4 Money Management Rules

4 Money Management Rules

Dear Trader As trading is an enterprise to make a profit in an atmosphere of wide-ranging probabilities, a flexible approach is a must. Therefore, the following four rules are not supposed to be taken as sort of traffic rules that need strict adhering to. They are more like a checklist of do’s and don’ts – a bit like the routine a pilot goes through before pressing the ignition button. Nevertheless, a new trader would do himself a great favour by sticking to them as the traffic rules for a while. CAP rule Count All Pennies involved in the total monetary value of the instrument to be traded beforehand. Especially the hidden ones that come up gift-wrapped in the form of Leverage, because Leverage is the real villain responsible for dispatching the trading capital on the road to hell more than often.     Let’s say, for example, that a nifty contract can be traded MIS for under 20,000 and as NRML for about 50,000. Now, this 20k leverage is the 25th part of approx. Rs. 500,000, the actual value of 75 shares of Nifty. The leverage thus is 25 times. So a trader with 100,000 trading capital can easily trade 3-4 contracts in one go, right? Wrong. What gets forgotten is that one Nifty contract will move with the full weight of 500K, not with that of 20K. That is, loss and profit will be calculated in terms of full value, not in terms of leverage. One simple rule to follow to save yourself is to make sure you never lose more than 2% of your capital on a...
“Do Not Exercise” Option’s

“Do Not Exercise” Option’s

Dear Trader, If you are active in the F&O segment of the stock market you must be knowing that you have to pay higher STT on options that are In The Money (ITM) on expiry.  A call option is said to be In The Money when its strike price is below the market price of the underlying asset. The reverse is true for a put option – strike price exceeds the market price of the underlying asset. How much do you pay as STT? Take the example of a trader who bought a call option with a strike price of 600 @ Rs.2.50 as he expected that the underlying security will close above 600 for the day and suppose it did close above 600 say at 603. Suppose he bought 2000 units of the call option at Rs.2.50, shelling off Rs.5,000 as premium. By normal calculation the profit should be Rs.{ (603-600)*2000 ( QTY bought) -5,000(premium paid to buy) }= Rs.1,000. However, when he received the contract note, he will see that the actual profit received by him is much less than this. The reason being higher Security Transaction Tax (STT) being charged on exercised options. The rate of STT on exercised options is 0.125% of the full value of the contract. STT on Exercised options on Expiry of Options = 0.125 % * (Strike Price + Premium) * Quantity So in the above mentioned example, the STT would be Rs. 2000 x (600+2.50) x 0.125% = Rs. 1,506.25 So he actually ended up making a loss of Rs. (1506.25-1000) = Rs. 506.25. Such huge differences in STT were troublesome for...
Pre-open Session . How is the equilibrium price determined ?

Pre-open Session . How is the equilibrium price determined ?

If you are a trader you must have seen that there is a pre-open session from 9 am to 9:15 am for both the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). It is basically the period of trading activity that takes place just before the regular stock market session. Traders keep a close eye on this Pre-market session to guess the strength and mood of the market while looking forward to market opening. Let us try to understand how things work during these 15 minutes. At the outset let me tell you that you can place two types of orders in the stock market – market order and limit order (refer to the following graph). The 15 minutes of pre-open session consists of 3 time slots Now that we know the activities carried during these 3 time slots belonging to the pre-market session, let us take a look at how the equilibrium price determination or the call-auction session functions. Case I Say for example, previous day closing price of Stock A is Rs. 200. The following table gives the price and quantity figures during the pre-open session Share Price Order Book Demand & Supply Quantity Maximum Tradable Quantity Unmatched Orders BUY SELL Demand Supply 202 1000 985 3400 985 985 2415 204 1275 1161 13600 22000 22000 -8400 205 5000 4300 10000 10500 1000 -500 207 4000 7500 4000 6250 4000 -2250 199 2000 10000 27000 37000 27000 -10000 Share price Rs.199 corresponds to the highest tradable quantity of 27000 and hence will be considered as the equilibrium or call auction price. Case II Let’s have a look at another possible...
How Execution Range Effects your Option Trading ?

How Execution Range Effects your Option Trading ?

  Traders, Today we will discuss Execution Range and its effect on your option trading. Currently, option trading has been contributing up to 80% of total exchange volume in NSE. But the liquidity is limited to present month contracts. With low trading activity in most contracts, there is a higher probability of higher impact cost. Impact cost is the difference between ordered price and executed price. To save traders from higher impact cost, the exchange has prescribed execution range for option contracts. Now let us see how it protects the interest of traders. But first the definition,Execution range is the price range on both sides of the current price of a contract. It refers to a range in which you can place orders for the various option contracts. Order placed beyond this range will be rejected. Price for each contract shall be calculated as follows, At market open – Option price derived from the underlying price. During market hours – 1 minute simple average of trade prices. According to NSE the execution range on both sides of price would be:            Now let’s explain it with a simple example, Consider the price of a deep ITM (in the money) Nifty option is 100. Now check the below Order Window. We know from the previous table, execution range for this option would be from 80 to 120. (20% of both sides) Anything beyond this range will not be accepted by the exchange. Now if we put a buy market order of 20 lots @ 100, then only 12 lots will get executed at 105 and 112...
What is NIFTY? How is it calculated? 

What is NIFTY? How is it calculated? 

Nifty, derived from the combination of two words “National” and “Fifty”, is a major stock index introduced by the National Stock Exchange of India. It comprises 50 stocks that are actively traded on the National Stock Exchange or the NSE. These stocks belong to various sectors. Nifty is calculated by using the “Free-float Market Capitalization” methodology. You can get their current values from the Index Bar of your NEST Trading Platform Understanding Free-Float Market Capitalization Free float shares are those shares of a company that are traded in the open market. Not all shares issued by the company are free float. Those that are held by the government or the management or promoters of the company or by foreign direct investors are not actively traded in the market. Only those that are traded in the market are taken into consideration while calculating Nifty. The classes of shareholding that are generally omitted from the characterization as Free-float are the following: Shares that are held by founders, directors, acquirers, etc. which contains an element of control over the business entity Shares that are held by individuals or groups or organisations having “Controlling Interest” Shares that are held by the Government playing the role of promoter or acquirer Equity held by the foreign investors through the FDI Route Strategic shareholding by private corporate bodies and/ or individuals Cross-holding or equity or shares that are held by associates and group companies Shares held by Employee Welfare Trusts Locked-in shares and shares which would not normally be sold in the open market Nifty Calculation The Nifty is a market capitalization weighted index based on...
Taxation Simplified for Traders

Taxation Simplified for Traders

Taxation Simplified for Traders: It’s Time To File Your Tax Return Taxation in leu of gains from trading or investing in shares is somewhat complex. SAS Online has made an attempt to simplify it for the taxpayers. Before you can figure out how much to shell off as the tax you must first decide whether you are a trader or an investor. Trader or Investor If you buy stocks with an intention to earn from dividends then you are an investor. A trader buys stocks to profit from price rises. Long-Term &Short-Term Gain If a listed security is held for less than 12 months and then sold, the consequent gain/loss is considered to be short-term capital gain/loss. If the holding period is above 12 months, long-term capital gain/loss arises. Speculative and Business Income Intra-day trading or same day buying and selling of any share is interpreted as speculation income.It involves no actual deliveries of stocks. Trader can gain or lose. Loss can only be offset against speculative gains. Income from trading F&O(futures and options), intraday as also overnight, on all the exchanges is considered as non-speculative business income. How to Calculate Turnover Turnover refers to the profits and losses that are incurred after the settlement of the trading account. In a financial year, if your turnover is over Rs.1 crore, then your books of accounts mandatorily have to be audited  Audit Requirements An audit is mandatory if you have business income and the yearly business turnover crosses Rs. 1 crore. For digital transactions, this limit is Rs 2 crores. All equity transactions are digital. For equity traders, an audit is mandatory(sec...