Options, FED rate hike and current market scenario….

 

The last time I wrote a piece on my website was almost 2
years ago, I was a novice investor and trader. A lot has happened since then, now
I believe(doubt) that I am a better trader. Made a good amount of money in the
bull run lasting more than a year. I completed my masters, became a certified
Research analyst and an investment advisor, soon in the process of applying for
SEBI registration. Since many of my friends were asking why and what next in this
mad market, I decided to compose this piece of reality and warning for other Degens
in the market.

Yes !! the markets have fallen and will continue to  fall a little more. Can we make money in a falling
market? Yes, we can. But it surely is expensive and highly uncertain.

The Illusion of Options….

Most of you might have gotten recommendations from
youtubers, tiktokers, reddit users and twitter gurus to just buy a PUT option
spread when the market shows a trend of going down. But buying options has
never worked for 99% of the traders and neither will it work for you.

Buying options is like buying tickets to a sinking ship
with hopes of reaching the shore before the ship drowns.

Its much better and safer to board a strong stable ship like
ETFs and Mutual funds to ride this wave of uncertainty.

First, we must learn why the Derivatives market was created?

It was created by O’Connor to help hedge the positions of the
traders in the commodities market. Soon they identified the immense potential
the F&O market had due to the greed and speculative nature of man. It started
bringing more business than the actual underlying asset.

But still the primary objective was to hedge their positions
or holdings and not be speculative in nature and still many big investors use
F&O as a hedging tool for their portfolio.

We in the last 2 years have gotten easy access to this
sinking ship thanks to new age digital discount brokers who have created probably
the largest number of traders in the history of Indian financial markets. These
individuals having no background in the field of finance or no prior solid experience
in the markets have dived into the riskiest markets of all- options. And mostly
weekly options as they are the cheapest, easiest, and quickest way to make or
break bank.

Weekly options are highly priced in, to hundreds of
scenarios by people with inside information and many other technical analysts. There
is no way to make guaranteed returns but a certainty of losing money if the trade
goes wrong. Is it worth to take on a decision knowing it has a sure way of
failure and only a mere glimpse of hope to get it right?? Absolutely Not!!

Avoid making this mistake and if you still want to trade in
options, it’s advisable to paper trade or virtual trade on platforms like sensibull
etc. for a period of 6 months to year. And back test and analyse trades using
algorithms. I started trading in options only after a year of paper trade, I allocated
around 5% of my portfolio for buying options and am up 120% as of now after losing
trades decisively in the last 2 weeks. For the time and energy spent, I didn’t feel
it was worth all the stress and charges of dynamic change of strategies
employed.

The major thing I realised was the learning yield curve of
trading doesn’t go up as we gain experience. We may learn new and better strategies,
but it won’t surely make us a better or a expert trader as it would in other
skills. I have attached the graphs below for better presentation.

 

Should you board a sinking ship? 

No but yes depends on your
risk appetite. (highly not advised, I have known and seen a lot of people lose huge
money is options)

The current market scenario is highly bearish and uncertain.
The VIX is up immensely, and a lot of factors are contributing to the fall in
markets around the world. The biggest being the FED rate hike and the surprise
RBI rate hikes to curb inflation. Nifty may find strong support around
levels of 15800 and if it is broken decisively, it may range between 14500 to 14800
levels in the next few weeks. Or if in case of a trend reversal it may find
resistance at 16800 levels and stronger resistance at 17200. The best and safe
bet is to average out long term holdings and mutual funds. Start accumulating
ETFs and create wealth in the long run.

One thing is for sure, the most powerful man in the world isn’t
Putin or Biden right now, it’s changed to Jerome Powell whose words can change
courses of economy and wipe out billions in liquidity or wealth. But happy
because it was a much-needed move to stop hyperinflation and reduce creation of
money.

My top 3 picks in the current market:

1. Tata Steel

2. SBI

3. Tata Motors

                                                                             - SHAMBHU N

                                                                                Direct Message Here

PS: This is not an invesment advise, Any ideas or strategies discussed above should not be undertaken by any individual without prior consultation with a financial professional for the purpose of assessing whether the ideas or strategies that are discussed are suitable to you based on your own personal financial objectives, needs and risk tolerance.