Yesterday I referred to an email in which the trader said he was short in Nifty December calls. I had suggested he should lighten up. Today I received this message "i have cut down my position down to xx now. xx lots of each 5700,5800,5900 are dec. call are left short with me , but it's creating huge loss, sir i dont have any MTM , margin etc problems, but the mental pressure is very high, i dont know what high can we see in nifty, is there any idea of any high point in nifty, so that i can prepare my mind for that???
This was my reply
"Okay, xxxxx, let me explain the problem.
You have xx lots, xxx Nifty short. They are calls but short calls become like futures. Now, if the Nifty goes up by another 1000 points, you will lose xx lakhs. I think this is the worst case scenario.
You should be mentally prepared for this. But, even if you can afford this loss, is it wise?
Therefore, you need to decide on a cutoff - a point at which you accept that the trade has gone wrong. That's ok. This is just one trade in thousands that you will do. All traders go through such phases. Not to worry.
Can you decide on a cut off? if so, let me know so I can give my opinion.
Now, I am travelling for the next 2 days - thursday and friday. I will be in Chennai but I am going for some darshan etc so I may not be able to access my email. If you wish to contact me for some reason, please call xx at xx number and ask him to convey your message to me.
Now, to answer your question: My analysis suggests it is a matter of days before a correction begins. But, what if I am wrong?"
My Notes: I have reproduced this exchange because (1) I feel this will help many traders avoid this kind of mistake, (2) I hope readers will offer their suggestions to help the trader.
Note how Silver has rallied to life time highs. What is the outlook for gold?
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