Option Buying - A Lottery Ticket

Option buying is consider a safe trading game. The reason we consider it safe because we know the maximum amount of loss in it. When you buy option you give premium to option seller so you don't need to deposit any margin which makes option vulnerable for the traders which don't have a large amount of capital to trade in the market. There is a limited loss and infinite profit can possible. The probability of profit while buying the option is not so high. The enemy of option buyer is theta decay. When option losses it value with time is known as theta decay.

When To Buy Options?

The first thing one should consider while buying naked option that it shouldn't be hold for more than five to seven trading sessions. We have a mentality of losing the entire amount of premium which is not helpful for any option buyer.  Every option buyer should take a stop loss while initiating a trade.

The only right time to buy the option is when there's a momentum either in the stock or indices. The  only reason one should buy option when trader knows the direction of the stock or indices. Buying option is a directional way of trading in the market. The last reason one can buy option is just to do gambling in the market. 

Firstly, avoid gambling in the market if you do never sell option for gambling just buy them.

Option Selling- A Rich Trader's Game

In derivative segment, traders are more towards option selling instead of buying the options. They prefer to sell options.  The perception of option selling is that it's very easy to make money through it.
Somewhere it's true but it also have a various setbacks related to it. The only advantage of option selling is Theta decay because of which option sellers earn money. The profit of option seller is limited and is maximum to the premium received. The volume of option trading in India is highest among the world.

Why Option Selling Is For Rich?

Option selling requires high amount of margin for that you need to have a decent capital in your trading account. Option selling involves unlimited risk if done without hedging. When you sell option you receive the premium. You need to deposit the margin. Amateur traders generally do naked selling without any protection which leads to destruction of their trading account. In case the shortfall of margin occurs while carrying position due to any reason. There will be heavy penalty imposed by SEBI on the trader.

How To Do Option Selling?

Firstly, you need to understand never carry position for next day without any hedging in the market. While doing day trading follow the strict stop loss. Naked selling is done by smart money in the market. They know how to manage their risk and adjust their position under various circumstances in the market. The probability of profit in option selling is quite high. To do option selling you need to understand various aspects which requires a good amount of training and time. Option selling is an art without knowing it completely and doing it's like playing with fire. You will burn your hand either today, tomorrow or day after tomorrow so before doing it learn it.   

Option selling is a man's game not for boys.  

  

Hot Topic "STOCK MARKET"

Stock Market is now-a-days are like a political party. Everybody has something to say about it. Today's world condition and spread of COVID-19 in all over the world has made stock market a CASINO. Only God knows what will happen next. Market is very much under the influence of various external factors. In our country majority of the people loves to play casino and unfortunately loses their money. In reality, stock market represents the various aspects of the economy.

One's Expectations From The Stock Market?

When one  starts doing trading or investing in stock market. The person has a perception about it. The maximum amount one can loose is the total amount that person has used for trading and investment but there is no upper limit how much that person can earn. 

This cheesy thought attracts people towards market and they end up loosing their entire capital several times which became a reason for the destruction of their financial health. 

This section of people never earn money in market forget about making the wealth from it. Exceptionally, if they earn X amount they end up loosing 2X amount. In the end they blame market for every thing.

The other section of people who want's to learn, do analysis and then to invest in the market. The only problem is that they want to learn some Holy Grain setup but the thing like this doesn't exist in the market. This is the most common problem with all the newbies who are entering in the market. Any proprietary trading firm in the country doesn't have any holy grain setup. They may be having various strategies, algorithmic trading, semi-algorithmic trading for different conditions and events in the market. Stock Market is dynamic so that the strategies. It also required alternation with respect to the market and needs to evolve them.

How To Earn & What To Do In The Stock Market?

Firstly, the basic and the foremost thing you need to do is to survive in the market. By survival, I mean not to loose entire capital in stock market. The only possible way to do that is just to take stop loss. Before taking any trade or doing any investment you need to decide how much money you are going to loose on this trade or investment and prepare your mind for it. Never loose more than 2%of your entire capital in a single trade and never invest more than 10% of your capital in a stock. No matter how good the stock is you just need to follow this rule. This is the fundament rule of investment and especially to make wealth in the stock market.

Regarding the earning prospective from stock market, there are various segments like Cash & Derivatives Market . It allows us to do various forms of trading like futures trading, options trading, hedging, speculation and several others. This is not the correct platform to know completely about them. As it requires a lot of hard work and training. Many of the people don't want to do this they simply want to invest to generate some income and create their wealth by investing for long term in the market. To do that you just need to learn some few things:

1. Psychology

You just need to invest in businesses you personally feel has a growth and you understand various factors related to it. You should have faith in your investment. Track it on regular basis and keep updated yourself on the news related to your business. Never do panic buying and selling. Never invest your emergency savings in the market.

2. Money Management

If in the worst case scenario you loose 50% of the capital invested in a single stock. You just loose 5% of your total capital which you decided to invest in the market. Money Management is the only key to ride trend in the market and to make big money from market. It is always suggested to do staggered buying in the market. Never invest 100% of your capital at once.

3.  Defend The Capital

Stock Market is a place at the end where we can't control everything. The only thing we can control is how much money we have to loose in the market. Last but not the least luck also plays quite a significant role in the stock market. 

                         All The Best For Your Journey In The Stock Market.

  

Short - Term Products

  Short- term Products- Low Returns with Capital Appreciation

Short term goals are those less than three five years in the future. To reduce the risk of loss, holding the investment in cash or cash like vehicles is likely the most appropriate strategy. Money market funds and cash equivalent investments are conservative popular investments, as are savings accounts.

                                                     Investors with short-term money/ goals have two primary objectives.

1. Safety of capital

2. Return on capital

Money Market Funds / Liquid Schemes

Money Market or Liquid Funds are very short-term maturity. They invest in debt securities with less than 91 days to maturity. The primary source of return is interest income. Liquid fund is a very short-term fund and seeks to provide safety of principal and superior liquidity. An investor seeking the lowest risk ought to go for a liquid scheme. However, the returns in such investment are lower. Cash-equivalent instruments and money market funds are the least volatile of the investment types and are therefore ideal for people with extremely low risk tolerance.

Short Term Debt Funds

Short term funds may provide a higher level of return than liquid funds and ultra short term funds, but will be exposed to higher mark to market risks. Debt instruments are FDs, Bonds, debt based Mutual Fund Scheme such as Short Term Funds, Gilt Funds, Liquid Funds, floater etc. Depending upon the liquidity needs and taxation, the product should be taken debt category.

Fixed Maturity Plans (FMPs)

FMP's are closed end schemes that invest in a portfolio of debt securities which mature on or before the maturity of the scheme. FMP's come with tenors ranging from 90 days to 3 years. The investment horizon of the investor must watch the tenor of the scheme.

Bank Deposits

The simplest of all investment by opening a bank account and depositing money in it one can make a bank deposit. There are various kinds of bank accounts: current account, savings account and fixed deposit account. Bank offer deposits of varying time frames beginning with a minimum of 7 days.

Post Office Time Deposits (POTDs)

The Post Office Term deposits is similar to a fixed bank deposit, where you save money for a definite time period earning a guaranteed return through the tenure of deposit.

Recurring Deposits (RDs)

This is one more type of secured investment. This product is ideally suitable to those who not able to invest a lump sum and looking for monthly investment. Ideally bank offers RD of minimum tenure with 6 months to a maximum of 10 yrs. Interest received on your RD is taxable as per your tax slab.

5- Yrs National Savings Certificate (NSC)

You can invest in Postal NSC of 5 years, only if you are sure that goal is exactly at 5 years from today. You can claim deduction under section 80 C. However, the interest on NSC will be taxable.

  

Derivatives

                                         Derivatives

Derivative is a product whose value is derived from the price of some other asset commonly known as underlying. It includes wide range of underlying assets. These include: 

1. Metals such as Gold, Silver, Aluminium, Lead, Zinc etc.

2. Energy resources such as Oil (crude oil), Coal, Electricity etc

3. Financial assets such as Shares, Bonds and Foreign exchange.

Derivatives market helps in improving price discovery. It helps in transfer of various risks from those who are exposed to risk but have low risk taking capacity. For example: Investors don't want to take the risk but traders are willing to take risk.

In Indian stock market there are two types of markets: 

1. Cash Market

2. Derivative Market

Derivatives are typically used for three purposes:

a) Hedging

b) Speculation

c) Arbitrage

A) Hedging

When an investor has an open position in the underlying, he can use derivative market to protect the position from the risks of future price movements. Without selling the assets from the portfolio investor can sell it in derivative market.

B) Speculation

A speculative trade in a derivative is not supported by an underlying position in cash, but simply implements a view on the future prices of the underlying, at a lower cost. Alternatively, he can take a long position in that stock through futures market as well. In derivatives, market you got a high amount of leverage this sometimes make derivative market risky. If the market had moved against his prediction, he would have incurred huge losses compared to the spot market.

C) Arbitrage

If the price of the underlying is Rs 100 and the futures prices is Rs 110, anyone can buy in the cash market and sell in the futures market and make the costless profit of Rs 10. This is called arbitrage. Arbitrageurs are specialist traders who evaluate whether the Rs 10 difference in price is higher than the cost of borrowing. Other highly traded derivatives in global markets are for currencies, interest rates and commodities. 

Risk & Its Types

                                           Risk

The deviation between actual and expected returns is the risk in his investment. If the return from an investment remains unchanged over time, there would be no risk. But, there is no investment of that kind in the real world. Deviations from expected outcomes can be positive or negative, both are considered to be risky. All investment are subject to risk, but the type and extent of risk are different.

                                    Types  Of  Risk

1. Market Risk - Systematic and Unsystematic

Total risk consist of two parts. The part of risk that affects the entire system is known as systematic risk, and the part that can be diversified away is known as unsystematic risk. Systematic risk is caused due to factors that many affect the economy/ markets as a whole, such as changes in government policy, external factors. Inflation risk, exchange rate risk, interest rate risk are systematic risk. Unsystematic risk is the risk specific to individual securities or a small case of investments.

Credit risk, business risk are unsystematic risks.   

2. Inflation Risk

Inflation risk is also known as purchasing power risk. It is a risk that arises from the decline in value of security's cash flows due to the falling purchasing power of money. Inflation risk represents the risk that the money received on an investment may be worth less when adjusted for inflation.

3. Interest rate risk

It refers to the risk that bond prices will fall in response to rising interest rates. Interest rate is inversely proportional to bond price, share price.

4. Liquidity risk

It implies that the investor may not be able to sell his investment when desired, or it has to be sold below its intrinsic value, or there are high costs to carrying out transactions.

5. Exchange rate risk

It is incurred due to changes in the exchange rate of domestic currency relative to a foreign currency. When a domestic investor invests in foreign assets, or a foreign investor invests in domestic assets, the investment is subject to exchange rate risk.

Capital Markets

Capital Market is one of the significant aspect of every financial market. Capital Market is a market for financial assets which have a long or indefinite maturity. It consists of financial institutions like IDBI, ICICI, UTI, LIC, etc. A capital market is a market for securities (debt or equity), where business enterprises companies and government can raise long term funds. Money is provided for periods longer than a year. The capital market includes the stock market (equity) and the bond market (debt)

            Functions and role of the Capital Market

1. Speed up Economic Growth and Development: 

Capital Market enhances production and productivity in the national economy. It makes funds available for long period of time. It helps in research and development

2. Service Provisions:

Capital Market provides various types of services. It includes long term and medium term loans to industry, consultancy services, export finance, etc. These services help the manufacturing sector in a large spectrum.

3. Proper Regulations Of Funds:

Capital Markets not only helps in liquidity, but it also helps in proper allocation of these resources. It can direct funds in a qualitative manner.

4. Capital Formation:

Capital Market helps in capital formation. Capital formation is net addition to the existing stock of capital in the economy. It generates savings. The savings are made available to various segments such as agriculture, industry etc. This helps in increasing capital formation.

Capital Markets can be classified as:

1. Primary Markets

2. Secondary Markets

Primary Market:

Primary Market is a market to raise money from public through IPOs (Initial Public Offerings). Companies need money to expand their businesses and public helps the company by subscribing in the shares offered by the company. By investing in the share capital of the company, investors become part owners of the company. Primary market is also known as "new issue market" (NIM).

              Features of Primary Market

The primary market is the market where the securities are sold for the first time. The securities are issued by the company directly to investors. The primary market performs the crucial function of facilitating capital formation in the economy. The financial assets sold can only be redeemed by the original holder.

Secondary Market:

Secondary Market is vital to an efficient and modern capital market. The secondary market is simply a place where existing securities are bought and sold. The secondary market is further divided into equity and debt markets. Stocks are traded in the equity market, while corporate bonds are traded n debt market.