Example 1: In case of FnO stock: (In this case, I can reduce risk by shorting future)
I short Reliance on Monday at 2000 rs. At 15:19, Reliance hits upper circuit of 10% and circuit dont open for the whole day since only 11 minutes are left. So I fail to buyback reliance and hence short delivery. (Price is 2200 now).
Now on Tuesday Reliance increases 300% as it hits upper circuit every time. (Price is 6600.0 now)
On Wednesday also Reliance increases 300% again (price is 19800 now).
Now on auction on Wednesday evening, someone sells me reliance share at 23760 (20% premium).
So I lost (23760-2000)/2000*100 = 1088%
Example 2: In case of non-FnO stock
I short DMART at 5000% on monday and it hits upper circuit of 20%. (Price 6000 now)
On Tuesday again 20% circuit. (Price is 7200 now)
On Wednesday again 20% circuit. (Price is 8640 now).
On wednesday evening in auction, someone sells it to me for 20% premium at 10368.
So I lost (10368-5000)/5000*100 = 107.36%
Another question:
What if no one wants to sell me in auction even at 20% premium?
Whenever I short a stock, it scares me to death, what If it hits upper circuit and this scene happens? I Put stop loss around 3% below the upper circuit, but sometimes it may not even get executed.
It just need to happen once in a lifetime and I am dead.
Well Damn. These examples are too extreme to be in factored in. But for the heck of it , lets say this does happen and your positions for some reason aren’t already auto squared off by your broker. Having such naked positions does mean that you will lose a lot of money if market makes a severe volatile move against you. Never trade naked calls in either direction unless you are dead sure about something happening, to be honest not even then, its a bad habit.
Black swan events are a risk you live with in trading and they happen all the time. Don’t be too worried about these, stay hedged and lose small when you lose.
I am talking about Equity trading not options. If I have 10k in my account, I only short stocks worth upto 10k only. (Broker only ask for 2k as they give margin, and 8k cash just sits in my account).
Are you suggesting, whenever I short a stock, I buy OTM CE Option for it? It is not feasible in most cases, since liquidity is so less in most FnO stocks.
And there is no hedge in non-fno stocks.
Just wanted to confirm this theory, this is scary!!
Actually the auction happens with T+1 price as reference. So price of Wednesday doesn’t matter.
If no one wants to sell, you will still get it at 20% premium. And your money will go to Investor protection fund.
The scenarios that you have given are too absurd. Circuits wont open 30 times a day to make reliance rally 300%. Read about circuit breaker rules on NSE website.
To mitigate risk you should not short sell on event days. Also make sure to choose stocks with good liquidity. You will be able to exit before it hits upper circuit during the day,on most cases, given you are an intraday trader who monitors his stocks.
I used to be very afraid of this short delivery while doing btst. The best thing we can do is to mitigate risk as much as we can and trade in liquid stocks rest all is luck.
@samurai So, the maximum I can lose in non-fno stock is around 40% right, no matter what happens?
Assuming, On T+1 the stock goes up 20% and I pay 20% premium on auction.
Let’s say for example,
TCS announces out of nowhere, that they created a smartphone chip that is 10x faster. This will make TCS bigger than Apple, since all smartphones may use that chip.
As soon as this news gets out (official or unofficially), circuit will hit. A big institution may place unlimited buy order in one go.
Chances are low of something like this to happen, but It only needs to happen once.
This steals peace of mind. I am ok to lose 20-50% due to a black swan event. I dont take leverage. If I have 100rs, I trade using 100rs only without margin. But losing everything is not ok.
Circuits wont open 30 times a day to make reliance rally 300%. Read about circuit breaker rules on NSE website.
As far as I know, there is a index circuit limit of 20%, but no circuit limit on FnO stocks. It can open every 15 minutes, right? I cannot find anything on NSE website, can u please share the article, if you know there is some rule like this. It will really give me some peace of mind.
Right, for FnO stocks there is no fixed limit. But institutions won’t be able to place orders at a price greater than 10%. If you have a SL-M order, then it will rarely occur that your order won’t get fulfilled. To ensure this, trade in liquid stocks. Usually all Fno stocks are highly liquid. Sure there will be slippages.
But the scenario that you have given is extremely rare. Try and find if historically any stock ever made 300% a day. Given that it is not a penny or non ipo listing day stock.