Options and Long term Goals - 22nd Jan 2021

A Very Good Morning to all of you. Yesterday I had given a query to everyone asking something very simple query to everyone, as why they are in the stock market. Now however simple this question may sound at the face value, trust me its not that simple. Trust me, most of you would not have even ever had a serious thought as why you are really here ? Is it for the money, or rather say the dream of making quick and unlimited money and the glamour associated with this profession and also the unlimited amount of luxuries you can buy with the unlimited amount of money that you have.

The second question was where do you see yourself 5-10 years down the line in stock market ? Now this is one question which most might not have thought definitely. Some are here to make one good profit and go away, then they got stuck in one bad trade and then to recover their old money they are now stuck in the market. Thats when they came to know about some big traders making big money and thats when they thought that even they can make good profit and then stayed and still trying to find a way. However some of the most have their paths cleared out who want to create long term wealth from the stock market. Some wanted to have their retirements sorted out by investing in the right stocks and staying for long term. Some had the goal to get a consistent secondary income so that they can have a better life.

Some had some interesting expectations from the market, like someone was showing a dream of making 1 lakh monthly from 30k capital. Now lets check how much is that actually, thats like 330% returns MoM. Annually it might even go beyond some 10,000% easily. Now how realistic is this, and don't you think that if this would have been possible then the whole world would leave every other job and doing this only. Someone wanted to earn 1% every day. Now lets understand the dynamics of this equation. Lets say you start with 100,000 ( 1 Lakh INR ) and start compounding your capital every day at the rate of only 1%. Assuming that you have 1,000 trading days in 4 years at 250 trading days in a year. You will end up having ₹2,075,163,924.54 by the end of 4th year, Thats a whooping 20 thousand times on your capital. Now how realistic is this ? To all such people this is what your expectations are, Unrealistic.

Now most of you might be thinking that why all of a sudden this type of question came in my mind. I normally do not ask these types of questions then why ? Well I have a very very serious reason for it. I started this group almost 1.5 years back. I had some thoughts attached to it, I never knew that It would become so big. The days progressed and it started growing by big numbers I noticed a rampanT problem. Almost everyone who came in our community was neck deep in options. I would suggest to buy in cash and they would buy the options for it. I would give only cash call, nobody would bother and everyone would jump in when I would give an options call. The bigger pain was, "ALL" of them were losing money. And even after losing money they had only one thing in mind, That the next option call would double their money and they would recover all their old losses. The bigger problem was they were not even aware about what an option is and still they are jumping at it. Small players with funds less than 1 lakh or even 50k are the ones who are more accustomed to such thing. Every day I write in market commentary that small players should not dabble in options and atleast not till the time you understand the dynamics of the instrument, but despite the several warnings they don't listen and come in when they are at a loss. Gives me a lot of pain when I see people losing money like this in the market.

I would try to give them some simple and realistic examples. Warren Buffet has never made more than 20% in his entire career. The best of Mutual funds in the world do not make more than 20-25% annually that too not so consistently. Now let us try out for a reasonable return of nearly 2% a month ( which is very very realistic and very much achievable by following some disciplined approach. Let us suppose you start by a nominal capital of 1 Lakh Rs ( I am talkinG for 1 lakh as you can easily do the math and find your goals ), by the end of 3rd year you would have doubled your money ( which is 5 years faster than an FD and 4 years faster than Bond ) and by 9th year your capital would be 8 times and in 10 years your capital will be 10 times. The bigger equation comes in 20 years it grows by 100 times. So no matter how small you start and stay disciplined you will have 1 crore at the end of 20 years which will not be a small amount By any standards. Always remember that wealth is never created over night. If you think that by playing in options you can create a small corpus for you over night and then slowly you will go the investing way. Thats not the way to go. It never happens, you will keep on losing your hard earned money with blood and sweat and eventually end up losing more and not only that, you will end up losing faith in the market and finally one day quit.

You need to understand that there is an ecosystem created all around you to make you addicted to options and make you buy that by planting stories of someone making a million dollars through buying PUT options during the Brexit time. To say the least, IT DOES NOT HAPPEN. Wealth through the market knows only the slow way and the the long term approach. There are people spread across the social media and everywhere who would feed you with articles and workshops to buy options of 50-60-70% overnight returns. So its better if you stop buying options and focus on building a good portfolio of growth which could give you somewhere around 30% annually. The most interesting thing what people tell me when they are buying options is, "They are small investors". Guys be very sure that if you are a small trader or investor then options is not the way to go, you should more specifically stay away from options as after a few trading sessions you will not be left with any money to trade. You can never make it big through that. So once and for all, stop trading in options, first make some money in cash and in that mean time try and learn the game and slowly you will realise when you understand the game that option is just an instrument to apply your trade but needs lots of expertise and timing. Once you achieve that timing over a couple of years you can surely try out trading in that with some limited funds and without damaging your portfolio.

---

Now coming back to markets, yesterday we had a sharp decline. Now seeing the market data and the stocks behaviour I can say one thing that markets might be entering into a phase of conslidation. We have had a stellar run and in a short span of 2 and half months the index has moved nearly 3000 points which is huge. So it might happen that we might have some kind of time correction if not on the index, which means that we might have some kind of sideways movements in the index, which could last for the next 15-20 days. However I would love be wrong here in this context and have another wave of upside. On the longer term the texture has not changed at all, the longer term target of index remains intact, we are still in a Bull market and we will continue to be till the levels of 13,500 are held strongly. We might be entering into a phase which can be called as a pullback within the bull market and this pullback could decide the tone for the next rally which we could see in the market. But yes we seem to have achieve a short term top and for that 14,750 is an important point. All the views of pullback and slowing in momentum will be negated above this point and market actually may end up start making a move to 15,000 levels.

The most important support zone for today for #Nifty stands at 14,520 below which we should not be holding any long positions even positionally. Technically if there is an upmove we could face substantial resistance at the 14,650 levels and I believe this should be the point where we whould be contemplating of booking out of some long positions. Technically this levels is of utmost importance today and any closing above this could give the bulls a breather and some relief. #BankNifty might now face tremendous resistance in the zone of 32,400 to 32,500 zones. However it will be a win for the bulls only under the case when Index finally makes a close above 32,600 levels. Else its better to now wait and watch a few days and let the index consolidate before it makes another attempt on the upside. The best support for the #BankNifty can come around 31,000 levels and for the #Nifty at around 14,141 levels. This could be a mean reversion trade for the indexes where they are moving towards their important moving averages. This could be the point where they could garner some real support and eventually start a fresh leg of the rally. As of now if you ask me what I am doing, I would make any trading decisions only after todays move would have completed itself and I will have a couple of days to go through the chart through the weekend.

#Reliance stands as the best bet as of now for small term traders and investors. It has started a very important move and if this sustains then a fresh new lifetime high cannot be ruled out on this stock.

Have a nice weekend and a great trading week ahead. Do leave a comment if you like what you read here.

Abhijeet.