You might be tracking Nifty and Bank Nifty and see that Bank Nifty has increased 1% or1% has broken. You see a lot of momentum in that 1% also. But you think about it, in stocks, the 1-2% move that you are seeing here, how much is there in the stocks. It is not possible. And if you trade in options, then you understand the importance of 1%. So if there is a 5% movement somewhere, then how much money can’t give.
If you have thought about it, then this blog is for you. Because today you are going to understand exactly that when such big move comes in the stocks, is there any way to capture that move? And there is a beautiful concept that is trap. Where are the writers getting trapped? Where are the call writers getting trapped?
Where are the put writers getting trapped? You can get good money specifically in stocks. And Shusha Agrawal will explain the whole concept to you today. So here we go. Thank you Pushkar ji again for this blog.
In this blog, I will go and explain what is a trap indicator. First, let’s understand the concept. I have seen a very common resistance of people that people want to trade index. Now think of an elephant. No matter how much you push, it will not move. The index is such a big elephant that it does not move. So there are very limited opportunities there. So in the stock market, I have seen from the beginning that one thing works is anomalies.
Which is such an instrument, which is such a market where were getting an anomaly to trade. So today the top 20 stocks, if you look at it, are highly liquid. There is no liquidity in any strike. We do not see this in HDFC Bank, SPI, Innocent Bank, TCS, Infosys. There are so many stocks where there is such a good opportunity, there are movements. And when we are trading in options, we are not taking the future.
That today we took it, tomorrow it may be a stock, it became Adani. This is not happening because we can go to the option and take hedge trade from the beginning. That you can sleep at night. You know how much risk you have and how much reward you are going to get. Exactly.
If I know that I will not have more loss than this, then I will sleep peacefully. And when I wake up in the morning, I can go and see that trade again. So that’s why there are a lot of opportunities in stocks. And still I think there is a little less awareness. Either people’s interest is less or everyone wants to do Nifty Bank Nifty.
But for the past few years, I have seen that there is a lot of opportunity in stocks. And here if you look, it is possible that if you are chasing 15-20% return in a strategy and you are doing Nifty Bank, you can boost it by 40-45% in stocks.
Why? Because you are getting anomalies to see. Now I come to the trap indicator. What exactly is a trap? What is its fund? We all know that the derivative is zero sum game. Which means someone’s profit, someone’s loss. And in general, you will see that there can be three types of traders. One is a buyer, one is a seller, and one is the hedger and opportunist.
But at one time, they are doing the same thing, but they are hedging. So let’s remove the hedger from the equation. They are very sophisticated, there are very few people who gonad trade like that. So what is the majority? Option buyer, option seller. Now if I have to earn money in buying, in low margin, low risk, I have to go and earn money.
So what do I have to see? I have to go and understand when the option writer will lose. Where the writer will lose, there will be momentum. I will get to earn there as a buyer. So if the writer goes and… Now what is the structure of the writer’s payoff? The payoff structure of the writer is that most of the time, the writer will make money. The strike rate is good. You will get a 60-65% strike rate easily. But when he loses 35% of the time, then he loses a lot.
And we call it eating like a bird and shitting like an elephant. Big losses, writers will pay to the market. And the equation overall becomes zero.
So what do we have to know? We have to know that 35% of the time, when he will come to the market and lose. We have to know this. So how can we understand this whole equation? So the people who do open interest analysis, if we do a little data processing on that, I will explain a little of its concept to you here. And then we will see how the indicator looks.
So we understand that the structure of open interest, the way we denominate open interest in the concept, it looks like this. This is call writing, let’s say. So we show it horizontally. I like to see it like this, but you can also see it vertically. But I find it more comfortable.
Now if we look here, this is a zone where multiple call writings are happening. Now if you think about this algorithm, let’s say I give you an example. If this is a strike of 100 rupees. Now my real trap, what does trap mean?
Now this is a strike of 100 rupees, so many open interest have been added. If the price of the future goes above this, then it is a trap. But if the price of the future goes above the price of the strike, then it is a trap. But it is not that easy.
Because let’s say when the call writer sold this option, he got5 rupees. So now the break-even, we see on the chart of open interest that this is the break-even. But where is the actual break-even? Here it i.e. tries to make a dash. So he got 5 rupees. So his break-even point is 105 rupees. This is the basic concept that if the price of the future goes above 105 rupees, then it is a break-even.
That’s why we see many times that the price of the future goes above the highest call and then it comes down. You have to get resistance from there. But it comes down by crossing. It comes down by 102.So many people think that this is a trap, but it is not a trap.
The share came, the share came, the share did not come. So how will you know this? Now this is not one price that we will say that I got 5 rupees premium. The price is changing every day. Continuous price trade is happening. The option of the stock is continuously trading. So how will you normalize this thing that what is the equilibrium price on which most of the people who sold the option will be trapped? So basically what our data algorithm does is that from the beginning, an algorithm normalizes the whole data and brings let’s say 105.
That 105 is that level. On an average, people have sold and taken options in this. In credit. So if there is a level of 105 which will cross and it will run on the highest call, it is not necessary. This option, the strike is also very big.
It will also account for that. It will also account for this and it will bring a normalized number where the domino effect is created. I will tell you the domino effect. So in simple language, let’s say if there are 1000 cycles, you go and drop the first cycle. So the rest starts falling. The whole 1000 cycles will fall. If you think that I will push 1000 cycles, you will not be able to give. But if you drop one cycle, all will fall.
So what this algorithm does is it finds which point is optimal, not best. There is a difference. Best means sure shot. Optimal means highest probable point, which will cross and convert into a chain reaction. When this person comes, I mean not just one person, but all the traders, it is possible that there is an optimal point here where these people will panic.
Because of which it will go up and then these people will panic and then it will convert into a chain reaction. For this, we may not even have to wait. There are two things. One is not 100, but 105, not 90, but 95. There may be different numbers. Its adjustment plus optimal point where people will behave and the probability of chain reaction converting will increase a lot. Our algorithm basically finds and brings the trap indicator.
I say this concept that the seller is running away with the lungi, the price can also run that way. But when the seller is running, I am trying to preempt. I am not attempting; I am saying by looking. Like you told in this way, there is an add-on that here was my maximum OI and at this strike price, my maximum volume was there.
So I explain this to people. Now what happened is that if there is a trap here, then they will run at the next strike price. So at the next strike price, the max OI will shift and the maxvolume will also shift there.
But along with that, the price will also run. So this trap was there, so they ran away. And they can go next time too. They start preparing in advance. So the build-up starts at the second strike price. And this will continue continuously. So what value addition are we doing? We are doing this value addition that what net premium did we get? And there is an optimization routine that is solving this that may not even wait for the highest call to reach.
There is a point before that, if you add these two, then it will be greater than the highest call. Something like this will be seen. So if you think logically, if these two points had been breached, then we did not have to wait for i.e. could have entered earlier. We could have entered earlier because this is the highest one combined basis, on a cumulative basis. So the right word is cumulative basis.
This was the highest point. You may not understand this here. Now you will understand what we are trying to show you. But you can watch this blog many times. It is available for free. So, on a cumulative basis, the concept I am explaining is that if you add the highest call on three strikes or any call sold, if you add two, then maybe it is the highest and it has crossed. So, I needed to wait for the third one.
So, we will calculate this. And now I will show you in Al goldomthat straight away, even if you don’t understand this, it is very simple. You will see there that this green means buys, red means sell. Traffic light signals. So, now we go to the trap indicator. So, I am here in search, I write trap in search.
And we go inside this tool. Now, if you see here, all the signals in the stocks are showing here that, like if I explain the first one, in Asian paint, today put writer ‘strap has happened. Put writer’s trap means that the put who sold, they got stuck in the deal.
So, that means that the market will fall from there. So, Asian paint will be correct because the put writer is trapped. And that zero is visible, return, because the signal date is today. So, after the market closes today, finally this signals left.
So, it will show you the signals in the live market too. Butte are calculating P&L EOD to Edson, it is showing here that today this signal is left. So, we can take this trade tomorrow. Similarly, if you see here, there are multiple stocks. And if you see this, the last signal, you will see the return here.
And P exit means? So, this is probable exit. So, when the price copy, so here is a little basic fund. When the price copy comes, the open interest that we are tracking, it changes. So, when the price copy is processed, it may change.
So, we are showing probable exit. I think in an hour when the price copy comes, you will see whether there is an exit or not. So, anyway I have to do the trade the next day. So, if there is an exit, I will go to the next day and square off the trade. Right.
We will try to make a blog for you. So, if we see the signals, then basically this is P&L, which we can see on the right. This is the P&L of all the stocks. So, you can see. So, these signals came in your app and 6% returns came. And when was the signal date? Signal date is 17th, 16th, 20th.Right. So, all these are the trades of this month. So, 6% returns have come from the 16th trade.6% return means if you have done that trade in the option, if you have taken the call option or spread, then it is a big return.
Ideally, you should take a hedged strategy in this. Right. Hedge, so that if there is any news in it, if it goes against, then the whole money is not broken. So, I will recommend that ideally bull call spread, bear put spread, you create and leave it. But still it will be amplified 3 times, 4 times if you are converting the trade in the option. So, in an example, I will take. You tell us which is the best strategy.
Yes, then we can go to the optimizer and find out. We can find out the best. But in that, we will find out the target and stop loss through the chart.
Basically, there is nothing to do. You see the last 10 signals and what is the average move coming. If you take that too, it will work. Okay. There is no need to complicate too much. If it seems that every time there is a move of 15 points in the Induced bank, then 15 points is the target. And if it comes in 3 days, then3 days is the time.
And according to that, the blog of optimizer that we made, youkan goes and see how we can find out the strategy. So, let’s take an example of Induced bank, which is visible in front. How did the trades come in the past? So, I will just click on it, then a chart will be seen.
So, basically, this is a simple chart. If you see red here, it means that the short trade was created here. The square was made here. There was a shortfall in this, I think, not much money would have been made. It was created here, the square was made here, so a lot of money was made in this.
Here, the buy trade came, the green means that the buy trade came here and the square was made here, and a lot of money was made. So, basically, you can do an analysis of the past trade like this, how this return is behaving.
So, my understanding so far in this utility is that traps are not much an opportunity in the index. I mean, if you show this thing in the index, but the strike rates not much better because the index is a giant. It does not move much.
Even if there is a trap, it will remain there. Even if there is no trap, it will remain there. Sometimes it becomes a pendulum, as we saw just now. It is not ready to move. So, this opportunity is in the stocks.
And if you go to the stocks and create a hedge strategy, then there is no unlimited loss. So, you can go to the stocks and create a basket of 3-4 stocks, 5 stocks, where the signals are coming, there and there, we can trade it through a bull call spread, a bear put spread.
Right. So, these signals at the back are that 6% return came,1% loss occurred. What is the average of this? So, every stock is different. But overall, if we see, the strike rate is about 68%. Every model is approximately the same. Any good model is between65-70. So, approximately 68% strike rate we have seen historically.
And which stocks do not work are the slow movers. Like if you say that I trade in the ALTI industry, then maybe it will not work. And where the options are not liquid, let’s say if you say that trade in MRF, then it will not work.
The reason for that is why not in MRF? Because, why are we doing this? We did not cover the concept, but you said it, so I remembered. Do you think that the option moves because of the future or the option moves because of the future? It will move because of the future. According to the book. But when 92% volume is in options, then if options are getting trapped somewhere, then the future will move because of tattoo’s, actually the answer is that both are interdependent.
Both are moving each other. So, if on the basis of options, we are saying that if the future is trapped on the basis of options, then it will move. It is the call that we are taking. So, now there are no options in MRF, no liquid. So, even if there was a small quantum there, it would not move. Because in options, we do not have much liquidity. There is no quantum. So, that’s why we should avoid all those stocks. We have to give because if someone is still interested in all the stocks, if they want to see some data, then we have to give.
But my recommendation will be that leave the illiquid stock where there is not much trade in options. If you trade in the top 20-30 stocks, then that will be a fantastic trade. You will get a deal easily. The signals are also very good. And it is very simple in this. You have to go and see. There is a signal, so you have to go and trade. So, we saw that in the Induced Bank, if you want to see the returns, then you have to see the other stocks that we saw on the first page. These are all the latest signals. So, the signals are coming regularly, the dates are coming.
And the returns that have come in that, this stock moved after that. The return in the option will be about 3-4 times more, the loss will be 3-4 times more, the profit will be 3-4 times more. You can hedge the loss. But the loss that we have learned in the optimizer, if you are using it, then the technique that we have learned in the optimizer comes here.
if there is a loss, then if there is a loss of 2%, how can I give 1%? And when there is a profit of 2%, how can I get 3%? So, that is optimizer. But from here, we get the basic signals that where we have to go and trade. Like in IRCTC, almost 2.6% of the return of the stock has moved. So, this is a put writer trap, which means the stock fell.
The stock fell by 2.5%. So, if the stock fell by 2.5%, good money could be made in theoptions.4 times. It could have been made more. Easily. So, this is a very good indicator for you if you trade in the options. And as we said that you can earn more profit in the stocks. So, you can use this indicator for that. And for this, you have to go to the concept. .