Arbitrage opportunities in options - how options are priced, explained in layman's terms - without resorting to the BS pricing model
Alright retards, I've been laid off at work due to beervirus and I've been eyeing and toying with the idea to get back into options trading. I'm writing this post to raise the bar for discussion on this sub, I'm tired of seeing just memes. We'll never match WSB unless there is a healthy mix of dankass memes and geniass discussions. Now, when it comes to options, I am completely self-taught (completely from first principles, back in 2008, before you autists came up with the idea of watching videos on youtube). Since I am completely self-taught, my perspective will be different from the people who learnt this stuff while studying MBA/finance courses/NSE accredited investing courses. So if what I'm saying is different from what you've heard from the dude who swindled you of 20K for two days of options education or your gay BF's live-in partner, remember when it comes to maths, there are many ways of approaching a problem, ultimately, all are the same - profit means account balance goes up, loss means a loss post on ISB goes up. Now, I'm assuming that you understand how options work. If not, I suggest heading to Zerodha's Varsity to read up on options. If you're too lazy for this, get your micro-dick outta options, this is a man's game, surprise butt-sex awaits amateurs. I'm also assuming that you've come to realise that the sustainable way to make money in options is to write options. Unless you've got Trump or Ambani on speed dial to get access to news before it becomes news, YOLOing whatever rent money you have on buying options will blow up your account, eventually. Writing options also means the possibility of account balance going tits up is a real possibility. You gotta, gotta, gotta measure and manage your risk. You can do this only when you understand options as well as your dick. Towards this, I intend to put up a bunch of posts (depending on many of you shit heads are still reading at this point) that comment about little things that are more of 'wisdom' than 'education'. The example below talks about currency derivatives. Why currency? Read below:
Lower margin needed. I can short a CE/PE contract with only Rs.2000, unlike the >Rs. 70,000 for index contracts. You get to learn, play and wisen up with an order of magnitude less money than with Nifty or Banknifty contracts.
More stable underlying. When you're shorting contracts, the last thing you want is the underlying asset going crazy like a broncho during rodeo.
Sooner or later, you end up acquiring a more balanced education on economics as a whole, rather than the shit fest that goes on in the local circles.
The more contracts you can short, the more strategies you can pursue
Decent hedging is possible without throwing away all of your potential profits
Lesser stress (anybody else going through premature hairloss or is it just me?) because of points outlined above.
Alright, today, I'm going point how the put-call parity works and by extension, show proof for 'efficient markets' by pointing out how opportunities for arbitrage is pretty much non existent, so you guys can cool it with the whole 'market manipulators' knee jerk reaction. Alright, to start off, here's the current spot rate of the USD-INR pair: https://preview.redd.it/qup28ay567j51.jpg?width=452&format=pjpg&auto=webp&s=b79ef1a3480e5cbafa42547143c651397ec57f13 Here's today's USD-INR futures closing rate for Sep expiry: https://preview.redd.it/krghirc677j51.jpg?width=511&format=pjpg&auto=webp&s=60d52b785baa8a1cd240d0df7949a48c8391ba2d The difference between spot and futures rates is due to differences in what is construed as 'risk-free' interest rates in the US and in India. Check out this video if you want to understand why the Sep futures is trading at a premium of 27 paisa to the spot rate. Alright, so the deal is, if you buy 1 futures contract @ 74.49, unless the USDINR exchange rate rises by 27 paisa at the end of Sep (i.e. a spot rate of 74.49) you won't make a profit (ignoring brokerage and stuff). If the exchange rate were to remain the same without any change, you stand to lose (0.27 * 1000, currency derivatives have a lot size of 1000) Rs. 270 per lot. Even worse if the rupee were to appreciate (i.e. exchange spot rate goes down). Now bear with me if the next few paras are exceedingly boorish, I need to spoon feed people who aren't used to currency derivatives. My strategies are mostly aimed at playing a more risk balanced play, something that yields consistent returns which can be compounded. 10% profit compounded monthly gives 314% growth per year, 3.5% profit compounded weekly gives ~600% growth per year. Given how the USDINR rate is crashing, one way to profit would be to short a futures contract (duh!). The orange line indicates the current USDINR exchange rate As indicated above, if the exchange rate does nothing and remains as is till end of Sep, each lot of USDINR futures shorted yields about Rs. 250 in profit (for something that takes up Rs.3000 in margin, that's a >8% profit in return). Things look even better if the exchange rate were to fall further. The problem is that things heat up quickly if the exchange rate were to go up. Ideally we would want to hedge against it (which also reduces the margin needed drastically). One way to hedge it would be to buy a at-the-money call (74.25CE @ rate of Rs. 0.555 -> Rs. 555 per lot (i.e 0.555*1000)). https://preview.redd.it/ze16kyphv7j51.jpg?width=588&format=pjpg&auto=webp&s=a3c2bba9fb314beff309671f03a013e69e08f4e0 Having purchased a call option, the P/L curve now looks like: The max loss is now limited to Rs. 315 The keen-eyed among you will recognise the above P/L curve as one that matches that of a put option. By shorting a futures contract and buying a call option (both with same expiry), we have created a synthetic put option that would have costed us Rs. 315 (0.315*1000) for one lot. Now, why go through all of this hassle if we can get the same returns by just buying a put option? Makes sense, as long as we can purchase the 74.25 strike put option at a price lesser than Rs. 0.315 (see above). Let's see what the put options are going for: Well, how about that... The market price of 74.25 puts are exactly the same price as our synthetic put. While the synthetic put came in at Rs. 0.315, the put costs another 0.005 extra to avoid the trouble of shorting a futures contract and buying a call at the same time. This is not by chance, big trading desks have algos (trading bots for the virgins here) that keep an eye out for price disparities. In this case, if someone were to be willing to pay more, the algos would compete amongst themselves to sell the puts at any price above 0.32. And if someone were to be willing to sell a put for less than 0.315, the algos would immediately buy. The price of the puts move in sync with the prices of the futures and call contracts. Conversely, we can create a synthetic call, and you will notice that the price of the synthetic call works out to be the same as the market price for the 74.25 strike call. We can also create a synthetic futures contract the same way. The prices of derivatives aren't decided willy-nilly. They are precisely calculated at all times, which forms the basis for the best bid/ask prices. There is no room left for someone to come in and make free money via arbitraging using synthetic contracts. If you found this insightful, and would like more of this sort of posts, let me know. Options when used properly, can be used to generate risk adjusted returns that are commensurate with the amount of risk you are taking. If you are YOLO-ing, sure, you can double or triple your money, because you can also lose 100% of your margin. Conversely, you can aim for small, steady returns and compound the crap out of them. Play the long game, don't be penny wise and pound foolish.
I often get asked about how I learnt investing at such a young age. I mentioned a brief overview of how I got into investing and learned the tactics. Here’s the story. The Idea. I was 14 years old kid eager to make money. My mom gave me an idea of investing in stocks. It seemed to be practical but I knew nothing about it. Later I asked my mom and dad. They knew very little. I called my aunt who trades every day for the last decade. She told me stuff but it didn’t help either. The Hustle. I started watching YouTube videos and read articles of investopedia. I understood nothing. It seemed like rocket science. I then bought a book called the intelligent investor. This book was for pros. I couldn’t read past a couple of pages. A month passed I was still on square one. I heard stuff like sensex, P/E, index, ROIC but I had no idea what they meant. Next, I watched YouTube videos on particular terms. I watched a video on what sensex means. What was a stock. How it works. Watching animated videos were quite helpful. I knew something. A few weeks passed I opened a virtual account on Stock trainer and traded a little. I watched CNBC everyday after I came home from school. Soon I knew the basic ticker symbols. And that’s how I learnt investing, at least the basics. The First Experience. In August I had the basic knowledge about stocks through YouTube. But I had no idea how to open a demat account and all. My mom opened it under her name through Icici Bank. Finally, on 6th September I bought my first stock. Coal India x1. I bought and sold random stocks. I mostly made losses. Over time I learned what fundamental analysis was. I watched animated videos on it. I soon selected stocks on the basis of P/E ratio, profit and sales growth. It didn’t work. I lost big on TATA Motors. Then finally I read my first book on stocks. It was called Rule #1. I had to read it 2-3 times to understand. It took me a month to read it. In August 2018, about a year later I saw a video on technical analysis. I never tried to understand it. I watched it. It was about 1.5hrs long. I was amazed to see how one can predict stock direction based on charts. Over the course of a few months watched over a 100 videos on YouTube about tech analysis since then. I loved the concept of margin. I came home early after my exam and bought my first stock on leverage. The Downfall. It was Infibeam Avenue. I shorted it. I made more money in half an hour than I had made in the entire year. I was soon addicted. Everyday after writing my exam paper I traded instead of studying for the next paper. Soon my exams were over. I had no time. I had to learn how to swing trade. I spent time analysing charts to figure out my next swing position. Again I lost a ton of money. I knew I had to scale back. So I set aside a small capital for trading. April 2019, I opened an account on Zerodha as the Icici brokerage was too much. Over the course I read books like- the intelligent Investor, Stock to riches, how to make money in stocks, how I made over 2 million dollars in the stock market and many more. So videos and books helped me learn more about stock market more than anything. The simplest way to start is just fucking start. If you’ve no idea what to do, just start. Search. Read. That’s how I learnt investing. The Sharing. In March of 2019 I decided to write a short blog on investing on a website called Quora. I was surprised to see the organic reach of my blog. Within hours I got over a thousand views. This encouraged me to write more. Over the course of a year, I ended up writing 450 short blogs on investing on Quora and a couple of books. In July of 2019 I decided to write a book on my experiences. I brainstormed the ideas and after 72 hours of writing and editing, my first draft was ready. I had no idea on how to publish it. After a few more hours of research and designing the cover I finally published it. After a few months I wasn’t satisfied with my book. It was only written for beginners. I decided to write something detailed for people who have decent amount of experience in investing. So, 15 days and 400 pages later I finished writing it. It did pretty good. I got over 5000 downloads. It's free (not trying to promote). The Pandemic. The pandemic was a great opportunity to learn more. I'd been watching hundreds of YouTube videos (I got 1k+ offline vids lol). And I learned more about deeper concepts. Like I'm currently learning about option chain and other forms of data analysis. The Bottom Line. At first I made a ton of silly mistakes. I lost money. But I kept learning and recently I started making profits consistently. It's not a rags to riches story, but it's something most people will go through. I'm no guru or expert, I'm just a guy trying to document his journey. "The more I learn, the most I realise how much I don't know". - Socrates (or some other old guy). -Vikrant C. If you read all that, hats off to you. It was extremely long (and probably not that interesting).
IPO Filings/DRHP’s are some of the best places to learn from when you are trying to understand the company and industry it operates in. In this letter, we will delve into the IPO filing of CAMS (the largest RTA in the country)
Founded in 1998, CAMS ( Computer Age Management Services Pvt. Ltd ) is India’s largest registrar and transfer agent of mutual funds with an aggregate market share of 69.4% based on mutual fund AUM managed by its clients (Asset Management Companies) during November 2019
This IPO is an offer of sale .i.e. the proceeds from the IPO will be going only to the existing shareholders selling their shares.
Shareholding pattern is available here. The subreddit does not let us post pictures.
Growth in the mutual fund industry on back of increasing savings moving towards financial assets: See chart here. Company has shown 17.4% CAGR from 2000-2019.
India’s mutual fund AUM as a % of GDP is significantly lower than the world average: See chart here. India is at 11%, compared to 103% for USA, 75% for France, 68% for Canada
The number of mutual fund houses have been largely stable over the last few years, hence, the growth in the revenues will be largely on back of growth of AUM managed by the fund houses.
Mutual fund industry comprises of 41 AMCs (excluding Infrastructure Debt Funds) and a majority of the total mutual fund AUM is managed by the top five AMCs which have approximately 60% of the total market share as of March 2019. (Market share of top five AMCs has risen in the last few years from 54% in financial year 2015 to 58% in financial year 2019)
Services provided by RTA’s to AMC’s:
Knowledge partner of AMC’s: Given the history of RTA’s association with AMC’s, they apply analytics to accumulated data and help AMCs in the development of innovative products
Service aggregator: RTA’s bring cost efficiency to the table due to having similar scope of work across major AMC’s (e.g. sending notifications to the customer)
Revenue is derived from fees charged for servicing the AAUM (average assets under management ) of the funds serviced by CAMS
Charge higher fees for equity mutual funds v/s debt funds
Contracts with Mutual fund and AIF clients are typically perpetual in nature, unless terminated by either party while it is 3-5 years for other clients
Major part of the revenue earned (estimated to be over 80%) is by means of tiered fees charged on the AUMs managed for which the MF RTAs provide service. These tend to decrease as a proportion of total AUMs once the AUMs surpass the tiers for which the fees are agreed on.
With the increase in AUM managed, the fees charged as proportion of AUM has been falling, but the extent of decline in pricing despite the strong growth in AUM (i.e. approximately a 30% CAGR) indicates the reasonably strong bargaining power enjoyed by MF RTAs
In FY 2020, MF RTAs witnessed some pricing pressure, as the SEBI reduced the total expense mutual funds were allowed to charge.
According to CRISIL, a moderate reduction in fees charged by RTAs as a proportion of AUM as the size of industry AUM increases is expected. However, RTAs will benefit from an expected increase in the share of equity and hybrid funds in industry AUM.
There is no impact of direct plans growth on RTA’s as RTAs as these are charged based on AUM, irrespective of which plan is opted for by investors
RTA’s also offer similar services to Alternate Investment Funds (AIF)
In addition, RTA’s also have offer similar services to insurance companies for policy servicing of e-insurance policies. There are 4 insurance repositories in India :
CAMS Insurance Repository Services Limited;
Central Insurance Repository Limited;
KARVY Insurance Repository Limited; and
NSDL Database Management Limited.
Following are the are the mutual fund registrar and transfer agents operating in India:
Computer Age Management Services Limited (“CAMS”),
Sundaram BNP Paribas Fund Services (acquired by Karvy in October 2019)
Franklin Templeton Asset Management (India) Private Limited
See market share and total AUM of top fund houses here. CAMS services the 4 out of the top 5 AMC’s and 9 of the 15 largest AMC’s. It has been able to manage and hold on to its market share in the last few years: See chart here. CAMS is the clear leader vs/ peers in profitability with RoE of 29.5% , PAT margin of 19% and witnessed the revenue CAGR of 20% over 2016-19: See chart here. CAMS also has a 3X higher business per branch despite having only 22% higher number of branches than Karvy: See chart here. There are multiple reasons for the oligopolistic nature of the RTA industry leading to significant entry barriers:
High client stickiness due to humongous hassles involved in migration ,business disruption , customer and regulatory hassles . New players have not gain traction, only consolidation or building in-house RTA have led to switching of RTA’s - this is evidenced by the CAM’s number of clients being the same over the last 5 years: See chart here.
The average term of CAM’s relationship with its ten largest mutual fund clients is 18 years as of September 30, 2019
High Technology intensity requiring continuous up gradation of systems due to changes in regulations
Need of extensive branch network to address service needs of customers
High operating leverage: RTA helps in addressing investor and distributor needs which are not addressed online
CAMS also has a significant presence in insurance repository market: Given the miniscule penetration of e-policies, there is a significant headroom for growth in this market.
Regulatory Risk : SEBI in its press release in September and October 2018 had provided a maximum cap on the Total Expense Ratio (TER) which can be charged by mutual fund companies on the various type of products . This capping can potentially impact the revenues of service providers like CAMS since the AMC’s can renegotiate their fee contracts with CAMS
Client concentration Risk: Top 5 clients have contributed to 65-67% of revenues in last 4 years. Given the Oligopolistic nature of the market, the client concentration doesn’t seem to be reducing soon.
Consolidation in Industry: M&A in AMC’s can reduce the number of clients and grant more bargaining power to the AMC. In the past, they lost one of mutual fund clients’ due to their merger with another mutual fund that was serviced by a competitor
Provides portfolio of technology-based services, such as transaction origination interface, transaction execution,payment, settlement and reconciliation, dividend processing, investor interface, record keeping, report generation, intermediary empanelment , brokerage computation and compliance related service
Also provide certain services to alternative investment funds, insurance companies, banks and non-banking finance companies.
Managed mandated transactions (collections , reconciliations) for AMC,s NBFC’s etc
For Insurance companies - processing of new applications, holding policies in demat form, servicing and support for policies
Digitization of account opening, back office processing for banks and NBFC’s
Number of folios serviced by CAMS are 38.3 million as of September 30, 2019
Has 278 service centers, four call centers, four back offices of which three are in Chennai
See chart here. CAMS operates in 7 business verticals namely: Mutual Funds Services Business, Electronic Payment Collection Services Business, Insurance Services Business, Alternative Investment Fund Services Business, Banking and Non-Banking Services Business, KYC Registration Agency Business and Software Solutions Business Mutual Fund vertical services
Transfer services like transaction origination , managing KYC , execution of transaction processing from investors and payments, calculation & payment of brokerage commission fees to distributors, risk management services like reporting to SEBI, anti money laundering services, Customer care services through service branches for customer and distributors and call centre.
Distributor services like record and maintenance of brokerage structures , computation of payable /clawback brokerage/ distributor queries
Also has developed a bunch of applications including mobile apps and solutions for investor, corporate and AMC needs
Electronic Payment Collection services: Manage end-to-end automated clearing house transaction and electronic clearance services and service mutual funds, non-banking financial companies and insurance for automated payments Insurance services: Scrutinizing and processing of applications, training and onboarding of new insurance agents, submission of proposals, scanning, indexing and data entry, reminding policyholders of payment receipts Alternative Investment Fund Services: Similar to MF Banking and Non Banking Services Customer interface and back office processing KYC Registration Agency Business: Maintain KYC records on behalf of capital market intermediaries registered with SEBI, eliminating the need to repeat KYC procedure. Software Solutions Business: Software solutions business through subsidiary, SSPL which owns, develops and maintains the technology solutions for mutual fund clients, with a team of 362 people .
As of September 30, 2019, CAMS employed 4,314 full time and 2,136 contractual employees.
Given the high operational intensity of the business, employee expenses is the major cost at ~38% of the revenues.
Dividend Distribution Policy:
Company adopted a formal dividend policy on February 20, 2018 which was further amended on January 2, 2020.
Company aims to distribute a minimum dividend of 65% of the consolidated profit, net of tax, for relevant financial year
Notes on financial information:
Nearly 254 Cr investments in mutual funds , 45 Cr of trade receivables, 157 Cr of cash & cash equivalents as of HYFY19
No debt on the books, just long term lease liabilites of 105 Cr as of HYFY19
Bulk of the revenues is from data processing
Data processing comprises of core AAUM based revenue, revenue from services to insurance companies, banking and non-banking financial services companies and services to alternative investment funds and our KYC registration agency business.
Customer care services primarily comprise paper transaction volume-based fees and NACH volume based fee from electronic payment collection services business.
Recoverables comprise out of pocket expenses incurred on clients
Miscellaneous services comprises revenue from call centre services and fees for applications made available to clients. Software license fee, development and support services comprises fee earned by Subsidiary, SSPL for providing services to external clients.
Major part (~50%) of the operating expenses is the service expenses
Service expenses: Out of pocket expenses incurred for communication services to investors or distributors, stationary and postage on behalf of clients
Data entry expenses: primarily incurred to process paper applications in mutual fund services business
Customer service centre charges: Expenses primarily associated with management of service centres and payment of fees to centre heads
Claims: Incurred on account of claims raised against CAMS as well as funds set aside by CAMS to provide for future claims
There is no debt on the books of the company or its subsidiaries
At current share capital of 48,760,000 shares, this translates to a price of 1230/- , meaning a current P/E of 36x on FY20E
Other comments: Given that the growth in the CAM’s business with be primarily driven by the clients’ AUM growth , unless CAMS acquire more clients (which looks difficult to high entry barriers) and low pricing power, the earnings growth in the future will be largely in line with industry AUM growth. Note: All the notes are based onthe filed CAMS IPO prospectus, please consult your financial advisor for advice before investing in any product. P.S - Apologies. A lot of the charts are images that cannot be posted on this subreddit. However, all of these are available on the source article - https://www.thegalacticadvisors.com/post/computer-age-management-services-decoded.
It wouldn't come as a surprise to people who have been trading options for long time but Indian stock options suck. Prices don't account for fast moving prices. On Lupin I initiated the trade on Friday. The idea was 950 will act as a resistance. Now I can understand what happened today. Pharma going up and all that. But the option pricing on Friday for 950 was very illiquid and didn't account for such volatility. Not to mention that even when I tried exiting the trade Zerodha kept telling me that even ATM option was illiquid so I needed to use limit orders instead of market orders to get out. I hit the bids and offers and got out of the trade. Something similar happened on Pidilite. The trade was initiated on 8th. With 1400 acting as resistance. The company revenue was shit but the price has rallied more than 100rs. And the OTM option prices didn't account for such volatility. Now I could've hypothetically saved the position by initiating short PE trades (aka PR Sundar's Infosys saving mode) or turned it around into a long trade (my method). The problem was that I didn't have extra margin. And I was unwilling to save the positions. Ended up with ~60k loss. So my two learning from this experience are:
Stock options are illiquid. At one point during these trades I was wondering if I will be able to get out at a good price even at expiry. I mean lets say if I sold an option at say Rs. 12. And on expiry the option is now OTM. And all the offers for the OTM are like Rs.2/3 then I'd be paying a premium of 2/3 rs just to avoid delivering the stocks. In my opinion that is not worth it. Especially considering I can get out of index options at 10/20 paise.
The amount of margin to save (trade) stock option is insane. PR Sundar says it requires 1 crore. And in spite of the hate he generates on this sub, I think he is correct on that one.
I am poor. So I am going to stick to index options.
Zerodha vs Upstox comparison from the perspective of a daytrader.
I already posted this on indiainvestments but I'm going to post it here too because I'm not sure if my post is going to get approved by the mods there. Every once in a while a discussion pops up on this sub about which is better, zerodha or upstox, and many of the replies are usually from investors or swing traders. As a daytrader who's used them both for almost an year, I just want to share my thoughts on this because it might be useful for someone looking this up in the future. In my personal opinion, zerodha is, by far, the better choice. Not because zerodha is amazing, but because upstox is terrible. Here's why:
Non-existent communication with its clients. Need to get some piece of information? Good luck with that. You can try calling the customer care and most of the time your call will go unanswered. Even if they do pick it up, their agents are very incompetent. They know only about the account-opening process and if you ask them anything else, they're clueless. They'll just give some scripted response and will be of no help. You can try asking on their live-chat. They'll literally make you wait for 20-40 minutes (not exaggerating) and then give you some copy-pasted reply which usually does not answer your question anyway even after all that waiting.
Well if you're desperate enough you can try asking on their forum but the last time any developer or employee even bothered to respond was years ago. Now it's turned into a wasteland full of people posting random crap. Seriously, just visit that link once if you want to have a nice chuckle.
Now coming to their web and app platforms. Their app is decent, no major issue there. Their web platform used to feel very sluggish compared to zerodha's which feels way more smooth & snappy and sometimes it would just completely freeze up and force you to close your browser from the task manager. I have a quite powerful gaming PC with 16gb ram and this was happening even when I had no programs open other than just the browser with only one tab.
I mainly trade commodities and the commodity market is open until midnight. One day I noticed at around 5 in the evening that the charts just completely stopped moving, both on the app and web. I mean they just froze and stopped updating tick by tick. I complained to their customer care both on the phone and on twitter and I thought it was going to get fixed soon because surely they're going to take it seriously when something that big & important is broken, right? Well they didn't. I thought it would at least be fixed before the market opened the next day. Well it still wasn't. I think the devs were not even aware of the issue and the customer care just forgot about it as soon as they hung up the phone and didn't even bother to report it to anybody. I finally got fed up and messaged their co-founder about it on LinkedIn and it got fixed within one hour. May be he didn't even see my message and it was just a coincidence or may be it wasn't.
They recently released a new version of their website which seems to be better than the old one. I used it a little and already noticed a major flaw which was making it impossible to update my orders. Honestly, it's an amateurish mistake involving form validation which makes me question the competency of their developers and if then even bothered to properly test the platform before releasing it. I reported the issue but I highly doubt they even saw my report yet.
All of these are just front-end issues. Now coming to their back-end, one day it just stopped working for almost THREE HOURS straight. Nobody was able to login, both on the app and web of course, and those who were already logged in were not able to place orders, see their positions or do anything at all. I thought may be it was just me but I went on twitter and there was a tsunami of users complaining. Well after such a big fuck-up surely they're going to say something about it right? May be apologize or release a statement about what went wrong or something? Nope, they just remained completely silent like it never even happened. Not even a single post or reply on twitter even to this day. Also this is not a one-time issue. Their back-end stops working quite frequently but it's usually for a few minutes only and not for three hours which is still bad if you're a daytrader. Zerodha has such fuck-ups too sometimes but they usually at least address it instead of pretending like it didn't even happen.
Next, they just do whatever the fuck they want without even informing the clients its going to severely affect. I was using their API (which I was paying a monthly subscription fee for btw) for many months and one day it just stopped working. Then I found out that they had just suddenly decided to STOP their api services INDEFINITELY for almost all of their users with ZERO prior notice. Obviously this is a huge problem especially for those who do algo trading but I guess upstox thought it wasn't such a big deal.
I mainly trade crude oil and one day during the whole corona virus fiasco I wasn't able to place any orders as it was saying I didn't have sufficient money in my account to place an order. I was very confused because I was able to trade without any problem on the previous day and now it's saying insufficient funds even though not much has changed since yesterday? I asked their customer care (it took me almost an hour to get a response from them btw) and they were clueless. They were just sending me a copy-pasted response as usual. I kept digging and found out after a lot of searching that they had decided to suddenly double the margin requirements overnight and even their customer care wasn't aware of it.
Are you seeing a pattern here? Lack of communication. They won't inform you about anything and won't respond to you even if you try to reach out to them. This was the most frustrating part of my experience with them.
This post ended up becoming quite longer than I expected but hopefully it will warn new users to stay away upstox unless they get their shit together but I highly doubt it's ever going to happen. Zerodha has it's flaws too but it's quite decent in my opinion and definitely the best discount broker in India. At least their customer care isn't stupid and can answer some technical questions instead of knowing literally nothing except the account-opening process.
Hello autists. I thought I shall share some tips on why I trade futures instead of options. If it is not your cup of tea, feel free to ignore this. After all, everybody's risk appetite is different. Tailor it to your Personal Risk Tolerance. Note: I am not a financial advisor. These are my ideas alone and anyone looking to go through with this must consult their advisor. Before i get started, I should warn newbies that it is not advisable to start off with futures. I have been doing this for 2 years now, starting off with 2L and saved up my salary every month to put it in my account. I realized that Mutual Funds were managed by tards and I do not want to enjoy a yatch when i am 60. But before all this, I started off with conventional stocks and slowly dipped my feet into futures. Pre-requisites: 1. Some understanding of your emotional levels (do you immediately square off your position if things are not looking good, or do you wait for it to play out? ) 2. Do you have a trade setup you trust? Do you keep a log of how it performs and how it does in a bull or bear market? 3. Is the money in your trading account something you can afford to lose? If not, save up more and come back. Futures: I shall not get into the details of what futures are, and why it was started in the commodity business. Basically, for brevity, the equity futures go by lot size. For example, Reliance has a lot size of 500. If reliance is trading at 1000, the margin given by zerodha is Rs. 2,00,000 approx to hold these shares overnight. For intraday, you need a margin of ~1Lakh. Imagine, if you wanted to buy the same amount of shares you would need an account size of Rs. 5L. Now, with great power comes great responsibility. Lets say, there is a huge oil fight and oil prices drop. The price of reliance drops 20% to 800. If you had bought the shares, your account size also drops 20% to 4L. But if you had bought futures, your account size of 2Lakhs now loses 1Lakh, which is a 50% loss. The plus side is, you can also make the same if you are right. Now why do i trade futures instead of options: Lets say my account size is 2.5 Lakhs, and I want to buy reliance and hold it overnight. 1. 2 lakhs is taken up for my margin, and i have a balance of 50k. If the next day, reliance goes up by Rs.20. I would have made a profit of Rs. 10000 (500x20). Now if i by the end of the night, my account size becomes 2.6Lakhs. That is i can use the full 2.6L margin now. This is very important for me. These profits are already realized in your account. And this is called Mark to Market (MTM). Note: in options, the profits you make are unrealized. They are sitting in your account until you square it off.
If i were to buy the same amount in shares (for 2 lakhs). The next day, i can only trade with 50k in my account. The 2 lakhs do not show up until i square off. But when i am holding futures, and the next trading day starts, I convert my overnight positions to intraday, thus saving up 50% of the margin. When things dont go my way, I immediately square off and use the full margin for my next trade.
If you are buying options, you need to be right about the direction of price movement AND the time it would get there (also called as delta and theta). Implied volatility also comes into play, meaning, when a herd of people are betting the same, you will still lose if you are with the herd. In futures, you only have to be right about the direction.
You ever get a thrill when the VIX is sky high? with so much volatility you profits keep shooting up and your losses are devastating at the same time? Do you enjoy that feeling? Then fuck it, you have a gambling addiction. But, thats how i feel like trading future. Even in a low volatility environment my losses can wipe away 10% of my account in a single trade. Know yourself first.
Hope this helped a few autists. Good luck trading. Current positions: https://imgur.com/a/arBO6RT Tldr: if you can't read this, stick to yoloing options
Rant on certain questions asked in the trading community
There are certain questions that get repeated in the trading community What is the capital required? Capital deployed? These questions make 0 sense and serve no purpose. Eg: If i make 1 lac and i share the screenshot. And i caption it on twitter as "Look I had 20k in my zerodha account before the day started , and now it is 1 lac" PAISA 5x ho gaya. That invites a lot of attention. But let's break this further. The importance of risk management: Maximum traders are trading with a risk of 1-2% of TOTAL capital. That means if their capital is 1lac, they are risking close to 1-2% of overall capital. Maximum traders trade with a risk:reward of 1:1, 1:2, 1:3 (proper autists only) That means they are risking 1000rs to make 1000rs reward . Risk to reward=1:1 (RR=1:1) Now. Let's go back to my first retarded example. "I MADE 1 LAC WITH 20K. LOOK AT MY ZERODHA BALANCE" Now, to make 1 lac I would be risking say 1 lac. RR=1:1 To risk 1 lac i would have to have a capital of 1crore (assuming i trade at 1% risk per trade) Cool? Now maximum traders have funds in various accounts- equity account , commodity accounts , and with some other brokers, just in case to prevent random buttfucking from a broker. So, if you see a profit screenshot, STOP asking "What is the capital required" That doesn't make sense. The person could be trading with 50x margin. It does not make sense. The only logical question that makes sense is: 1.On average what kind of Risk:Reward are you playing with? 2. How much of your total capital do you risk per trade? It's all probabilities With 1% risk per trade you get to YOLO 100 times before you lose everything With 2% risk per trade you get to YOLO 50 times before you lose everything With 5% risk per trade you get to YOLO 20 times before you lose everything With 10% risk, just don't .STOP.
I don't know if it is only me, but Zerodha's P/L and tradebook and ledger really needs a lot more work to be properly usable. I trade solely on equities, and for the love of my life, I still cannot get a clear idea of the charges incurred for each transaction. Let's say I have Rs 5000 as my opening balance on a fine morning. I haven't placed any sell order within a week, and so, there is no chance of DP charges. I place a bunch of buy orders, amounting to about Rs. 4990, they go through, I am happy and go to sleep. I wake up the next day, and instead of Rs 10 balance, it's negative. Obviously, going through the contract note gives me an idea of additional charges incurred. Now, to add to the problem, Zerodha Console's P/L needs a lot of time to be updated. The DP charges incurred on 20/05/2020 has still not been updated in P/L. I understand the system of eventual consistency, but, seriously? 4 days and it still hasn't been updated? Also, Kite app's funds doesn't seem to be up-to-date. According to my ledger, it turns out I placed buy orders with negative balance, where I know for a fact that Kite rejects any CNC buy order if I don't have adequate margin. The entire system seems to be kludgey. Currently. if you want to calculate and recheck your balance, you have to move between Ledger and Tradebook in Console, and Contracts in email. Is it not possible for Zerodha to provide a simple order-wise breakdown of transactions, along with incurred charges? Or am I missing something?
I have been using Zerodha for almost 3 years, mainly for investing. Started trading 6 months ago, facing margin issues on Zerodha. Currently I'm trading with capital of 1L due to which I can't take multiple positions in F&O Looking to make the following transition For futures - Flyers For Options - Aliceblue Please give your suggestions and feedback
Brokers said they could end up paying 30-35 per cent less in initial margins. The Securities and Exchange Board of India (Sebi) is looking to revamp margins on derivatives trading to reduce costs for market participants, said two people aware of the development. The regulator will consider a single margin system that will help those who trade in futures and options to hedge their share portfolios. Brokers said they could end up paying 30-35 per cent less in initial margins and trading costs could drop 5-10 per cent for others, depending on the nature of their bets. Sebi and stock exchange officials discussed the matter in the last week of October, the people said. Market participants have been lobbying for such a move on the grounds that margins in India are among the highest in the world. This is said to be one of the factors behind foreign portfolio investors (FPIs) preferring to trade Indian derivatives in offshore locations such as Singapore instead of on-shore. The regulator didn’t respond to queries. Derivative market traders currently pay two margins — standard portfolio analysis of risk (SPAN) and exposure. The first is an upfront margin that traders pay at the time of placing trades, a percentage of the value of the trades as calculated by the SPAN software. Exposure is an additional margin that brokers collect from their clients for trading in derivatives at the time of initiating a trade. The regulator and the exchanges are looking at scrapping the second and retaining only SPAN, the people said. An increase in SPAN margins will partially offset this, benefiting hedged bets. “If the proposal is implemented, several traders using hedging strategies will end up paying substantially lower margins since SPAN margin is calculated at a portfolio level,” said Chandan Taparia, derivatives analyst, Motilal Oswal Securities. The exposure margin, on the other hand, pertains to that particular trade. “This is a welcome step since such hedging strategies carry limited risk and hence would not be subjected to high margins,” Taparia said. Brokers said a single margin structure will help individual traders bet on options trading strategies at lower cost. “On Indian exchanges, retail traders don’t trade option strategies as the margin requirements make them non-viable even though the maximum risk is limited,” said Nithin Kamath, founder and CEO of Zerodha. “With the new proposed margins, we would be enabling retail to trade options through strategies, which have limited risks.” The regulator had received several representations from industry bodies, including FPIs, to rationalise the margining system for the derivatives market. In the run-up to settlement, margins on some stocks surge as much as 100 per cent of the contract value whereas the global standard is 10-20 per cent. “The idea of Sebi was to simplify the margining structure and also give some benefit to genuine traders who use derivatives for safety net purposes,” said one of the persons cited above. “However, Sebi is planning to tweak the existing calculation for SPAN margins by increasing the multiplier. This would mean SPAN margins could go higher in lieu of exposure margin.” A single margin structure will help market participants allocate capital more efficiently. “Until now, introducing a single margin wasn’t possible since BSE and NSE do it at the exchange level. However, with the introduction of interoperability before the clearing corporations, such a step has been made possible,” said a senior exchange official. “We have also represented to Sebi not to increase the SPAN margins substantially higher since an internal study done by us showed current SPAN margin calculation covers losses that could occur in 99 per cent of scenarios.” However, those punting on highly volatile stocks are unlikely to get any relief from the scrapping of exposure margins, said the head of derivatives at a domestic brokerage. “Such contracts are currently subject to more margins, including additional surveillance margins (ASM) and bonus margin for highly leveraged stocks,” the person said. “Our sense is that Sebi will continue to charge the additional margins on such counters.” About 30-40 stocks are subject to additional margins. In October, Sebi proposed to impose 35 per cent higher margins on the contracts of companies where more than 25 per cent of the promoter shareholding is pledged. This impacted nine counters including Bajaj Consumer, Dish TV, Sadbhav Infrastructure and GMR Infrastructure. https://m.economictimes.com/markets/stocks/news/sebi-mulls-lowering-cost-of-derivatives-trading/articleshow/72016315.cms
Securities and Exchange Board of India (Sebi) has allowed stock exchanges to extend timing of equity derivatives trading till 11:55 pm with effect from October 1, 2018. The move is aimed to enable integration of trading of various segments of securities market at the level of exchanges, Sebi said. Trading in equity derivatives will take place from 9:00 am to 11:55 pm, similar to the trading hours for commodity derivatives segment which are presently fixed between 10:00 am and 11:55 pm starting October.
These measures pertain to margin collection requirement and computation of liquid net worth for the equity derivatives segment. The provisions of the circular will be effective from June 1. With regards to client's margin collection requirement in the equity derivatives segment, SEBI said that clearing members or trading members should include initial margin, exposure margin or extreme loss margin, calendar spread margin and mark to market settlements. Client margins are required to be compulsorily collected and reported to exchange or clearing corporation. This is likely to have a negative impact on option writers and traditional brokers. The initial margin required for the positions is computed using a software called SPAN (Standard Portfolio Analysis of Risk). SPAN margin covers almost of the risk for of the day. Exposure margin is the margin charged over and above the SPAN margin which is the discretion of the broker. Failure to have requisite SPAN margin in the account can result in penalty being levied by the exchanges. “These changes will impact the brokers who collect minimum margins for F&O trading especially option writers” said Nitin Kamath, founder and CEO, Zerodha. “Now brokers will have to collect span margin, exposure margin and MTM loses upfront, while the penalty on margin shortages is huge”.
Zerodha - India's biggest stock broker offering the lowest, cheapest brokerage rates for futures and options, commodity trading, equity and mutual funds Span margin must be maintained in the trading account as long as the Zerodha futures trading position is open. Exposure Margin is the amount over and above span margin that is used for settling mark to market. Its value is in the range of 4% – 5% of the contract value. Kite (Web-based Trading Platform)– It is a simple HTML 5 web-based trading application that is both powerful and compatible with mobile and web with millisecond order placement, the complete market watch with minimum bandwidth consumption, advanced order types, charting with 100+ indicators & tools and much more.This particular platform is used by over 70,000 clients and serves over 5 Before step into the discussion of the Zerodha Margin Calculator, let’s get acquainted with the concept “Margin” in the trading field. Let’s assume that a trader is engaged in the stock market and doesn’t have enough funds to initiate a trade. Here, in this situation, he can get a loan from his brokerage firm to purchase securities. So overall it’s good to have a trading account with Zerodha but you need to be wary of the brokerage charges and even the margin they provide is not up to the mark. Thus have a look at their margin and brokerage calculator before investing your hard earned money in it.
Margin Trading With Zerodha - 20X Benefit Intraday Trading
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