Month: May 2021

Jun21-W1: Nifty to consolidate this week (May31 to Jun4)?

Though I have not been able to find time to trade Nifty mainly due to office work, I could not resist making a brief analysis for this week especially since Nifty has hit ATH. Congratulations to those who stayed invested.  

Now, here’s what I am looking at:

Saying that Nifty has broken previous ATH would be a call made too soon. This week is crucial to see if Nifty has broken the red resistance rectangle.  

Thus, scenarios for the week ahead…

ScenarioProbabilityAnticipated Price Action
ConsolidationHighBetween 15500 and 15250
DowntrendLowIf breach below 15250; to drop till 15100
UptrendLowIf breach above 15500; to rise till 15650

Lingering around ATH levels is always a very tricky situation and I personally think Nifty is far away from its averages and thus, revert to mean is a good possibility. RSI structure too is a bit confusing. So, consolidation should be the name of the game, this week. Let’s see.

DISCLAIMER: I am not a SEBI registered adviser. All the information provided on this website is for educational / informational purposes only and should not be taken as investment advice.

How to make money work extra hard!!

Money works silently in our bank accounts, growing each year steadily at rate of 4 to 6% per annum. With fixed deposit, it works harder and it works hardest when put in good quality stocks or mutual funds. Money loves the idea of compounding and builds itself. But it cannot work if it is kept idle in a trading account. Then it would only be me who will work via trades but not my money.

To let money work on its own in a trading account, one can pledge the share / MF holdings. By pledging, I allow my broker (Zerodha) to create an extra trading limit aka collateral margin. While I can use trading limit to undertake intra-day or positional trades in F&O segment, I also allow my money to keep earning on the funds or shares that are pledged. And so, both I and my money work on the trading account.  

But there is no such thing as free lunch and one must be mindful of following points..

  1. Collateral margin from pledging cannot be used for buying options or for buying stocks…yeah, such a bummer.
  2. A percentage called haircut is deducted from overall corpus being pledged i.e. if I pledge Rs. 100 of stock which has a haircut of 10%, I would be entitled to trade only with Rs. 90. Furthermore, this Rs. 90 of collateral margin will be adjusted for the price variations in the security at the end of each trading day. 
  3. For overnight F&O positions, 50% of the margin needs to compulsorily come in cash and remaining 50% in terms of collateral margin. For example, a future / option trade requiring Rs. 1,00,000 of margin will require Rs. 50,000 as cash irrespective of collateral margin. Otherwise, account will be in debit balance attracting penalty of 0.05% per day applicable to the debit amount.
  4. Liquid funds are exempted from the above 50% cash:collateral rule i.e. corpus after haircut is treated as ‘cash’ anyway.
  5. Pledging and un-pledging follows T+1 settlement. For example, if I pledge my stock today, I would receive collateral margin tomorrow (or even on T+2 as the case may be)
  6. Losses on F&O using collateral margin should be adjusted with capital, else the broker has right to square off pledged holdings to make up for the losses (recent example being Archegos)

Now Zerodha allows pledging of almost all important stocks, mutual funds (yes, it does), ETFs, gold bonds and liquid funds. The latter two i.e. gold bonds and liquid funds are classified as cash components (and follow point 4 as mentioned above). Anything else being pledged is non-cash and must comply with 50-50 cash-collateral rule. This link provides complete details about securities and their haircut. It gets updated every month.

Since I am primarily an option seller, pledging can definitely help me with the extra leverage. The problem for me is that I do not have much capital. Hence, it is not prudent for me to buy mutual funds, pledge them and still maintain lot of cash for carrying option trades. Besides, I have a negative bias for market anyway this year. Therefore, I currently have liquid fund whose pledging lets me give collateral margin as ‘cash’.

The return from liquid fund (albeit very low these days) adds to any gain made from trading options. This strengthens the power of compounding. In future, I would like to maintain more cash so that I can buy Nifty ETF. That would mean an approx return of 15% via ETF + a hopeful 15% from option selling. Quite a dream but it would be really awesome to witness money working so so hard.  

May21-W1: Nifty correction due to failed triangle breakout (May3 to 7)?

I have to admit that I got it wrong last week. Since Nifty was always somehow taking support from 14200 (happened 3 times), I should have written that probability of bounce was higher. Even RSI with its divergence was hinting this. Even then, I would never have expected range of bounce to break triangle by such a huge margin. At the end of week, Friday played spoilsport bringing Nifty back inside triangle.   

Now, here’s what I am looking at:

My bias is on downside as I believe that this is a pattern failure. I expect coming week’s price action in the yellow highlighted box

Thus, scenarios for the week ahead…

ScenarioProbabilityAnticipated Price Action
ConsolidationHighBetween 14250 and 14850ish
DowntrendHighIf breach below 14250ish; to drop till 13850ish
UptrendLowIf breach above 14850ish; to rise till 15050ish

Even Nithin Kamath was amazed by the rally witnessed last week. The disconnect between reality and market continues but I guess this market is a function of liquidity and not of fundamental factors. In any case, I am neither a fundamental analyst nor an expert at expert analysis. And then there is this disclaimer anyway 🙂

DISCLAIMER: I am not a SEBI registered adviser. All the information provided on this website is for educational / informational purposes only and should not be taken as investment advice.