Practicing targets

abstract accuracy accurate aim

If there’s one thing we see consistently across all self help books, it’s setting goals. They talk obsessively about setting goals and breaking them down into sub goals and sub sub goals and planning every hour of your day….

Some goals require that kind of dedication and hard work. But some goals require work with carefully selected targets. Much like a company sets sales targets for its employee to reach the goal of profitability, we need to set ourselves some targets to reach our goal of consistency in trading.

As I wrote previously in my blog post, we must focus on what we can control and hence the targets that we set ourselves must be aligned to the same philosophy.

Most traders set targets for profit, or return on capital. I realized I wasn’t walking the talk. Market doesn’t owe me my target. I can’t force the market to give me the returns I expect or want.

Target setting varies from system to system. An intraday trader can reasonable expect to take several trades in a week. For her it might be statistically correct to check the PnL at the end of the month. For a swing trader there could be months where she doesn’t close any traders and PnL will be zero. Or a month could force her to book 3 losses in that month while several trades end in good profit the next. In such cases, monthly PnL isn’t a right measure.

Setting unrealistic targets can mess with your psychology too. If it looks like you won’t meet your weekly target, which you shouldn’t have set to begin with, you might force the trades and give up any gains that you might have made so far.

Also if you have multiple streams of income, you can set a collective quarterly target across all. I would consider trading in Equities, currency and commodities as three separate streams since required fundamental understanding of markets is quiet different in all three.

So set the targets you can achieve realistically with the capital you have. Follow prudent risk management and work on a trading system that gives you consistent market beating risk adjusted returns.

Happy Trading…

P.S. – Due to some personal reasons I will not be able to publish a post for two weeks.

You dont know what you dont know

white beads on question mark sign

Let me start with example. There is a internet message board called reddit. Communities on it are call subreddits. Among thousands of communities on gaming, cooking, landscaping and other activities, there is one for traders. And I use that word very loosely here. It is called WallStreetBets. Started as a genuine community for traders to share their research, it slowly evolved into a degenerate cacophony of gamblers trying to use derivatives market in america to place all-or-nothing type of bets. One such user was called 1r0nyman. He did some research and found out that there is an options strategy called Box Spread.

Here’s how a box spread works. You enter a bull call spread and enter a bear put spread in such a way that the bought call and sold put are of the same strike price and the bought put and the sold call are at the same strike price. In short, you enter into a long synthetic future at one strike price and enter into a short synthetic future into another. Here’s an example:

You can see in the payoff diagram that no matter where the Nifty moves the profit will be 203. Such strategies are called arbitrage strategies where traders try take advantage of market inefficiencies. But for retail traders the profit is not even enough to cover the cost of the trade. If you trade with a discount broker like Zerodha, you are charged 20 rs per order. Then it could only be economical if you could enter into at least 10 such spreads at a time so make something post charges. Also for 10 spreads you will need about 4 lac of margin. That makes roughly 2000 rs return a half a percent return for the trouble. There are some other problems as well. If you do not enter at the exact prices the arbitrage will not exist. Nifty lot size is 75, which means if you miss entries by as little 2.6 rs there wont be any arbitrage. Only large institutions and HFTs do this since this strategy is only efficient when done with automated systems.

Our trader buddy 1r0nyman had only seen the payoff diagrams. He figured that options on the SPY ETF which is comparable to our NIFTYBEES would work for this trade. He did the calculations and proclaimed that this trade literally can’t go t*ts up because money at risk is zero. Now here’s the catch. In India we trade in European style of options. That’s what the E in CE and PE stands for. European style of options can not be exercised before expiry. There is another flavor of options though called American options. These options can be exercised any time the buyer of options feels like. Now since we are short two options, one call and one put, one of them will always be in the money. Meaning there will always be the risk of one of those two options being exercised and us being forced to either give delivery of or take delivery of the underlying. Box spread is only profitable if held till expiry. But as soon as 1r0nyman entered into his trade, which was several times his account, people started exercising the options. He lost about $60,000 on an account of just $5,000. His broker realized what had happened and immediately closed 1r0nyman’s account. But sometime between getting into the trade and broker force closing the account, 1r0nyman had taken $12,000 worth of profit out from trading account into his bank account. So though his account showed a loss of $60,000, 1r0nyman made over 100% profit before closure. The loss was borne by his broker since 1r0nyman wasn’t supposed to be able to take that much leverage in the first place. Since then that broker has banned box spreads from their platform.

So what’s the lesson here? 1r0nyman didn’t know how bad his trade can go. But what is worse is his broker didn’t know about such catastrophic strategies. That is why it is important to remember that you will not know what you don’t know until the time something like this happens.

In India MCX didn’t know what happens when price of Crude is forced below zero in the international market. On MCX all futures contracts are physically settled. So if you hold a long contract of futures of Crude, you will have to take delivery of 100 barrels of oil. If you hold a long contract of Gold you will have to take delivery of 1 Kg of gold. Yes you read the units right.

Futures contracts on NSE are cash settled on a day to day basis. If you had 10L margin but zero cash in your account, you could enter into a future long in Nifty. About 1.3L of margin will be blocked. Let’s say unfortunately Nifty closes 100 points down and your account shows an MTM loss of 7500 rupees. At the end of the day exchange expects you to pay that 7500 loss in cash. Margin will not work there. So despite having over 8L of margin in your account your broker will raise a margin call against your account. You didn’t know that you don’t know about cash settlement. But you will have to come up with that money somehow.

‘I didn’t know’ excuse doesn’t work in stock market. As a market participant you are expected to do your own due diligence.

So be aware, be prepared, and happy trading.

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…