I am a stupid investor

13 comments Written on April 20th, 2007 by
Categories: Futures, Options, Stocks
I mentioned in my last post that I bought a Put option on Tata Steel. Now notice how much the 510 put option has fallen today. From Rs. 12 at yesterdays close to Rs. 2.4 closing today. That's a loss of 80%!

(This option is the right to sell Tata Steel at 510. I bought it when the stock was doing 505 so it was "in-the-money" then, not considering my premium. It closed at 533 today)

And the figures are grim. You can't buy just ONE share - you have to trade in lots of 675 (the number differs for each stock). Now, this is a loss of Rs. 9.6 per share, so for one lot you would have lost Rs. 6480 in one day!

Okay, I've lost that much. And I know this: I am a stupid investor, making the most common errors. I will try to learn of course, and tell you what I learnt, so you don't make the same mistakes.

Ddue to reasons of having actual work, I missed opportunities to sell the put and lower my loss. Unfortunately, I can't blame anything else - this is the price I pay to learn.

Was this my first exposure to options? Not to index options - which I buy and sell Nifty options fairly regularly since my opening of a Reliance Money account which has extremely low brokerage. But it was my first exposure to single stock options.

The options are extremely volatile. In general options can move around 10-50% in a day, and usually do. I should have been more careful- and watched the put move around a day or two before I placed my order.

Second, this was an aberration of sorts. Tata Steel is up 5% in the day. This kind of movement does not happen regularly - in fact it hasn't happened like this in the past few years! So I should not let a one time movement of this sort affect my broader judgement.

I also forgot to consider that the option expires on 26 April,next Thursday. At that close a point, buying out-of-the-money puts needs more research. My research may be sound, but it may not impact the market in one week! Perhaps I should have waited.

And finally, I have learnt that trading options is not something that you do without serious time devoted. Given the high volatility, you should track the option closely and take out your losses earlier (and also, book gains faster). This does not mean close stops, it just means that the time between buying and selling should be small. Options decay over time.

So, lessons learnt:

1) Your logic may be sound fundamentally, but it may not pan out for options, which have a shorter duration of existance. Nothing in Tata Steel will change till next Thursday so my entire analysis has no relevance to this month's option. Tata Steel is still a sell, but not on this month.

2) I should have sold the future instead. Yes, that needs me to keep more as premium, but that also means I can roll it over to the next month in case the share price doesn't move down. (You can't roll over options you buy)

3) Don't ever trade options unless you have the time to track them.

4) Options are very very volatile. Setting close stop losses in options is stupid - you will get stopped out with the volatility. Setting far stops is much higher risk, so you should choose a lower premium option. If I had chosen the 480 put instead of the 510 put I would have lost just Rs. 1,500.

5) Don't blindly buy an option just because it looks good. Watch the way an option moves, at least for a couple of days, before you take a decision. At least if you are investing in single stock options for the first time!

6) Tata Steel's rise today was not something that happens everyday. So this shouldn't discourage me (or you) from understanding option trading.

Futures and options are very interesting. Typically futures involve between 25,000 to 50,000 of margin per "lot" and it's not money gone down the drain, it's money that's with your broker who will return it when you square-off or exercise. Selling options (or "writing" them) involves the same kind of margins, but buying options just involves paying a premium (which you don't get back).

Nifty options involve small premiums - a lot of 50 Nifty can cost you just Rs. 1500. That's probably a better thing to use to learn.

But a series of small profits can be wiped out by one big loss, as I learnt. it's time to use the golden rules of trading: Risk, Allocation and Money Management. I got them all wrong this time. But I'm learning.

Related Posts Plugin for WordPress, Blogger...
About the Author:
http://www.capitalmind.in
The man behind Capital Mind. Deepak is a co-founder at MarketVision, a financial knowledge company. Deepak also provides data research and consulting services, and now lives in Bangalore. Connect with him at deepakshenoy@gmail.com.

13 comments “I am a stupid investor”

>Hi Deepak

What is your opinion on J P Morgan NFO ?

>Hi Deepak,

If you are a stupid investor then I have to go and drown in the ocean.I already told you how I missed so many buying oppurtunities. Last week I sold Reliance Communication.Today its at 463. More that 10% of what I bought for. Although I did make a profit, I could have waited. If I tell you the reason why I sold it you could laugh. In the last mondays ET Investor guide section a person had given a sell rating on Reliance Comm. So I sold it.
I think you can take solace from me.
I want to clear one doubt. Between Infosys and TCS which do you think is fairly valued.I thought you will say it an article after both of them announced their results.Also what is your pick on Wipro.
In telecom sector is it ok to buy Bharti now?

On a concluding note Warren Buffet call F/O as financial weapons of Mass Destruction.

regards
Hari

>Hi Deepak,

As you said in reply to my previous comment, you would have one or two stocks in your portfolio which would help ride the loss in others. The loss amount is substantial but I am sure you have made so many good picks that it would balance out.

It felt good to see an honest post wherein you admitted to what you did wrong and how and put it up as a lesson for others (though I personally am not into F&O yet, m still grappling with the stock market).

I regret missing RIL when you had recommended it around 1285 levels, amongst many other regrets .

I would appreciate if you could give your views on the following stocks in the reliance stable
1. Reliance Capital
2. Reliance Energy
3. Reliance Natural Resources Limited

Do you feel that @ current levels they are worth getting into? My point of view is long term holding, say for 2 years or so at least. I am not looking @ any short term / quick returns. Some people are suggesting that it is better to wait coz around May generally the trend is that markets experience a dip and that is a good time to buy. I am new to it all so am not sure whether waiting for that fall (correction as some say) is a wise thing or not.

You had put up a post about a bad experience with ICICI in which you had mentioned that such behaviour and attitude might have an impact on the share price in the long run. Since you have using Reliance Money (as you mentioned in this post), what has your experience been of it and hence of Reliance Capital.

I understand that you put up entries on the blog as time permits plus you may not have studied the above stocks to be able to answer. It would be unfair of me to expect that you would be able to provide an answer always. If you have not had a chance to look at them yet and do not intend to in the near future, then no worries.

Please keep up the good work of regularly blogging on this subject.
As always, it is a pleasure going through it (though I am yet to read all the past entries too)

Regards,
Sumeet
PS: My comments may seem long but then you had said that you do respond to mails as a rule, hence I put everything in comments.

>Hi Sumeet: Thanks again – and by the way – you can mail me and I will reply. I don’t mail people who come here and tell me “please mail me at (email address)” – and usually it’s great to have comments in one place. Maybe I’lll introduce that in my blog post – a place to ask me questions!

I haven’t analysed Reliance energy or RNRL. Rel Cap is excellent – they just became the highest AUM fund so their income on that front will increase.

When people tell you to stay away from the markets, it’s a good time to buy. This is going to be the biggest bull run the market has seen – according to me it will reach around 17000 to 18000 before it crashes. And it will crash – like crazy, because teh interest rates are too high.

But don’t take my word at face value. See teh value in the markets – there are solid companies (like Balaji, BHEL and RIL) which won’t be hugely affected by temporary blips. 2 years is medium term – and some stocks may double in that time!

>Hi Deepak,

Did I ask any impertinent question?Does my opinion of F/O hurt you in any way? I asked you about the two IT biggies because in your post on Infy you had said that you will wait for the TCS results to make a decision on which to buy. If my questions and opinions were quite rude I apologize.
Regards
Hari

>Hi Deepak,
good that u r admitting to ur mistakes, that’s the first step of learning.
If u remember few wks back I had written in my comment on one of ur posts:
Tip No. 1 : Decide for sure whether u r a trader or investor.

Now look at ur post:
Headline: I am a stupid INVESTOR
Last para: time for golden rules of TRADING

With all ur readings on this topic u should have figured out that investing and trading r two totally different things and require diff strategies and skils.

Investors never try to predict the scrip price for a wk or so.
The first thing that we teach in Security Analysis and Portfolio Mgmt is the difference between Invesorr and a trader/speculator.

Do u think there is any funda to predict the price of any scrip/market on a day to day or wkly/monthly basis?

Investors use Fundamental Analysis
Traders use Technical Analysis.
Investors invest for long term
Traders try to predict (?) on a day to day basis and feel that the underpricing/overpricing may get corrected in a day/wk/month (who said markets always behave rationally?)
Investors buy and hold in the cash market
Traders use leverging in F&O and try to make lots of money in quick time (?) by borrowing/levereging (whether badla/carryforward or future or options)

This is just the beginnig, we are all still in the learning process-it never stops.

Bye
Sandeep

>hari: Hey sorry mate – I forgot to respond to your comment :) Lately I have been very busy with some other work.

I think Warren Buffet has a right to his opinion :) But again, he does not invest in technology companies because he does not understand them (and does not try to). I think it’s the same for futures – they can make you a nice little packet at the end of the day if you try to learn them.

Infy vs. TCS, right now both look bad to me (in fact the whole tech pack) because of the dollar being so much lower agaiinst the rupee! Wait for another quarter before buying…

Bharti – have not analysed recently, soorry…

>sandeep: Good point – but in this case, I was being an investor as I was taking a fundamental call on F&O. I should have been a trader – that’s why the rules of trading are mentioned. F&O are tools for the trader, not the investor, because of the time required.

But let me be honest: there is a fine line between investors and traders. Everyone says there is a difference, but every trader is also an investor and nearly every investor tries to go short term every now and then.

Investors do the same thing as traders, except traders have a different time frame and a different strategy. But buy-and-hold doesn’t always work – you should have a stop-loss and a review strategy – traders have that, in the extreme short term.

My mistake here was that I took a fundamental (investor) view but used a trading tool like options. I should have used futures (which can be more fundamental because of rooll overs) or simply, waitied till the dip to buy in cash.

Trading rules are mentioned because what I did was trading (though I should not have done) and learnt a few things. I see what you mean too, we have a lot to learn!

>Deepak

i’m planning to open a Religare account for trading. While browsing thru their site I came across the following in FAQ.

“What is POA demat account?

POA stands for power of attorney. This implies that the client has given the right to operate his demat and bank account to Religare. “

What does this mean? Is this legal?
I’m using HDFC Securities at the moment and it isn’t that good. High brokerages and no reliable charting or quotes. Religare has a brokerage of 0.5%. What do u recommend? Isnt this Power of Attorney clause harmful to my interests as an investor?
Vikram

>vikram: POA for your demat account is necessary otherwise they would have to ask you for demat transaction slips signed by all investors for every single trade.

The bank account POA is shady. I don’t like it but I had to give it for REliance too. What I did was: I opened a new account at HDFC bank, and maintain a minimum balance at it – only when I need to invest money do I transfer money to it and then further to Reliance Money.

>Nice post, its a really cool blog that you have here, i like the way you present things, keep up the good work, will be back.

Expect more from you…

Warm Regards

Biby Cletus :- Blog

>Deepak
I need some advice about personal finance.
I’ll be taking an MBA next year so I’m planning to save for that.I’ll be funding the fees through education loans.So I’ll just need some cash flow for expenses since only my wife would be working.
Do you think ELSS with dividend payout would be a good option?The way I see it, not only can I save taxes for this current year (and next year for my wife), but I can get cash from them as well.
I know that an MF dividend is not the same as a share dividend and I prefer growth options for the compounding effect.
I do have some open ended schemes (Sundaram Midcap & Reliance Vision) with growth option. But since they dont give tax sops I was thinking of an ELSS like SBI Magnum Taxgain which recently gave a 110% dividend.
WHich option do you think would give me a reasonable cash flow considering taxes and liquidity?
Vikram

>2) I should have sold the future instead. Yes, that needs me to keep more as premium, but that also means I can roll it over to the next month in case the share price doesn’t move down. (You can’t roll over options you buy)

How do I rollover future contracts to the next month?
~Confused
~S