Wealth Management

 Ten Commandments for success in F&O market

1. Do not enter any stock in which you don't have conviction - Many investors don't understand risk, only return. F&O is a serious commitment to make an investment for the long term, its not sattabaazi.. if you don't like Adani Ports, don't sell the put or buy the future or sell the calls or any such thing. ... that's gambling.. be a long term investor in F&O and you are guaranteed to make money

2. Whatever your advisor says - A Put is always, always, always safer than a future... Imagine if you were willing to enter a future, you have downside risk uncapped (unless you buy a put). Now, when you write a Put, you are basically taking a deferred Future.. how could a lower strike price put be more dangerous than a future - So get your common sense hat on

3. Returns are not important - managing Risk is - Arbitrarily writing puts willy nilly just results in lot of headache in future - reason being as the market gyrates, your puts become extremely risky and hence cutting you down ... See note below on strategy to write puts

4. Be Contented - Generating 5% per month is not difficult. However people come to market to make double their money in a month... if you compound 10 Lacs at 5% per month in 10 years your portfolio will be 34 Crores 89 lacs.

5. Never Write naked calls - While your ability to time the market may be considered awesome by you, naked calls will only leave you without clothes. Never, never,never write naked calls. .. always use a future to hedge your call

6. Judicious use of Margin - If you have 10 Lacs deployed in F&O, then make sure 3.5L is kept aside for M2M. Never ever take positions which eat up 9.9 LAc OF MARGIN if you have only 10L.. that's a recipe for disaster.. we will compute the 5% on full 10L, but only deploy 6.5L in positions

7. Never borrow money to invest in F&O - Self explanatory

8. Uptrading of risk - Many people uptrade their risk for higher returns. For example if you sold a Infy 1500Put for say 300 x 15.. and infy ran up to 1700.. now your 1500put is at 5 Rs.. you want to replace this with a 1620PE for say 18 Rs. Your 1500PE still yields you 2% on margin deployed.. you are uptrading risk for higher return.. do this at your own appetite - not recommended

9. Ignore the Noise - If your conviction in a stock is rock solid, ignore the noise and the accompanying fluctuations in market.. they are like apsaras; trying to distract vishwamitra from his penance... you be focussed on the long term value of your stock

10. Don't Listen to advisors (including me).. anyone who comes on CNBCTV18, stock market tips, indore based sms or calls, friends relatives etc... Don't ever listen to anyone. Just be focussed on your strategy and returns will follow.

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How to write a Put

1. Identify a core stock - which you are willing to hold for 10 years

2. Identify the price and write it on a wall or excel or notepad

3. Wait for the price to correct atleast 5% in a week - 5% correction spread in a period >  one week doesnt count

4. If 5% correction happens over > 1 week, redraw point 2 and wait for 5% correction in a week

5. When correction happens to your level of satisfaction, write your PUT another 6-7% below the reduced CMP.. this gives you a full 12% buffer on an A grade stock

6. don[t write mid month or far month puts

7. Wait till Month beginning like 5th of the month to start your Put writing till you gain confidence

8. Keep yield on margin > 7.5% atleast

9. If your Put becomes ITM, then roll over by another ITM put next month or by buying the future and ride it on way up or down.. never exit the stock

10. Be careful of writing puts during event calendars

posted by Icarus  # 10:01 PM