I have already been cautioning you with the growing difficulties for traders. RBI reduced the repo rate by 25 basis points. However, the market expressed negative reaction to this and closed down with a decline. In this article, I had earlier predicted this. Depositors will get the benefit of reduction in interest rates before the boror. The prime lending rate (PLR) is only for the top credit-remedies, other borors have to pay more interest on their loans.
I told my readers about the challenge of calendar year 2025. This is a difficult time for retail trader and will have to struggle to protect himself. For this reason, I recommended ‘Dal-rice’ style trading. Remember that Derivatives (Futures and Options) traders are facing a lot of difficulty, as they have to take care of their initial margin and large lot size. This means that capital allocation has increased.
Based on the experience, we know that traders often maintain their positions when the trade is going against them. This is more compulsion than choice. An average retail trader can settle its trade for small profit. But he can maintain the loss trade with a large loss. This causes his capital block, which makes him disappoint. Increased lot size means that the capital gets stuck in such trade, which will not give any returns.
For the solution of this problem, average retail traders are also using the method called professional traders ‘downtrading’. In marketing and sales, trainee salesmen are described as a trick to sell something to a potential buyer. If the customer does not buy a top brand because he is very expensive then the salesman shows him a cheaper brand. Since, the customer is buying a cheaper brand instead of the top brand, which is called downtreading.
For the past few months, I have seen that the share of index and stock futures is declining rapidly, while the index and stock options are increasing. What is this happening? This is downtrading. Traders are not able to repay the initial margin and they are buying call options. It has to pay small and fixed costs for long. It seems right to do so at first sight. But, is this correct? I don’t think so.
The retail trader is putting itself in a lot of difficulty. Why am I saying this? The reason for this is that options are called ‘Westing Asset’. An option that pays the premium starts decreasing with the passage of time, even if the price of security is stable. The reason for this is that the close expiry means that the days are less left to reach the profitable position. In this way option traders have two types of problems-Price and Time!
Vijay L Bhambwani
(The author is the founder and CEO of a property trading firm)