What? F&O?

If you have ever joined a telegram group, chances are you have seen a message like this:

Both calls ended in loss that day. The messages with the fire emojis stopped the minute it went into loss.

Curious why they only selectively post their winning trades?

Stock market seems simple. You buy low and sell high. That is like saying batting in a world cup final easy, just hit the ball with the bat. Both statements oversimplify the complexities massively. If you are trading in cash delivery markets, 9 out of 10 times you will not need to know about technical complexities besides the T+2 settlement cycle and the new rule of margin requirement for selling your shares. If you are trading intraday you have to learn how leverage works, and what happens when your MTM loss at the end of the day is more than the money you had in your account in the morning.

But these are still trivially simple compared to what you need to know to tread into derivatives market of equity, currency and commodities (pun intended!). If you jump in directly, you will realize that you did not know what you did not know.

I thought I will give you a small checklist of things you will need to know by heart to be safe in the market.

  1. Expiry time – Know the expiry time and date for the contract you are trading. Equities expire on Thursdays at the end of the day. Currencies expire on Fridays at noon. Recheck the details yourselves. I may be wrong, or rules might have changed since publishing this article.
  2. Type of settlement – Nifty and Banknifty contracts are cash settled, meaning you receive the gains or pay the losses and the contract is considered settled. Stock futures and in the money stock options are physically settled. Meaning, depending upon the side of the contract you hold, you must either take delivery or give delivery equal to the number of lots you hold. An ITM Reliance contract would be settled with 505 shares of Reliance. That requires full value of contract i.e. 505 x CMP of Reliance and not just 2.5L margin that the broker takes.
  3. Margin Maintenance – Unlike cash trades where once you buy the shares and pay for them, you do not need to maintain any money in the account, derivatives need cash or margin. (Cash can be given as margin but margin cannot be paid as cash!). If you go long in a futures contract and market goes down a little, resulting in an MTM loss of 5000 Rs. Then you must pay 5000 Rs cash at the end of the day. If you are holding an option position however, just some margin will be blocked. So, you can get a margin call if you run out of cash to pay for the futures MTM settlement EOD even if you have plenty of non-cash margin left. Some brokers require additional margin two days prior to the expiry of physically settled contracts. If you are carrying the position throughout the month for about 1.5L margin, you will need about 3L margin to keep the position open on the last two days of expiry. Your trade could very well have ended in profit had you been able to keep it open till expiry. But if you get a margin call on Wednesday, you might be forced to close the position at a loss.
  4. Liquidity – F&O market is much more illiquid than stock. It might be quite easy for a seasoned trader to enter and exit from a 10,000-share position of GODREJCP. But it will be difficult for her to square off 10 call options at slightly OTM strike of the same stock since the liquidity is much less. So, your position might show 2000 rupees profit, but by the time you exit fully, you might have paid 400-500 rupees to slippages. That is 20-25% less than the profit you were expecting. This is especially true for multi leg option strategies.

There are many more factors you need to look out for while trading in F&O market, but hope this post gets you started on at least some of them…

Also read my article on starting to trade in FnO market: What is the ideal size?

Black Swan Events

two black ducks on grass lawn

This is the catch phrase every single news channel likes to throw around. It is an event that is beyond what is normally expected. The word ‘normally’ is a bit subjective. When you start trading, for the first few months upper or lower circuits would seem like abnormal events. Soon you would get used to extreme volatility where 8% up and 9% down happens one day after another. You will see a stock tanking 10% after a historically bumper result. And through all this if you manage to keep your account afloat, you will see the shortest bear market in the history lasting about a month from peak to trough.

But let us see some events that would have surely caught many ‘professional’ traders off guard too.

There is one event I would like to talk about. One where the value of crude oil contracts went negative.

No, it did not mean that you could go to petrol pump and get paid to fill the tank of your car. It was a time where world was locked down due to COVID-19. There was little demand for crude. People holding long futures of crude would have to take delivery of oil on expiry of their contract. It is worth mentioning here that crude contracts are physically settled in US unlike on MCX where they are cash settled. So long traders would have been stuck with barrels upon barrels of crude which had no demand in the market or any economically viable place to store. So, traders started selling the contracts. Selling did not stop. Eventually the ask side of the orders started working in negative. Traders were ready to pay money to close their long positions because taking a delivery would have meant an astronomical loss.

At least in the US the exchanges could process negative orders and the market kept running. In India last traded price of April month future contact was 965 rupees but the final settlement price was assigned as negative 2884 rupees.

A lot of traders and brokers have moved to various courts of appeal. Traders and brokers claim that MCX had no system to submit negative price in spreads and hence it cannot assign a negative price for settlement.

The cases are still in the court. The difference between LTP and settlement price was over 3500 Rs. Multiply that by 100 barrels per contract and a long trader could have potentially lost 3.5 lakhs per contract that day. That is more than the margin requirement for the same contract at that time.

Results from the court are still awaited. The traders who lost big that day might get some of their money back. But that will take time. And they would have lost precious opportunities that presented themselves from April till today.

Nobody, not even our exchanges had anticipated negative prices before this event. Since then the margin requirement on crude oil has increased a lot. Currently it is more than even the notional value of the contract.

Black swan events are unexpected. So naturally there are little safeguards in place against them. But there is always a way to prevent large losses. Here I mean losses large enough to mess with your psychology, make you lose confidence. It might reduce your capital so much that it is no longer viable for you to trade.

Remember, in trading, not losing money is more important than making a lot of money. It is prudent to hope for the best but prepare for the worst.

What is the ideal size?

person in black pants holding yellow ruler

Apparently professional traders are often asked about the minimum account size one must have to trade in futures. There’s a long answer and a short answer for this. You can find the short answer on twitter somewhere so I will walk you through the long one.

Lets say there are 10 stocks you trade very regularly. You have also done backtesting of your strategy to figure out the idea stop loss that is required.

StockLot SizeCMPStop Loss (%)Stop Loss (Rs)Stop Loss/lot
RELIANCE5051945358.3529,500
HDFC30021953.576.82523,000
HDFCBANK550140045630,800
TCS300270025416,200
INFY60011002.527.516,500
ONGC770080.5021.6112,400
ITC320019447.7624,832
HINDUNILIVR3002125242.512,750
BANKNIFTY252915051457.536,438
NIFTY75128352.5320.87524,066
I have rounded off some numbers for ease of calculations. Lot sizes change over time, so double check the sizes you use from NSE website before calculation.

Stock, Lot size ,and Current Market Price (CMP) are the data columns. Stop loss percentage comes from your backtesting. Then per share loss is simply multiplication of CMP and Stop Loss (%). For example, for RELIANCE, 1945*0.03 = 58.35/- rs per share. Since one lot of RELIANCE is made up of 505 shares. You will lose 505*58.35 = 29,500/- rs per lot.

So let’s look at the maximum loss by amount in the last column of the table. Thanks about 36,500 rs for Banknifty. We will use this for our risk calculations.

Now comes the next question. How much money as a percentage of your capital can you risk per trade? If your answer is 1%, then 35,000 should correspond to 1% of your capital. That comes to 36,50,000 or 36.5 Lakhs.

Let me illustrate why the textbook answer of “About 15-20L is enough to trade in futures” is harmful for your trading journey. Let us say you jump in with 15L to trade in futures. If you are still willing to risk only 1% per trade, you can only take a loss of up to 15,000/-. So if you spotted a trade in Banknifty, you would be forced to either take the trade with half of your normal stop loss or break your rules and take more risk per trade than you have initially decided. If you keep half of the normal stop loss, the accuracy may reduce. If you take more risk per trade then your account can drawdown more than you had anticipated.

In my personal opinion one should only use futures when one wants to take a short position in a scrip. If you want to go long, you can simply buy the stock. You get the freedom of position sizing. You can add more if you want, you can book your partial profits at first target, you get benefits of corporate actions while you are holding the stock, etc.

I know that indices, currencies and commodities are only traded in futures. But the same risk management principles apply there as well.

Take the same approach we Indians take while packing food for the trip. We usually pack enough for us, our co passengers, the conductor, the driver, the cute dog we see at the rest stop and some more for the return journey. Have enough margin in your account before getting into futures so that even if your every single trade goes wrong in the first month, you can still trade once the calendar turns.

Happy trading…

Monthly Options portfolio October 2020

I did make a simulated options portfolio for October as well. I focused a lot more on some experimental strategies this month as compared to simple delta strategies of September. Also I apologize for not making a sheet as promised for ease of tracking of the positions instead of such screenshots. Hopefully I will get some time this series to make it. This is directly the update post like the last month. Since not all of this portfolio was built at a time, there was no point in writing a ‘Start of the month’ article. Also this time it is difficult to gauge maximum profit on portfolio since some of the strategies did not have a fixed maximum reward. So let’s get into it.

BIG DISCLAIMER - I may not have position in the strategies I post here due to margin reasons. Derivatives are the most risky instruments available to retail traders. Please do your own studies before taking any trades in the stock market. I will not be responsible for outcomes of these trades. I do not own any charts or data I share here. Everything is for educational purposes only. I assume you agree to the disclaimer if you continue reading this article. 

Banknifty Double calendar spread

So what is a double calendar spread? In short, you buy options in far expiry, 26th NOV in this case, and sell options in current expiry. Unique feature of this strategy is that you get positive theta, and positive vega. Meaning, you gain from theta decay AND you gain from rise in volatility. I think this strategy deserves a post of its own. So I will discuss the details separately.


Maruti Bull Put spread

This was a relatively simple strategy. Maruti has a good support around 7000. So when the stock came around that level, I initiated this spread. Since this strategy was initiated just a week before the expiry and 200 points out of the money, the premium was very low. But that also meant that theta decay would be rapid. For about 30 thousand rupees of margin, and about 6-7 days of holding period, this was a decent trade.


Wipro Bull Call Spread

This was one of trades that went horribly wrong both in this portfolio as well as my real money trading account. Results of Wipro were declared after market. A potential buyback was announced at 400rs. So without studying other numbers thoroughly, I took a bullish position in Wipro. Not only did it open gap down, it ended the series about 10 percent down from the results day. I did try to reduce the loss a little by booking profit in 370 CE and selling 360 CE making it into a Bear call spread.


Reliance call condor

This was another one of those experimental strategies I tried out this month. I did the same strategy in Cipla in my real account. I had initiated this strategy at the beginning of the month hoping that 2200 is the lowest RIL would go. It went much lower than that. Just like double calendars, call condors have some unique properties. I will write about it in a separate article. One thing I would like to point out that I booked out on 23rd of October when reliance was at 2100. Despite that the loss I incurred in this strategy was negligible. No it is not a bug or a manipulation, that is a feature of call condors.


Infosys call condor

This was a results day trade. Results trades are designed to take advantage of volatility crash after the results are announced. Traditional results trades are designed around short straddle strategy. I decided to give it a try with a call condor. About a week before expiry I decided to cover 1200 CE short call and short 1150 CE since it didn’t look like IT pack was in the mood to give a rally. This was one of the good trade, not just because of the profit but because the system worked.


Coal India bear call spread

Coal India looked very bearish after breaking and retesting 120. I initiated a bear call spread since I didn’t expect a further sharp down move neither did I expect Coal India to reclaim 120 levels. Those with a keen eye would recognize this trade as similar to the one taken in Eicher motors in the previous month. Entry was decent. But looking back at it, I do not remember why I exited out of this trade. The trade would have ended at maximum profit had I held on to it. This trade was worse than Wipro because I broke my system though the loss is smaller than that in Wipro.


Reliance box spread

Box spread is an arbitrage strategy. You enter into a vertical call spread and a vertical put spread or vice versa. Either one of the call spread or put spread will be a credit spread and the other will be the debit spread. Since the strike prices are same, the difference between credit and debit will be your profit. And theoretically, no matter what happens to the stock your profit will remain constant at expiry. I just wanted to check MTM fluctuation in this strategy. This is another one of those things about trading that looks easy but isn’t. I will write about this separately too.

In total the portfolio made about 17 thousand profit. Applying our deductions of about a thousand rupees per strategy, we still made about 10 thousand rupees on this. Though in this portfolio the capital used would be a lot less than previous month, we would still consider 10L as our investment. That makes the ROI for this month at 1%. This is significantly less than last month’s returns. It is also less than Nifty returns for the month which are around 3%. But we must keep in mind that after continuous reduction for 6 months since April, India VIX rose by almost 27%. That is a crazy increase in volatility. So despite the rise in volatility we managed to make some profit. That is what portfolio approach is all about.

Happy Trading.

P.S. – I had said in my previous monthly portfolio update article that I will post my trades on twitter. But it turned out to be a lot more tedious task than I thought it would be. So I don’t think I will be live tweeting all of my trades from now on. I may post some of the trades some of the times.

Monthly options portfolio (September – 2020)

Unless it wasn’t clear from my earlier posts, I like trading. I particularly enjoy how well options help you translate your market view into a trading strategy. So I figured why not share some of them here.

BIG DISCLAIMER - I may not have position in the strategies I post here due to margin reasons. Derivatives are the most risky instruments available to retail traders. Please do your own studies before taking any trades in the stock market. I will not be responsible for outcomes of these trades. I do not own any charts or data I share here. Everything is for educational purposes only. I assume you agree to the disclaimer if you continue reading this article. 

There will be some trading jargon in the discussion that follows. So here’s a short key for that:

  • Position – A position in a stock would consist of multiple option trades.
  • Trade – Entry or exit from an options contract.
  • ROI – Return On Investment
  • PoP – Probability of Profit

So there are some rules that I will follow while making these strategies:

  1. Maximum margin used will be 10 lacs.
    After SEBI’s new margin rules, required margins have reduced greatly risk defined strategies. Some of my strategies will be risk defined.
  2. Adjustments, i.e. additional trades, will be taken if any position has the potential to give losses.
    It might take additional margin and hence we will leave some margin unused at all times.
  3. Margin calculation will be done in the ‘India’s Best Trader’ tab of Zerodha Sensibul.
  4. PoP will take priority over ROI.
  5. Strategies will only be in the options which are liquid.
  6. Strategies on stock options will be in current month.
  7. Strategies can be initiated anytime except in the week monthly of expiry.
  8. Strategies targeted at events such as results, court hearings etc, will only be taken if at least twice as much free margin is available to manage any unexpected movements in stock.
  9. 5% of capital (i.e. 50,000) in the MTM loss on a closing basis will be the hard stop to exit any strategy.
  10. After 40-50% of the max profit is achieved, we will look to exit out of strategy depending upon stock movements.

I know these are a lot of rules. But trading without any is just asking for your account to be blown up. Another disclaimer would be that I have constructed this on a weekend so option premiums are according to the closing price on the Friday 4th September. When you track these tomorrow the premiums will be different. Idea isn’t to get the exact entry price but to have positions which will require minimum maintenance through the expiry. If the market moves against any of the positions I might add the adjustments done here. But don’t hold me to it. I will also do weekly expiry trading in BNF in my trading account which I may update separately.

Not all strategies will have explanations as some of them are pretty textbook.





This is part of the positions which will be added as the expiry comes near. All the positions will be converted to MIS on the day of expiry and I will do the expiry day trade.




This is a little complicated one and relies on volatility of the NIFTY remaining high through this weekend. So the next week long options will not lose too much premium to time decay and I will get to keep the premium from this weeks sold options.

So far we have used a little over 6 lacs for these 9 positions. I will update changes, if any, in the captions of those images. Also I will try to find a better way of putting such trades on the blog. Suggestions are welcome.

This is the first time I am putting some of my trades in public. Please do not blindly follow anything you see on the internet including this blog.

Happy trading…