Library / MiyeeStockBuddy: The Complete Guide to Indian Markets

Part 20. Common Mistakes, Ranked by What They Cost

These are ordered roughly by how much money they take from people, not by how often they are discussed.

20.1 Position size chosen by margin rather than exposure

The most expensive mistake in Indian derivatives, and it is arithmetic rather than judgement. A margin of two lakh does not mean a two lakh position, it means an eighteen lakh position. People take three lots because they can afford the margin on three lots, and then a two percent gap does something to their account they had not thought possible.

20.2 Buying far out of the money options because they are cheap

A twelve rupee option has a delta near 0.06 and is priced correctly at twelve rupees. Nine expire worthless, one pays several times over, the trader remembers the one and repeats. This is the mechanism by which a great many accounts go to zero slowly and then all at once.

20.3 Selling naked options for the income

High win rate, catastrophic loss distribution. It works for months, which is what makes it dangerous, because by the time the bad week arrives the trader has scaled up on the evidence of the good ones. Buying the protective wing costs about a third of the income and removes the outcome entirely.

20.4 Moving the stop loss

The trade goes against you, the stop is about to be hit, and a reason appears for why this particular case is different. It is never different. A planned two percent loss becomes an unplanned thirty percent one, and the position is now an investment you never intended to make.

20.5 Averaging down into a falling position

Buying more of something that is falling feels like conviction and is usually the opposite. Adding to a loser increases your exposure to the thing that is already proving you wrong. There is a legitimate version of this, which is buying more of a good business at a better price according to a plan written in advance. The version that destroys accounts is the one invented afterwards to avoid taking a loss.

20.6 Trading a scheduled event with plain options

Implied volatility is highest immediately before the event and collapses immediately after. You pay the highest price of the cycle and then watch the position lose value on a correct call. Part 12 covers the fix, which is to use a spread or to be early.

20.7 Confusing activity with progress

Fifteen trades a week feels like working hard. Part 15 showed what it costs in a year. Most portfolios would improve if their owner did nothing for three weeks out of four, and almost nobody can bring themselves to test this.

20.8 Taking tips

A tip has no stop loss, no thesis you can check and no exit. When it falls you have no basis for deciding anything, because you never had a reason for owning it, and the person who gave it to you has moved on. If you cannot explain in two sentences why you own something, you do not own it.

20.9 Ignoring the balance sheet because the chart looks good

A chart cannot tell you about promoter pledging, a qualified audit opinion, or receivables that have doubled in a year. Those things do not show up until they show up all at once, on a day when the stock is locked at the lower circuit and you cannot sell a single share at any price.

20.10 Believing more indicators means more certainty

Twelve indicators calculated from the same price series are one piece of information counted twelve times, and the feeling of confirmation is manufactured. Two indicators measuring genuinely different things, such as trend strength and volatility, are worth more than twelve measuring momentum.