We have RBI Monetary Policy announcements from time to time.

On those days, banking stocks move both ways and finally can go either lower or higher, the same outcome as on any other day.

But we listen to all the nonsense being dished out by the experts about the base rate change (or no change).

The same move in stocks could have happened without the announcements and its interpretations.

When Ravneet Gill was appointed CEO of YES BANK, it was made out as if all the problems of the bank were solved.

The stock shot up from Rs. 168.70to Rs. 222.60 in a day (31.95%).

That was February 2019.

Nothing, even the new CEO could not prevent the stock price to collapse later. Today it trades at Rs. 11.00.

Ravneet Gill is as qualified to run a bank today as he was two years ago. No one talks about it now.

Most of the reasons given for what happens in the market are — pure unadulterated bullshit.

This has been summarized wonderfully by Nassim Nicholas Taleb in his book — Fooled By Randomness.

“The formation of our beliefs is fraught with superstitions—even today (I might say, especially today). Just as one day some primitive tribesman scratched his nose, saw rain falling, and developed an elaborate method of scratching his nose to bring on the much-needed rain, we link economic prosperity to some rate cut by the Federal Reserve Board, or the success of a company with the appointment of the new president “at the helm.”
― Nassim Nicholas Taleb, Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets

NIFTY OPTION BUYING and Randomness:

We are fooled by randomness and we benefit from randomness.

Market moves higher over a period of time — is a fact.

The manner of moving higher is random.

Option Buyer can benefit from randomness for the reason:

Loss in a wrong trade is fixed.

Profit in a right trade is open to market move.

If we try to take advantage of this simple principle, we shall come out with profit after certain time period. That time period will be determined by the randomness of market moves.

Let me show with two examples;

`Year 2018:

On December 2017 expiry NIFTY closed at 10477.

One year later, on December 2018 expiry, the close was at 10779.

Just 2.88% up move in one year.

But the month to month moves were big.

ATM CALL buying resulted in small losses and bigger profits when a big down move and up move occurred.

Here is the month-wise chart:

Summary of year 2018:

Series NIFTY Open NIFTY Close ATM Call Buy Price Sell Price Profit Points
Jan 10477 11069 10500 136 560 434
Feb 11069 10382 11100 182 0 (182)
Mar 10382 10113 10400 161 0 (161)
Apr 10113 10617 10100 202 512 310
May 10617 10736 10600 162 134 (28)
Jun 10736 10589 10700 140 0 (140)
Jul 10589 11167 10600 139 566 427
Aug 11167 11676 11200 149 465 316
Sep 11676 10977 161 0 (161) (161)
Oct 10977 10124 11000 214 0 (214)
Nov 10124 10858 10100 299 754 455
Dec 10858 10779 10900 199 0 (199)
             
Total           847

There were 7 losing months but the profit from the 5 months were good enough to get 847 points.

Let us see the immediate next year.

Year 2019:

Nifty moved from 10779 to 12126.

A gain of 12.49%.

What was the profit from ATM CALL buying.

Here are the numbers:

Summary of year 2019:

Series NIFTY Open NIFTY Close ATM Call Buy Price Sell Price Profit Points
Jan 10779 10830 10800 199 20 (179)
Feb 10830 10792 10800 222 0 (222)
Mar 10792 11570 10800 229 768 539
Apr 11570 11641 11600 229 39 (190)
May 11641 11945 11600 398 346 (52)
Jun 11945 11841 11900 227 0 (227)
Jul 11841 11252 11800 243 0 (243)
Aug 11252 10948 11300 170 0 (170)
Sep 10948 11571 10900 255 669 414
Oct 11571 11877 11600 229 277 48
Nov 11877 12151 11900 205 252 47
Dec 12151 12126 12200 158 0 (158)
             
Total           (393)

Even while NIFTY had bigger gain this year as compared with 2018, the randomness of monthly moves caused a loss.

How to make profit from the random moves:

Two things are not going to change.

Market will always move higher over a long period of time.

Option Buyer will always have a limited loss in case the trade goes wrong.

These two factors will combine very well to deliver profit from ATM CALL option buying in NIFTY because NIFTY is the market.

More in next post on Sunday.

Disclaimer: This post and examples are for teaching purpose only and are not meant as advice/suggestion to trade in these stocks. Trading in Futures and Options can lead to big losses and should be done with appropriate knowledge and advice only. Mentioning the stocks here does not imply that I have a trading position or likely to take a trade in these stocks.