Long Call Butterfly Spread

         A long call butterfly spread is an independant trade, that uses a combination of four calls, and is a bidirectional strategy (meaning it will be profitable if the price does not move in either direction). The trader buys a single in the money call contract and a single out of the money call contract, and then sells two at the money call contracts. If the price does not move, then only the lower striking long call will expire in the money, and the trade will be profitable. If the price moves up significantly, all of the calls will go into profit, and if the price moves down significantly, all of the calls will expire worthless, both of which result in a loss equal to the premium paid for the calls. The trade is entered at a debit (the long calls cost more than the premium received for the short calls), and is therefore a debit spread strategy (i.e. the maximum loss is taken upon entering the trade).

Making a Long Call Butterfly Spread

1. Purchase a single in the money call contract, and a single out of the money call contract
2. Sell two at the money call contracts
3. Wait for the at the money and out of the money calls to expire worthless to realize the profit

Risk and Reward

The risk of a long call butterfly spread is low, and is limited to the premium paid to enter the trade, regardless of how far the price moves up or down (both of which are against the trade). The risk of a long call butterfly spread is calculated as:
Maximum Risk = Difference between long and short call premiums

Maximum Loss = Premium received - Premium paid (initial debit)
The reward of a long call butterfly spread is limited to the difference between the strike prices of the lower striking long call and the short calls. The profit of a long call butterfly spread is calculated as:
Maximum Profit = Difference between lower striking long call and short calls strike price

Profit = Short calls strike price - Lower striking long call

Option Strategies

1). Bull Spread: when the market is expected to go up (bullish outlook) a bull spread can be created to make profits in rising market with minimum amount of risk. Bull spread is created by buying a call/put of lower strike price and selling another call/put of higher strike price. 2). Bear spread:

When the market is expected to go down (bearish outlook) a bear spread can be created to ensure profits in a falling market with minimum amount of risk. Bear spread is created by buying a call/put of higher strike price and selling another call/put of lower strike price.

3). Bottom straddle or Straddle purchase:

when the market is expected to be volatile and the direction of it is not clear bottom straddle strategy can be created. Bottom straddle can be created by buying a Call and a Put together of the same strike price and same expiry date.

4). Top straddle or Straddle sell:  when the market is expected to move in a sideways zone a top straddle can be created. Top straddle can be created by selling a Call and a Put together of the same strike price and same expiry date.
5). Butterfly Spread:  when the market is expected to move in a sideways zone a Butterfly spread can be created. Butterfly spread can be created by buying two call options, one with low strike price and the other with comparatively high strike price, and selling two call options having the strike price which lies in the middle of above two strike prices and which is close to the current prevailing market price.

6). Strangles:  

when the market is expected to be volatile and the direction of it is not clear bottom straddle strategy can be created by buying a call of higher level and buying a Put of lower level. Both of these price levels of buying Call & buying Put forms the basis of ranges of Index beyond which it is expected to remain. If the prices remain outside the price range he makes profit otherwise loss.

7). Strips:  

when the market is expected to be volatile and the direction of it is not clear bottom strips strategy can be created by buying a call and two puts of same strike price. Investor makes profit if the exercise price close far from the strike price of Call and Put taken.

8). Straps:  

when the market is expected to be volatile and the direction of it is not clear bottom straps strategy can be created by selling two calls and a put of same strike price. Investor makes profit if the exercise price close far from the strike price of Call and Put taken.

Free Nifty future tips

Nifty Option Call and Put can buy at the trigger price of Nifty Future, a low risky trader can move sl to trigger price when it reaches first target. Make partial profits on each targets. Don't trade without Stop loss.

Nifty Future Tips For 5/12/2011
Scrip	Trigger	Price	SL	T1	T2	T3
NIFTY	Buy above	5106	5083	5126	5146	5178
	Sell Below	5061	5083	5041	5021	4989

Strike price

        Strike price is another important term used in options trading. It is the price at which the option can be exercised. In simple, it is the betting or expectation price where you think markets may go up to. Let us take nifty call put for better understanding. For instance, if nifty is trading at 5480 and you think markets may move further 220 points UP, then one can opt to buy a Nifty CALL of 5700 strike price (5480+220=5700) — ‘Nifty 5700 CE’. (5700 is not the buying price value but only an estimated level till where nifty many reach in the near future, moreover its just like a name given to that option. Current buying price value is called premium where you buy, say it as Rs.40) As well if you predict that nifty may crash 280 points more, you can opt to buy a Nifty PUT of strike price 5200(5480-280= 5200) — ‘Nifty 5200 PE’ (say its current price/premium is around 50).
NOTE: Strike prices are available only with a difference of 100. So trader has to opt for 5600 CALL, 5700 CALL or 5800 CALL ……
Now what is my profit if my expection is correct?
In the first case, if you expectation is correct, you would get a profit around 220 points. You predicted market when the price is around 5480 and as per your expectation nifty travelled from 5480 to 5700 (220 points). At the time of your buying, we assumed the premium/current price is around 40. When market reaches your expected level of 5700, you get 40+220=260 where you get a profit of 220 points leaving your initial investment 40 points. Now if the lot size of nifty is 50 shares, you would get a final amount of Rs.13,000 (260 points X 50 shares) — 11,000 profit and 2,000 investment return.
In the second case, if your bet is correct, nifty fell from 5480 to 5200 and at the time your PUT buy, say the current price of premium is 50, you get 50+280 = 330 points in which 280 is the profit and 50 being your investment return.
Summary of strike price:

• Strike price is the term used to refer the gap between expected move and current nifty price
• Strike prices are available with a difference of 100 points for nifty index
• Based on current price, strike prices are divided into ITM, OUT and ATM (moneyness of options

Stok Trading

         In general, trade is the synonym of a purchase, sell or exchange of good. In stock market, the act of buying or selling shares is called as trading. The same is also called as investing, of course with a good difference between them which will be explained in our next posts. Once after the trading account is allotted to the client, he can buy or sell the shares as per his time and price. Basic parameters required to place an order for a trade are name of the srcip/share, price at which the clients wishes to buy/sell, quantity of shares. Its important to note that it’s not required to buy/sell the shares at the time of placing order. Pre-orders can also be placed which will get execute when the price of the share triggers the order price. The former type of orders are called current market price orders or market to market order where as latter type of orders are known as trigger orders.
CLASSIFICATION OF TRADES:
Based on Action:

• Long – First buying and later selling of those shares will be executed
• Short – First selling and later buying of shares will be executed

Based on Time Frame:

• Intraday – Buy and selling (or) selling and buying to be executed in the same day
• short term – Buying the securities and holding for a shorter time period probably around 3 to 6 months
• Long term – Buying the stocks and holding for a long term of year or more are said to be long term trades

Based on contract:

• Equity – Equity/Cash are simplest trades where any number of shares can be sold or bought with no time limit.
• Futures – In futures, only multiples of lot sizes (fixed no. of shares) are permitted to trade which are different for different scrips with time boundary within which one needs to square off their positions.
• Options – Same as futures, trading in fixed lot sizes and time limits but with different strike prices and premiums

Based on Companies:

• Index Trading – Just like companies, trading can also be executed on index like Nifty, Bank nifty, CNX IT etc
• Stock Trading – All other than indices are called stocks/scrips or companies

Offline trading and Online trading

Offline trading is the traditional way of transacting the shares through a broker probably by means of phone. Online trading is a revolutionary change introduced in 21st century which lead to a huge improvement in the trading volume. This is one of the reasons why the turnovers of stock exchanges increased phenomenally. National Stock Exchange is the first exchange in India to introduce online trading. There are innumerable advantages in online trading when compared with offline trading but still some traders still prefer trading offline due to security reasons.
Advantage of online trading to offline trading:

• Time – Only a trader knows how important time factor is, at the time of trading. Online trading makes it quite easy to place order in a few clicks saving lot of time.
• Money – It also avoids all miscellaneous costs as in case of offline trading, broking firms charge extra for the service they provide.
• Minimizing losses – Trader can square off his positions immediately when markets turn against his positions which is never possible in traditional type of trading
• Buying & Selling – One of the most advantages a trader could experience is trigger trading where he/she need not wait till the required price comes. In case of buying or selling (including stop loss trade), the trader is just a click away to place his order and leave the terminal. So, there is no need to buy at current price or wait till the price arrives.

Apart for the above advantages, there are also many advantages in online trading comforting the trader and helps in gaining maximum profits

Trading account

         Trading account is an account used to buy and sell shares. It is maintained by financial institutions and administered by the trader. This type of account can be compared with bank account to understand in an easy manner. Just as our saving bank account holds the cash, trading account holds securities. Just as savings bank account is offered by many banks like ICICI, HDFC, SBI, trading account is also offered by many broking firms like India Infoline, Share khan, India bulls, SMC etc.
There is a bit confusion among the traders on the number of trading accounts and demat accounts one could open. Let’s try to put that away. It is recommended to open only 1 demat account and as many trading accounts as per traders wish. All the trading accounts can be linked with 1 demat account. There are many reasons why a trader needs to open many trading accounts.

• To avoid confusion – A perfect portfolio management requires more than 1 account at least to self test the trading style. In detail, if a person has 10 lacks, he can split 5 lakhs for investment, 3 lakhs for intraday equity markets and 2 lakhs for intraday commodity markets. After 1 year, he could better self test which of the three is better in terms of returns, trading style etc. Apart, it also makes easy at the time of tax payment.
• Trading Terminal – Some broking firms has good software terminals. So at times, traders needs to change or open a new account for the better trading experience.
• Brokerage – Last but not the least, some broking firms charge more brokerage which may make it necessary for the trader to open another account.

What is a demat account

           Dematerialized account is abbreviated as demat account. In india exclusively, every individual trader/investor must possess an account in order to trade in the stock market as per Securities Exchange Board of India (SEBI). This account serves many purposes out of which the key is that the securities and shares are help in virtual format instead of physical certificates. This avoids many confusions and bottlenecks in the stock market for every investor. An account is opened with an exchange broker normally called as broking firms. If traded in physical format, every transaction penalises 0.5% stamp duty which was avoided by demat account system. Every account has a unique ID with a password into which the securities are deposited. Demat account offers innumerable benefits as follows:

• Quick clearance and settlement
• Avoids confusion in the ownership of securities
• Easy allotment of IPO
• Holding of shares are very convenient and easy
• Securities can be transferred easily
• Elimination of paperwork
• Elimination of mid-brokers
• Certificate thefts can be avoided
• Conversion of shares and money is easy
• Risk involvement is almost eliminated

Apart from the above advantages to the investors, broking firms too enjoy many benefits such as elimination of time delay, paperwork and useless settlement issues

Websites are proved to be fraud in nature.

     Nifty Options Tips are the used to trade in nifty call put. In Indian share market, these kind of tips are provided by many websites, each with their own unique features. However, many of these websites are proved to be fraud in nature. 

Apart from these websites, clients also need to check some key features which are described in our nifty option tips article. Nifty options can not be carry forwarded like nifty futures as the premium keep on falling with time even if the price of respective stock increases. So, nifty options traders must keep time period in mind while subscribing to any nifty options tips providers. The recommendations provided are of intraday or positional have to be checked thoroughly before commencing the trade. At times, BTST (Buy today sell tomorrow) and STBT (Sell today buy tomorrow) calls also are dangerous when options are nearing expiry. Let us recollect the important features to check while subscribing to these tips.

• Firstly check whether any free trial is offered by the website.
• If it offers paid trial, pay maximum for a period of 1 week.
• In the course of time, check all features of nifty options tips.
• Also, see that the provider you choose is available for support during market hours.
• Check how old the website of providing this service is?
• Check the performance of atleast 1 year before subscribing.
• While calculating performance, check the premiums along with percentage.
• Premiums of Options tips must be atleast 70 or above to get actual performance.
• If possible, choose the one near to your broking house so that you can visit if necessary.
• See that the price of nifty options tips is minimum.

Taking small losses is part of the game. Taking large losses can take you out of the game.

Begin as a trader

A new trader must watch the market 2-3 weeks before start Trading. You must have a strategy to how to trade what the buying price, targets, stop loss. and you have to continue a same strategy(if u believing the strategy) a long time, like 1month. Continuously strategy changing may loose your money. f you have a Tips provider must obey the rules. Stop loss is a grater thing if u avoid it you must lose your all money.A good tips provider gives first target is same or grater than the stop loss.If the sl is bigger than first target you can't make profit.

Softwares-Metatrader

 There are so many software use full in day trading. 'Meta trader' is a good one to see live market. It also contains lots of good indicators like ichimuku,macd,stoch,moving average.It  is very help full. Use its 5min chart for a nifty option trader. just search in u tube for how to using these indicators.


just search in Google for GCI MT4 u will get NSE supported meta trader. first u download and install it and make a demo account, it needs no money, and then check in symbols-indicators-NSE nifty, show it.u can see NSE in market watch (left side chart) right click and click on chart window.

              STOP Believing 99.99% Accuracy in NIFTY tips

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STOP believing 1lakh to 2.5lakh profit in NIFTY Options.

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The History of Future and Optiopns in India.

In India Derivative markets havebeen functioning Since the 19th Century with organaise Traing in cotton through the establishment of The cotton Trade association in 1875.

In June 2000 The NSE introduced the derivatives as exchange traded financial instrument.

In 2001 NSE introduced INDEX and STOCK options.

In 2011 NSE starts Currency Options in a seperate segments.

Option Trading

Option trading has many advantages over other investment vehicles. Trading in option contracts can give an investor the flexibility to place bets on very specific market outcomes.

For example, an option trader can make a bet that in 6 months time a stock will be trading either above a certain price or below a lower price - an each way bet if you will. If the stock trades between these two prices in 6 months, the trader will lose a predetermined amount. This type of option strategy is known as a Long Straddle or could also be a Long Strangle.

Option contracts also provide traders with an enormous amount of leverage. In the US, 1 option contract represents 100 underlying shares. In other countries, such as Australia, option contracts can be in multiplies of 1,000 times the underlying stock or commodity. So, with a relatively small amount of money an option trader can control a very large underlying stock position.

Because of this, option trading can also be a very risky venture for the inexperienced. Of course, option trading can make you very large returns in small amount of time, but trading options can also lose you the same amount if you are not careful.

An Introduction To Stock Market

Stock Market Index: The Basics

In Stock exchange : What is it, Who owns, controls it  we had discussed about what is stock, what is stock exchange, the stock exchanges in the world, who owns and controls the stock exchange, how stock exchanges have evolved from trading floor to online trading. This post is about the index. What is index? How is it calculated?

What is stock exchange?

A stock exchange is an institution, organization, or association which hosts a market where stocks, bonds, options and futures, and commodities are traded.  It can be thought of as a big room where stocks are sold and bought. If a particular company is traded on an exchange, it is referred to as “listed”. Just as there are many supermarkets in an area or many Khans in the Bollywood, a country can have more than one stock exchange.  Two famous stock exchanges of India are Bombay Stock Exchange(BSE), National Stock Exchange(NSE).
As per BSE website total number of stocks/scrips listed on BSE are 8452. In NSE the number of companies listed are 1461 (Ref:CSV file at NSE)
http://www.bseindia.com/about/list_comp.asp

What is index?

It would be too difficult to track every single security trading in a stock  exchange. So a smaller sample of the market that is representative of the whole is taken. Just as the average marks in a class test tells you how the class has fared in the test,just as pollsters use political surveys to gauge the sentiment of the populationthe stock index tells you the general health of stock market.  If the stock market is doing well, then the prices of stocks tend to rise in what is known as a bull market. If it’s doing poorly, prices as a group tend to fall in what is called a bear market.

In India Sensex is an index that captures the increase or decrease in prices of stocks of 30 companies that are traded on the BSE. The word Sensex comes from sensitive index and was coined by Deepak Mohoni.

Nifty is the Sensex’s counterpart on the NSE and comprises of 50 companies.

How is index calculated?

An index can be calculated in various ways. Some of them are as follows:

• Price Weighted index: Ex: Dow Jones Industrial Average,Nikkei 225
• Market value weighted or capitalization-weighted: NASDAQ Composite, NASDAQ-100,
• Free Float Market Capitalisation Weighted: Sensex, Nifty-50, FTSE-100, CAC 40

Price Weighted Index:A stock index in which each stock influences the index in proportion to its price per share.Stocks with a higher price will be given more weight and, therefore, will have a greater influence over the performance of the index.

For example, assume that an index contains only two stocks, one priced at 1 and one priced at 10. The 10 stock is weighted nine times higher than the 1 stock. Overall, this means that this index is composed of 90% of the 10 stocks and 10% of 1 stock. In this case, a change in the value of the 1 stock will not affect the index’s value by a large amount, because it makes up such a small percentage of the index. The Dow Jones Industrial Average is an example of a price-weighted stock market index.

Market-value weighted or capitalization-weighted: Such  index ex:Hang Seng Index factors in the size of the company. It’s individual components are weighted according to their market capitalization, so that larger components carry a larger percentage weighting. Some investors feel that this over-weighting toward the larger companies gives a distorted view of the market, but the fact that the largest companies also have the largest shareholder bases makes the case for having the higher relevancy in the index.

Free Float Market Capitalization Weighted:is calculated by taking the stock price and multiplying it by the number of shares readily available in the market. Instead of using all of the shares outstanding like the full-market capitalization method, the free-float method excludes locked-in shares such as those held by promoters and governments.

Yet another variation are Fundamental indexes, which use factors such as dividends, cash flow, sales and book value rather than market cap to determine relative weight

Nifty-50 and Sensex Calculation

From June 26, 2009, S&P CNX Nifty is computed using Free Float Market Capitalisation weighted method.The base period selected for S&P CNX Nifty index is the close of prices on November 3, 1995. The base value of the index has been set at 1000 and a base capital of Rs.2.06 trillion. For details check Index computation at NSE Website

SENSEX, first compiled in 1986, was calculated on a Market Capitalization-Weighted methodology of 30 component stocks representing large, well-established and financially sound companies across key sectors. The base year of SENSEX was taken as 1978-79.Since September 1, 2003, SENSEX is being calculated on a free-float market capitalization methodology. For details on how to calculate Sensex One can read with detailed explanation at Onemint How Sensex is Calculated

Why do we need Index?

Every stock price moves for two possible reasons: news about the company (e.g. a product launch, or the closure of a factory, etc.) or news about the country (e.g. nuclear bombs, or a budget announcement, etc.). The job of an index is to purely capture the second part, the movements of the stock market as a whole.The news that is common to all stocks is news about the country . On any one day, there would be good stock-specific news for a few companies and bad stock-specific news for others. In a good index, these will cancel out, and the only thing left will be news that is common to all stocks.. That is what the index will capture.Index is calculated using different methods which do some kind of averaging so that, the individual stock news/fluctuations cancel out reducing risk. The averaging that takes place in an index is equivalent to diversification. Index are like a thermometer for the stock market – they give us a general sense of whether things are hot or cold.

Stock market indexes are useful for a variety of reasons. Some of them are :

• They provide a historical comparison of returns on money invested in the stock market against other forms of investments such as gold or debt.
• They can be used as a standard against which to compare the performance of an equity fund.
• In It is a lead indicator of the performance of the overall economy or a sector of the economy
• Stock indexes reflect highly up to date information
• Modern financial applications such as Index Funds, Index Futures, Index Options play an important role in financial investments and risk management.

Comparison of Indices of the World

You can find the performance of the International stock markets at Wall Street Journal Online

Interesting Read:Good Bad and Ugly of Index

Why don’t we put all the stocks of the exchange into the index?

There is little to gain by diversifying, beyond a point.  Putting more stocks into an index yields more diversification but  there are diminishing returns to diversification. Going from 10 stocks to 20 stocks gives a sharp reduction in risk. Going from 50 stocks to 100 stocks gives very little reduction in risk. Going beyond 100 stocks gives almost zero reduction in risk. Secondly If the stock is illiquid, the observed prices yield would contain contaminated information and actually worsen an index. Hence Sense has 30 stocks and Nifty 50 stocks.

How many indices can a Stock exchange have?

It’s not unusual for people to talk about “the market” as if there were a common meaning for the word. The most important type of market index is the broad-market index, consisting of the large, liquid stocks of the country. In most countries, a single major index dominates benchmarking, index funds, index derivatives and research applications. In India we have two major Stock index, Sensex of BSE and Nifty-50 of NSE. But many indexes of the differing segments of the market exists. These different indices don’t always move in tandem. If they did, there would be no reason to have multiple indexes.

BSE has following indices:

• Broad based Indices like SENSEX, BSE-100, BSE-200, BSE-500, BSE Mid-Cap and BSE Small-Cap index
• Sector Indices like:BSE Auto Index, BSE BANKEX, BSE Capital Goods Index, BSE Consumer, Durables Index, BSE FMCG Index, BSE Healthcare Index, BSE IT Index, BSE Metal Index, BSE Oil & Gas Index, BSE Power Index, BSE Realty Index

And NSE has following indices:

• Major indices like: S&P CNX Nifty, CNX Nifty Junior, CNX 100,Nifty Midcap 50
• Sectoral Indices like CNX Auto,CNX Bank, CNX Energy
• Thematic indices like: CNX Commodities, CNX Consumption, CNX PSE

Index is not static-it’s dynamic

It’s not that once index is made it is frozen. Its composition changes. The world changes, so the index should change.For example:

On Aug 8 2011 Coal India, Sun Pharma replaced ADAG stocks in top 30. Coal India Limited  replace Reliance Capital stock in Nifty 50 from 10 Oct. Bosch Ltd, Dabur India, Idea Cellular and Reliance Capital made their entry into CNX Nifty Junior Index from 10 October.ACoal India Ltd, Patni Computer Systems, Punj Lloyd and Syndicate Bank moved out ofCNX Nifty Junior Index . Ref:Firstpost

The change is not  sudden – for that would disrupt the character of the index. Exchange use clear, researched and publicly documented rules for index revision. These rules are applied regularly, to obtain changes to the index set. Index reviews are carried out ensure that each security in the index fulfills all the laid down criteria. IDBI was once not listed; SBI was once illiquid; Infosys was once an obscure software startup.  A stock may be replaced from an index for the following reasons:

• Compulsory changes like corporate actions, delisting etc. In such a scenario, the stock having largest market capitalization and satisfying other requirements related to liquidity, turnover and free float will be considered for inclusion.
• When a better candidate is available in the replacement pool, which can replace the index stock i.e. the stock with the highest market capitalization in the replacement pool has at least twice the market capitalization of the index stock with the lowest market capitalization.

Who Regulates the Stock Market

Every country has it’s own regulatory body. In the United States, it is the Securities and Exchange Commission, commonly known as the SEC.In India Stock market is regulated by following governing bodies:

• Securities and Exchange Board of India (SEBI)
• Department of Economic Affairs (DEA)
• Department of Company Affairs (DCA)
• Reserve Bank of India
• Stock exchanges

Governance

Nifty is managed by a professional team at IISL, a company setup by NSE and CRISIL with technical assistance from Standard & Poor’s. There is a three-tier governance structure comprising the board of directors of IISL, the Index Policy Committee, and the Index Maintenance Subcommittee. S&P CNX Nifty has fully articulated and professionally implemented rules governing index revision, corporate actions, etc. Ref:NSE website

Psychology of the Stock Market Cycle