trading method where investors use high trading volumes to make a profit rather than trying to increase profits for each trade. Scalping utilizes small constant price fluctuations and relies on small profits from each trade. However, the number of trades done is much higher, adding to the profits. For example, if you are executing the Scalping technique, you may make 50-100 orders and sell them after minutes to profit from the increasing price. Thus, you rely on high order volume even though your profits for each trade are low. Scalping requires investors to have immense discipline and a strict exit strategy. As the price is constantly fluctuating, they have to exit as soon as the price shows an upward trend. If not, the price can go lower, wiping out the small profits made from other Scalping orders. IITIAN Trader by Saurabh Maurya 43When traders execute the Scalping technique, they prefer doing technical analysis and skip fundamental analysis. They use trading charts, time frames, etc., that are of the shortest horizon to understand the ‘by minutes or seconds’ past price movement of the stock they want to buy. After observing the patterns, they execute the high-speed trading style and can complete 10-100 orders per day. The investors who perform Scalping are known as Scalpers, and they believe that it is better to have small profits in several trades than to risk it over a single trade in a day. Even if their profits are smaller and they risk losing on bigger profits, the volume of their trades allows them to earn a considerable amount of profits. IITIAN Trader by Saurabh Maurya 4411.Retail vs Institutional Traders Individual traders, like you and |, are called retail traders. We can be part-time traders, or full-time traders, but we're not working for a firm and we're not managing other people's money. We retail traders are a small percentage of the volume in the market. On the other hand, there are the so-called institutional traders such as _ Wall Street investment banks, proprietary trading firms, mutual funds and hedge funds. Most of their trading is based on sophisticated computer algorithms and high frequency trading. Rarely is any human involved in the day trading operations of these large accounts. Through whatever means, institutional traders have considerable money behind them and they can be very aggressive. IITIAN Trader by Saurabh Maurya 45Therefore, you need to find stocks that will make quick moves to the upside or to the downside in a relatively predictable manner. Institutional traders, on the other hand, are trading with very high frequency and will profit from very small movements of price, or as it is sometimes called, from “choppy price action’. IITIAN Trader by Saurabh Maurya 46It is extremely important to stay away from stocks that are being heavily traded by institutional traders. As an individual retail day trader, you must stick to your retail trading territory. You will not trade stocks that other retail traders are not trading or not seeing. The strength of retail day trading strategies is that other retail traders are also using them. The more traders using these strategies, the better they will work. As a retail day trader, you profit from volatility in the market. If the markets are flat, you are not going to make any money; only high frequency traders make money under these circumstances. IITIAN Trader by Saurabh Maurya 4712. Risk Management Risk management refers to the processes that are put into place when trading to help keep losses under control and keep a good risk/reward ratio. It can help prevent a trader from losing all their money on the account. Risk management should be applied by both beginners and experienced traders. Trading is risky that is how it offers a high potential reward. This is especially true when using leveraged products. Using leverage means you don’t put forward the full amount of the value of the trade in order to open or run the position. Instead you put forward a small percentage of the value of the trade, called margin. IITIAN Trader by Saurabh Maurya 48Set Stop Loss point: One of the easiest and most effective ways of protecting yourself against the risks of a volatile market/trade is by using stop losses. When you know how to utilize them correctly based on the nature of the stock, commodity or index that you're trading with, you can protect yourself quite effectively against losses or inefficient trading, i.e. trades that lose money, rather than earn profit. A stop-loss point is the price at which a trader will sell a stock and take a loss on the trade. This often happens when a trade does not pan out the way a trader hoped. IITIAN Trader by Saurabh Maurya 49Set Take Profit point: Take Profit point is the price at which a trader will sell a stock and take a profit on the trade. This is when the additional upside is limited given the risks. Successful traders know what price they are willing to pay and at what price they are willing to sell. They can then measure the resulting returns against the probability of the stock hitting their goals. IITIAN Trader by Saurabh Maurya 50Follow 1% Rule: This rule of thumb suggests that you should never put more than 1% of your capital or your trading account into a single trade. So if you have 21,00,000 in your trading account, your position in any given instrument shouldn't be more than 21,000. This strategy is common for traders who have accounts of less than 210,00,000—some even go as high as 2% if they can afford it. Many traders whose accounts have higher balances may choose to go with a lower percentage. Position Sizing: If your position size is too limited or too wide, you may end up taking a lot of risks or end up taking not enough for you to profit from a trade. Ideal position size for trade=account risk limit/amount of trade risk For Example: IITIAN Trader by Saurabh Maurya 51The total account size is Rs. 50,000, and you set the account risk limit per trade at 1%. That is, Rs.500 per trade is your money at risk. Now suppose for stock ABC, you entered the trade at Rs.30, and you set up the stop loss at Rs.20, then your total amount of trade risk is Rs.10. So, the ideal position size for the trade would be: 500/10=50. IITIAN Trader by Saurabh Maurya 5213. Trading Psychology Trading psychology refers to a trader’s mindset during their time on the markets. It can determine the extent to which they succeed in securing a profit or it can provide an explanation as to why a trader incurred heavy losses. Human beings have complex emotions. For example, even if a stock price is falling, you might decide to hold on to it because you have been a regular consumer of a product offered by the company and believe in it. The emotion in play here is ‘admiration’ that does not allow you to look at the data but take additional risks. IITIAN Trader by Saurabh Maurya 53Trading psychology is different for every trader, as it is influenced by each individual's own emotions and pre-determined biases. WHY NOT TO TRADE EMOTIONALLY - OUTCOMES: 1) Selling at a loss at the worst possible time. 2) Fear of missing out (FOMO) and buying at the top. 3) Being greedy and taking on excessive risk. 4) Excessive trading and several trades due to boredom, FOMO, or greed. 5) Fear of being wrong prevents you from trading when an opportunity arises. 6) Believing you're invincible following a string of unbroken trades, only to discover the hard way that you're not. Some Tips to follow: IITIAN Trader by Saurabh Maurya 541)Before you attempt your next trade, take a few moments to consider whether this is the appropriate thing to do or if this is exactly what you should be doing. 2)Early entries and misleading indications might leave traders in a bind. So, before making any decisions, wait for a candle. This could help you perform better as a trader. 3)Mid-candle judgments are almost often spontaneous, as proven by experience . It is always advisable to the new traders not to make mid-candle decisions as it may severely affect them. 4)Making a list of all the entry criteria is a great strategy to avoid making emotional decisions. 5)You won't go anywhere near success if you don’t believe your system and ability and stick to a consistent strategy in everything you do, not just trading. 6)Opinions are important, but only if you do your study and grasp both sides of the issue. IITIAN Trader by Saurabh Maurya 55Some of the emotions which impact trading are: ¢ Happiness e Impatience ¢ Anger ° Fear © Pride IITIAN Trader by Saurabh Maurya 5614. How to build Your Trading Watchlist Stocks in Play: A Stock in Play is a stock that offers excellent risk/reward setup opportunities - opportunities where your downside is 5 cents and your upside is 25 cents, or your downside is 20 cents and your upside is one dollar. That's 1:5. You can regularly read a Stock in Play that is about to trade higher or lower from its present price. They could be, in no particular order: e Astock with fresh news e Astock that is up or down more than 2% before the market Open e A stock that has an unusual pre-market trading activity « Astock that develops important intraday levels from which you can trade off IITIAN Trader by Saurabh Maurya 57Float and Market Cap: Float means the number of shares available for trading. Market cap is the total market value of all of a company’s shares. It is calculated by multiplying a company’s float by the current market price of one share. For example, as of May 13, 2018, Apple Inc. has the greatest market capitalization at $927.86 billion, assuming a price of $188.59 per share. Apple is considered a “mega cap” stock as it has issued 4.92 billion shares as of May 13, 2018. These stocks usually don’t move much during the day because they require significant volume and money to be traded, so Apple shares might on average change by only one or two dollars each day. They are not very volatile, and therefore day traders don't like trading them. Day traders look for volatility. On the other hand, there are some stocks that have a very low float. For example, Cesca Therapeutics Inc. (ticker: KOOL) has only a 1.2- million-share float. IITIAN Trader by Saurabh Maurya 58This means that the supply of shares of KOOL is low, and therefore a large demand can very quickly move the price of the stock. Low float stocks can be volatile and move very fast. o ity SS Pre-Market Gappers: Experienced traders are sensitive to being in the right stocks at the right time because you can be the best trader in the world, but if you are in the wrong stock, you will lose money. IITIAN Trader by Saurabh Maurya 59Experienced traders are sensitive to being in the right stocks at the right time because you can be the best trader in the world, but if you are in the wrong stock, you will lose money. Pre-market Gappers Scanner is set based on the following criteria: « Stocks that in the pre-market gapped up or down at least 2% e Stocks that have traded at least 100,000 shares by 9 a.m. in the pre-market « Stocks that have an average daily volume of over 500,000 shares ¢ Stocks that have an Average True Range (ATR) of at least 50 cents (how much of a range a stock has on average every day) ¢ There is a fundamental catalyst for the stock We use this because, when there is a fundamental catalyst, there will be unusual pre-market activity and a Stock in Play will have gapped up or down before the market opens with a significant number of shares being traded (such as 100,000 shares). IITIAN Trader by Saurabh Maurya 60How to Select Your Final Watchlist: The next step is to narrow down the list of stocks that hit the Gappers watchlist. You may at times have over ten stocks hit pre- market Gappers watchlist, but are all of them tradeable or should all of them be on the final watchlist? No, Aside from investigating any fundamental catalysts, to better narrow down the selections you must also look at the pre-market activity of each candidate. Look for: 1) Clean and uniform pre-market price action. 2) Clean trading levels (avoid too many close support & resistance chart) IITIAN Trader by Saurabh Maurya 61Real Time Intraday Scans: Sometimes you cannot find any good Stocks in Play on your Gappers watchlist. Sometimes many stocks will come into play after the market opens for a variety of reasons including the important and previously discussed breaking news. You often have no way to find those stocks in the pre-market. Therefore, it is important to have intraday scanners that show you active stocks after the market Open at 9:30 a.m. Some traders have proprietary scanners to find these stocks. Depending upon a_ trader's strategies, many different parameters can be set and various filters applied to define a scanner. IITIAN Trader by Saurabh Maurya 6215. F & O Trading Strategy A solid strategy is needed to profit from the trade. It allows a person to maximize profit and mitigate the risk. It takes only a small effort to learn how to make use of the power of options and its flexibility. 15.1 The Covered Call: Mr. X owns Reliance Shares and expects the price to rise in the near future. Mr. X is entitled to receive dividends for the shares he hold in cash market. Covered Call Strategy involves selling of OTM Call Option of the same underlying asset. The OTM Call Option Strike Price will generally be the price, where Mr. X will look to get out of the stock. He will receive premium amount from writing the Call option. Example: RIL is trading around Rs 745 levels. Lot size of RIL Option is 250. Mr. X is bullish in nature and buys 250 shares of RIL @ Rs 745 from the market. He also shorts one 760 Call Option for a premium of Rs. 15. His net investment will be Rs. 182500. [{(745)-(15)}*250] IITIAN Trader by Saurabh Maurya 63Case 1: If RIL closes at Rs. 755, Mr. X will get a capital appreciation on his investment of Rs. 2500. [(755- 745)*250] plus the Call Option premium he received from writing it ie. Rs.3750 (15*250). His total gain will be Rs 6250. Case 2: If RIL closes at Rs. 780, Mr. X will make a profit on his long position in spot market but incur loss on his short call. His net payoff will be Rs. 7500. [{(780-745) + (15-20)}*250] IITIAN Trader by Saurabh Maurya 6415.2 Married Put: This strategy is applied when trader goes long on the underlying asset i.e. he buys the stock in cash market. He has a bullish view and expects the market to rise in the near future, but simultaneously has the fear of downward movement of the markets. In order to cover his position from vulnerabilities he buys one ATM Put Option of the same underlying asset. Here, a trader will receive all the gains from dividends, bonus issues since he is holding long positions in the cash market. Example: Suppose that RIL is trading at Rs. 745, and Mr. X is bullish on the market. He buys 250 RIL shares in the cash market. Now the risk always persist (downward move) and to cover himself from this adverse move he will buy one 740 RIL ATM Put Option at a premium of Rs. 20. His total investment will be Rs. 191250. [(745+20)*250] IITIAN Trader by Saurabh Maurya 65Case 1: At expiry if RIL closes at Rs. 710, then Mr. X will make a loss of Rs. 6250. [{(710-745) + (30- 20)}*250] Case 2: At expiry if RIL closes at Rs. 740, then Mr. X will make a loss of Rs. 6250. [{(740-745) - (20) }*250] Case 3: At expiry if RIL closes at Rs. 770, then Mr. X will make a profit of Rs. 1250. [{(770-745) - (0- 20)}*250] IITIAN Trader by Saurabh Maurya 66w 15.3 Bull Call Spread : o Bull Call Spread option trading strategy is used by a trader who is bullish in nature and expects the underlying asset to give decent returns in the near future. This strategy includes buying of an ‘In The Money’ Call Option and selling of ‘Deep Out Of the Money’ Call Option of the same underlying asset and the same expiration date. When you write a call, you receive premium which results in reducing the cost for buying an ITM Call Option. However, the profits are also minimized in case of a windfall rise in the underlying asset's price. This strategy is also called as ‘Bull Call Debit Spread’ as your account gets debited while deploying the strategy. Example: Suppose that the NIFTY is trading around 5180 level, and Mr. X enters into Bull-Call-Spread strategy. Lot Size of NIFTY is 50. IITIAN Trader by Saurabh Maurya 67He buys one 5100 ITM Call Option for a premium of Rs. 165, and sells one 5300 OTM Call Option for Rs. 55. The net investment will be only Rs. 5500 [(165- 55)*50], after premium received from writing the 5300 call. Case 1: At expiry if the NIFTY dips down to 5000 level, the maximum loss will be only Rs. 5500 (Investment Value). Case 2: At expiry if the NIFTY closes at 5200 level, net profit will be Rs. 6000. [{(55) - (100-165) }*50] Case 3: At expiry if the spot NIFTY closes at 5400 level, the intrinsic value of the 5100 ITM call will be Rs. 300 and that of 5300 OTM call will be Rs. 100. At expiry, the cash settlement will be done with a credit of Rs. 4500. [{(300-165) - (100-55)}*50] IITIAN Trader by Saurabh Maurya 6815.4 Protective Put: Protective Put Strategy is a hedging strategy where trader guards himself from the downside risk. This strategy is adopted when a trader is long on the underlying asset but skeptical of the downside. He will buy one ATM Put Option to hedge his position. Now, if the underlying asset moves either up or down, the trader is in a safe position. Example: Suppose that RIL is trading at Rs. 745 and Mr. X buys 250 shares in the Cash Market. He will buy One 740 ATM Put Option at a premium of Rs. 20 to hedge his long position. His net investment will be Rs. 191250. [(745+20)*250] Case 1: At expiry if RIL closes at Rs. 710, then Mr. X will incur a loss of Rs. 6250. [{(710-745) + (30- 20)}*250] Case 2: At expiry if RIL closes at Rs. 740, then Mr. X will incur a loss of Rs. 6250. [{(740-745)- (20)}*250] IITIAN Trader by Saurabh Maurya 69Case 3: At expiry if RIL closes at Rs. 770, then Mr. X will make a profit of Rs. 1250. [{(770-745)- (20)}*250] Note: It is observed that once the stock starts moving up, the time value of Put will shrink half times the cash price. This will also depend on the number of days left in the expiry. A professional trader can also keep a stop loss in ATM Put once stock rallies sharply. IITIAN Trader by Saurabh Maurya 70