Learning sharks-Share Market Institute

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Basics of stock market

• Induction
• Bull call spread
• Bull put spread
• Call ration Back spread
• Bear call ladder
• Synthetic long & Arbitrage
• Bear put spread

• Bear call spread
• put ration back spread
• Long straddle
• Short straddle
• Max pain & PCR ratio
• Iron condor

learning sharks stock market institute

1.1 Induction

Before we begin this module on options strategy, I would like to share with you an article I read in behavioral finance a few years ago. The title of the article was “Why winning is addictive.”


Here is the article written by B. Venkatesh, a consistent columnist for HBL:

To purchase and wager on a lottery ticket, a game you usually steer clear of because you know the chances of winning the jackpot are slim. If you do, however, win the ticket, you’ll probably feel pressured to continue purchasing lottery tickets in the future!

We behave similarly in terms of our investments as well. Why does this behavior occur? Our lives as humans are governed by anticipation. So both the anticipation of and fulfillment of a lottery win are exciting.

But according to neuroscience studies, dreaming about winning is more thrilling than actually succeeding! However, after experiencing the thrill of winning the lottery, you feel compelled to overeat. In other words, even though you know the odds of winning the second lottery ticket, your brain forces you to buy the first one.

The fact that we can lose money makes our experience of winning against such odds even more exciting! This is not so much true of lottery because a lottery is a game of chance while investments, we believe, require some degree of skill

You might be wondering why I posted the aforementioned article at the start of this module. This article, however, takes some of my ideas a step further by putting them in the context of behavioral finance. One thing that I’ve noticed in all the conversations I’ve had with options traders, both seasoned and new, is that most of them view trading options as a hit-or-miss proposition. When one begins an options trade, there is always a sense of humor; however, many people are unaware of how fatal this naive humor can be.

Traders buy options (month after month) with the hope they would double their investment. Trading options with such a mindset is a perfect recipe for a P&L disaster. The bottom line is this – if you aspire to trade options, you need to do it the right way and follow the right approach. Else you can rest assured the gambling attitude will eventually consume your entire trading capital and you will end up having a short, self-destructive option trading career.

I do have to point out that the saying “limited risk, unlimited profit potential” is a silent P&L killer when it comes to options. This “theoretically correct” but practically disastrous fact disillusions new traders, who then slowly and steadily blow up their books as a result. As a result, in my opinion, trading options without a plan is a “dangerous but irresistible past time” (a quote from Pink Floyd).

learning sharks stock market institute

1.2 – What should you know?

Only a small number of strategies must be thoroughly understood by you. Knowing these strategies makes it simple to map the current market (or stock) situation with the appropriate option strategy from your strategy quiver.

We will discuss some tactics while keeping this in mind.

Besides discussing the above strategies I also intend to discuss –

  1. Max Pain for option writing – (some key observations and practical aspects)

  2. Volatility Arbitrage employing Dynamic Delta hedging

One options strategy will be covered in each chapter so that there is no muddle or confusion regarding the strategy. This means that this module will consist of roughly 20 chapters, though I suppose that each chapter won’t be overly long. I’ll go over each strategy’s history, execution, payoff, breakeven point, and perhaps the best strikes to make given the remaining time. If you want to use the strategy, I’ll also be sharing a working Excel model with you.

Please keep in mind that while I will discuss all of these strategies using the Nifty Index as a benchmark, you can apply the same principles to any stock option.

The most crucial thing I want you to know is that this module will not contain the Holy Grail. Nothing in the markets, including none of the strategies we discuss in this module, is a guaranteed way to make money. The goal of this module is to ensure that we discuss a few straightforward but crucial tactics that, when used properly, can generate income.

Consider it this way: if you drive your car safely and well, you can use it to commute and ensure your family’s comfort. However, if you drive rashly, it could be dangerous for both you and those around you.

Similar to how these strategies generate income when used properly if not, they can damage your P&L. It is my responsibility to make sure you comprehend these techniques so you can learn how to drive a car. I will also try to explain the ideal circumstances in which you should apply these techniques. But you have the power to make it work for you; this really depends on your discipline and market savvy. Having said that, I have a good feeling that as you spend more ‘quality’ time in the markets, your application of strategies will get better.

The “Bull Call Spread” makes its debut in the next chapter, which focuses on bullish strategies.

Remain tuned.