Making Money from the markets

We cannot have this discourse without first enumerating different ways one can trade in the stock markets. All successful methods of course must have clarity of purpose. If you are plus sixty in age , and you are investing for the next 30 years as a long term compounding method , you have clearly lost the plot. In a similar vein, if you put everything you have into the speculative markets (Now or never syndrome) you are playing with your life literally.

in order to systemise , we must have to begin with all different ideas in front of us. One cannot make a system unless one has in front of him a broad canvas to choose from.

To facilitate this exercise, let us enumerate first various known ways one can trade

  1. Buying good quality stocks on major dips. Selling part at rises.

This method is typical Warren Buffet. Can never fail as relies on market forces which let you buy at fraction of the fair price because of mass frenzy. This can be aligned with the wave theory and further enhanced by selling at the money call first time. In case the stock falls you have the stock at the “purchase price of stock – call premium.. In case the stock zooms up like lightening, square up both  at net profit of the call

2.  Buying mutual funds.

Apart from saving taxes , a good mutual fund may beat the index over a long period. However in case of major falls one can see on paper wealth being eroded. Therefore one may have a healthy mix of debt funds in order to get consistent returns.

3.  Buying selected stocks and hedging with calls.

a.   Hedging with single stocks bought in quantity equal to the lot size.

This is a system which is used by hedge funds. However in order to do this you must have a thorough knowledge of trading with options. Half knowledge may be disastrous.

b. Buying a basket of stocks exact equal to lot size of call option. Then hedging monthly with the nifty call option

4.  Buying Nifty index (nifty bees) and covering with call on monthly basis.

As the index has less volatility , one can definitely have more peace of mind in this system.


5.  Naked derivatives.

I have kept this to the last as this is by far the most dangerous of any trading system. Not only the markets can confound you, it can take away all your money within no time. As a rough guess, about 99 percent of punters lose money in this venture and only one percent may end up positive. Buying or selling naked futures is even more risky vis a vis naked options.

However one with discipline and thorough knowledge of technical analysis can be part of the 1 percent winners mentioned above.


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