The North Korea-US war of words combined with many other factors have seen the Asian and Indian markets correct quite sharply over last few days.
Whether we call it a correction or this proves to be a big crash in the longer term, is yet to be known. The fact is people have lost money over these few days.
Most people know only the buy side of the trade.
They buy and wait for the price moves up.
There are no plans for prices going down except wait for the turnaround.
When that does not happen, they get jittery and ultimately end up selling at a very big loss.
Such stories are repeated at every major decline in the market.
NIFTY Movement September 19–25, 2017
Source: Moneycontrol website
Making Money From Market Declines:
Money can be made by doing just the reverse of buying— SELLING.
In market terms it is known as Short Selling.
You sell the stock without owning it.
In US markets, lot of things are written about borrowing stock for shorting, cost of borrowing etc.
In Indian markets, we need not worry.
You can short the stock only for intra day basis. The borrowing mechanism gets taken care by your broker.
It is a simple arithmetical transaction.
You sell at a price believing it will come down soon. When it does, you buy back and make a profit.
To do it more effectively, it can be done through Futures Trades.
Futures contracts let you carry the position till expiry of contract which is the last Thursday of the month.
The profit or loss is credited/debited to your account on the settled price at the end of the day.
Options can also be used to make profits through declines.
One could buy PUT options and if the stock value falls significantly within the duration of the contract, good money can be made.
It would be best to explain with real examples:
Shorting through Futures:
I had considered shorting IDEA CELLULAR stock in the first week of September. The reason was the likely reduction in the Interconnect Charges between the various service providers. Apart from that telecom sector is going through a severe churning and was virtually a non performer in a strong market.
That is what is required.
See what sector is weak and which stock is underperforming. One has to short the weakness.
We may go wrong, but rewards are great when the trade goes right.
Here is how this trade performed:
Sold 1 Lot of IDEA CELLULAR ( 7000 shares) for September 28 Expiry at Rs. 87.35 on September 05, 2017.
It went down to Rs. 79.00 on September 12.
Next day saw a very big up move and I was stopped out of the trade at Rs. 83.10.
A profitable trade but a big part of the profit was gone due to this reversal.
I still retained the opinion that the price was headed down only.
I entered the trade again exactly at the price where stop loss was hit.
Virtually it was continuation of the same trade with loss of one brokerage transaction.
Yesterday, the price closed at Rs. 76.30.
What happens today is not known, but this short has given a profit of a little more than Rs. 77000 before brokerage and taxes.
In between there was a day trade done on September 11, which yielded a small profit of Rs. 0.25 per share.
This transaction will pay for the incidental charges of the main trade.
Buying PUTS when expecting lower prices:
On September 01, I bought a PUT for Strike Price of Rs. 280 for SBI stock.
This PUT will become profitable if SBI stock moved significantly lower from 280 levels.
It happened and I could close this transaction profitably yesterday.
The PUT was bought for Rs. 6.90 on September 01, 2017.
Sold for Rs. 20.70 on September 25, 2017.
Lot size is 3000 shares.
The trade gave a profit of exactly 200% excluding brokerage and taxes.
But it is not a walk in the park:
Profits look good when they happen.
But things can go wrong and they often do.
Painting only the rosy picture is not the right way.
Seeing the dark side of the trade, the losing side is equally important.
I had a view that Tata Motors will stay below 480.
It had touched 458 a few days ago and I expected the stock to revisit that level.
Bought 1 Lot of PUT 480 for Rs. 10.05 on September 01.
Bought another lot for Rs. 7.80 on September 12.
The stock kept going up and the PUT kept losing value.
As the stock is volatile and at times moves 4–5% in a day, there is always a chance of strong reversal.
That did not happen.
Now it is almost worthless.
Yesterday the closing price was Rs. 0.40 and I am looking at a loss of approximately Rs. 27915 in this trade.
What is important is to maximize the profit like in SBI trade, as the loss could be equally big when the trade goes wrong.
Trades in NIFTY Index:
When not having any opinion about a particular stock but expecting the general market direction to be down, it would be advisable to short NIFTY futures or buy NIFTY PUTS.
Individual stock may perform against the trend, NIFTY trade will keep you with the trend.
For this reason, the most traded volumes are in NIFTY contracts.
Conclusion:
A crash or correction in the market could be profitable through short trades.
Shorting can be done effectively through Future or Options.
Trade should be taken with appropriate stop loss to minimize the loss in case of price reversal.
There is nothing wrong about shorting. Only precaution is that trades should be in high volume stocks.
Do not trade in penny stocks even if they are falling 10% every day. Exiting the trade is more important than initiating it.
Trade cautiously.
Trade profitably.
Thanks for reading.
Image Source: icicidirect
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