Zebu blog

Tag: risk management

  • What Is Bottom Fishing?

    Bottom fishing is the practice of investing in assets that have gone down in value, either because of internal or external factors and are thought to be undervalued.

    Every move in the share market is critical, but so is the technology you use to make those moves. As an experienced online trading company, we offer our users a seamless online trading platform and the lowest brokerage options to support their trading journey.

    How to Figure Out Bottom Fishing

    Investors who use the bottom-fishing strategy are called “bottom fishers.” They bet, using either technical or fundamental analysis, that an asset’s low price is only temporary and that it will rise again over time to become a profitable investment. Bottom fishing can be a risky strategy when asset prices are down for a good reason or a smart strategy when asset prices are trading at irrationally low prices.

    Bottom fishing is based on the tried-and-true method for making money in the stock market, which is to buy low and sell high. In short, look for value and invest in it. Value investors like Warren Buffett and Benjamin Graham have made a lot of money by buying assets that are selling for less than they are really worth and waiting for prices to go back to normal.

    Bottom fishing as a way to make money has often been thought of as more of an art than a business strategy because it is so abstract. The most important thing to know about this art is that a successful bottom fisher doesn’t try to buy a stock at its absolute lowest price, but rather at a point where it has the best chance of going up.

    The best way to describe the risk of bottom fishing is with the market saying, “There’s a reason why the price is where it is.” Simply put, the market is always deciding how much a security is worth. If the value of a security has dropped sharply, there may be a good reason or reasons for the drop. It is very hard, if not impossible, to tell if this drop is due to something temporary, like panic selling, or if it is a sign of deeper problems that are not obvious.

    Here are some examples of bottom fishing:


    Putting money into the stock of an aluminium company when the price of aluminium is low.
    Buying shares of a company that ships containers during a recession.
    Putting money into a print media company when the internet is driving them out of business.
    Buying shares of a bank when the economy is in trouble.
    In each of these situations, it’s not clear when or if the stock price will go back up, but you could make a case either way. During the 2008 financial crisis, investors who bought bank stocks made a lot of money, but investors in print media companies may have lost money because the industry has never been able to fully recover from the increasing competitive pressures.

    Strategies for bottom fishing
    Bottom fishing is appealing because it has a higher chance of making money than assets that are fairly valued or overvalued. Bottom fishing is most popular in bear markets, which makes sense.

    Value investing is the most common way to fish at the bottom. Value investors look for opportunities where the market may be pricing assets too low. They do this by looking at valuation ratios and predicting future cash flows. A company that had a bad quarter because of a problem with its supply chain and saw a big drop in sales would be a great example. Value investors might decide that this is an isolated incident and buy the stock in the hopes that it will recover and trade at a price that is more in line with its peers.

    Many traders also use technical analysis to find stocks that have been oversold and could be good opportunities for bottom fishing. For example, a company may report quarterly financial results that are worse than expected and see a big drop in price. Traders may see that the pressure to sell is starting to ease and decide to go long to take advantage of the short-term recovery. Often, these traders will use technical indicators that help them figure out if a security has been oversold or look at patterns in candlestick charts to do the same thing.

    As an experienced online trading company, we offer our users a seamless online trading platform and the lowest brokerage options to support their trading journey.

  • How Traders Earn Passive Income From Cash Covered Puts

    Futures and options are two types of derivatives contracts. They are used not only to protect the equity position but also to make a steady income. Many traders and investors combine futures, call options, and put options to make regular money from the stock market. They do this by using their holdings and balance margin to start trades.

    In this blog post, we’ll look at how selling cash-secured puts can be used as a way to make money on the stock market.

    Are you a regular trader? Then, Zebu’s lowest brokerage for intraday trading plans is what you need. As a share broking company, we understand that the lowest brokerage plans can help our users tremendously.

    How do cash-secured puts work?

    As part of an option-selling strategy called “cash-secured put selling,” you set aside enough money to buy a stock at a certain price and then sell the put option for that price. The goal is to buy the stock for less than what it is worth on the market.

    There are, however, some risks involved. The first risk is that the price of the stock may never drop to the level where the trader wants to buy it. This could make it impossible to buy the stocks in the long run. The second risk is that the price of the stock could fall way below the strike price.

    Why selling cash-secured puts is a good idea

    To make money from the option premium, cash-secured puts are usually sold. How much you get depends on the value of the security and how much you are willing to pay for it.

    Gains Invested Quickly

    Cash-secured puts can give you cash right away. It can make option income more appealing and can also help reduce risk.

    You can get paid to invest

    A cash-secured put strategy is a great way to get paid to buy the stock you want to buy. This strategy lets you choose from a number of strike prices and expiration dates.

    Low-dividend stocks can be profitable

    If you want to increase your cash flow but don’t want to be limited by a low dividend yield, you can do so by selling cash-secured puts.

    Risks involved in this strategy

    Multiples of the Lot Size
    Futures and options, which are examples of derivatives, can only be traded in lots. This method won’t help you if you want to buy stocks in a very small amount or a fraction of the lot size.

    Not being able to profit from price correction
    Most investors who want to own shares of a company in the long run shouldn’t use the cash-secured put strategy. If the price of shares stays high, they may never be able to buy any.

    Repeated Actions
    Most investors are more interested in a simple “buy and hold” strategy. In this strategy, you sell cash-secured puts so that you can buy stocks when the person who bought the put options decides to sell. Since the option doesn’t have to be used, it takes more time to go through the same process every time it expires.

    Effects on tax
    When you sell cash-secured puts, the money you make is considered business income and is taxed based on the trader’s tax slab. If the trader owned the stock, he or she would get money from dividends and the increase in value of the stock. Together, these two types of income might have a lower tax rate.

    Getting to Know with an Example
    Let’s say that the price of Stock XYZ is Rs. 250 right now. Stock XYZ’s derivatives contract has a lot size of 100 shares, and you want to buy 100 shares of XYZ for Rs. 235.

    You can make money by selling the 235 strike price put option every month and keeping the premium. Let’s say that for the current month, the premium for 235 put options is Rs. 8. You get Rs. 800 when you sell that put option (Rs. 8 x 100 shares).

    This means that you are willing to buy 100 units of the stock XYZ for Rs. 235 at the end of the expiration period if the price at that time is Rs. 250 or less. For this obligation to buy, you need to keep an account balance of Rs. 23,500 (Rs. 235 x 100 shares).

    If the stock price goes above Rs. 235, you get to keep the entire premium you got for selling the put option with a strike price of Rs. 2350.

    The Bottom Line: Cash-secured put selling is a strategy that involves buying a security at a price that you would be willing to pay. This method works for people who want to make more money or feel safer without spending too much. You might not want to sell cash-secured puts because the deal is complicated and you don’t want to own the security. This strategy could be better for investors and traders who want to make money on the stock market without doing much work.

    If you are a regular trader then, Zebu’s lowest brokerage for intraday trading plans is what you need. As a share broking company, we understand that the lowest brokerage plans can help our users tremendously.

  • Here’s How Volatility Impacts Put and Call Prices Equally

    What does it mean to say that something is volatile? Volatility, in simple terms, is a way to measure risk. But in technical terms, what does volatility mean? It can be thought of as the average difference between returns and the mean. Every investor wants a way to put their money to work that will give them predictable returns over time. When returns are too unstable, they can’t be predicted. At that point, the asset is worth less than it did before. Investors usually don’t like stocks that are too volatile, and those stocks tend to be worth less. But did you know that when it comes to options, it’s the other way around? In fact, volatility makes both call options and put options worth more.

    As we all know the market is volatile, but your platform does not have to be. Zebu, one of India’s top brokerage firms provides our users with a seamless online trading platform that can help them create the best trading accounts.

    Usually, volatility and the prices of assets go in opposite directions. The risk is higher when the volatility is high, and when the risk is high, the returns are lower than expected. Investors are always willing to pay more for stability than for risk. But things are very different when it comes to call and put options. When the market gets more volatile, both call and put options are worth more. So, let’s figure out why volatility makes the price of options go up. Let’s also look at the relationship between how volatile an option is and how much it costs. How does this affect the implied volatility between a call and a put?

    First, let’s look at what it means for call options.
    Volatility means that the stock’s returns are likely to be very different from the mean. It also means that there is too much uncertainty in this situation. But why does that make the put option worth more money? Let’s start by looking at the basic Black-Scholes model.

    According to the Black Scholes model, the price of an option is affected by 5 main factors:

    Market Price of the Stock: When the stock price goes up, the value of the call option goes up, but the value of the put option goes down.

    Strike Price of the Stock: When the strike price goes up, the value of a call option goes down, but the value of a put option goes up.

    Interest rates: When interest rates go up, the present value of the strike price goes down. This makes the call option more valuable and the put option less valuable.

    The value of a call option and a put option goes down if the time until maturity or expiration goes down.

    The value of both the call option and the put option increases when the stock’s volatility increases.
    As you can see from the points above, volatility is the only thing that affects both call and put options in the same way. The time to expiration is the same, but it is a subset of volatility because a longer time to expiration makes people expect more volatility. But why does volatility have the same effect on calls and puts?

    It’s not hard to figure out why. Both calls and puts on an option are not the same. This means that the person who bought the option will only use it when it is good and will not pay the premium when the price goes down. This rule is true for both call and put options. The risk of going up or down is high when volatility is high. When there is a risk of going down, the person who bought the call option won’t pay the premium. When there is a chance of going up, the person who bought the call option will make a lot of money. Put options are also subject to the same rule. This is why call options and put options are worth more when the market is volatile.

    This shows that the value of the call option and the put option goes up when volatility increases, as long as all other factors stay the same.

    Zebu, one of India’s top brokerage firms provides our users with a seamless online trading platform that can help them create the best trading accounts. Visit us for more information.

  • Why You Should Know Time Value Before Trading In Options

    When it comes to trading options, the time value of an option is one of the most basic and important things to understand. In technical terms, it is called “Theta,” which shows how an option’s value decreases over time. Before we get into the details of time value and time decay, let’s take a quick look back at what options are and how they work.

    Before we get into understanding the importance of time value in trading, we should understand that the right technology is equally important. As a share broking company, we offer our clients a seamless online trading platform and also provide them with the lowest brokerage on intraday trading, to make their journey as a trader as smooth as possible.

    So, what are options really all about?

    As the word “option” suggests, it is a right that doesn’t have to be used. Unlike a futures contract, which is both a right and a duty, this is not the case. The buyer of the option has the right to buy or sell the underlying asset at an agreed-upon price (strike price). If the price change goes in the buyer’s favour, he will make money, but if the price change goes against him, he will not use the option. That doesn’t seem fair to the person who sold the option, does it?

    Not at all! Since the person who buys the option has a right but no obligation, the person who sells the option has a duty but no right. The seller won’t do that for free, that much is clear. The person who buys an option pays a certain fee to the person who sells the option for the right to do something without having to do it. This fee is called an “option premium,” and it is what gets traded on the NSE when you buy and sell options. The buyer of the option pays the option premium to the seller of the option as a reward for taking on the obligation without the right.

    Options can be either “call” or “put.”

    Call options give you the right to buy something, while put options give you the right to sell something. You buy a call option if you think the price of a stock will go up. If you think the price of a stock will go down, on the other hand, you will buy a put option. Even though it sounds easy, it’s not as easy as it sounds.

    Getting to the heart of an option’s intrinsic value and time value.

    Before you can understand the idea of time value, you need to know about the three types of options below.

    1. An In-The-Money (ITM) option is a contract for an option that has an intrinsic value that is greater than zero. If the market price of the Nifty is higher than the strike price, a call option on the Nifty is in the money. If the market price of the 17000 Nifty call option is Rs.70 and the spot Nifty is at 17100, then the intrinsic value of the Nifty call will be Rs. 100 (17100-17000). The option’s time value will be the remaining value, which is Rs.30. So, of the Rs.70 option premium that is being quoted on the market, Rs. 100 is due to intrinsic value and Rs. 30 is due to time value. If the spot price of the Nifty is lower than the strike price of the put option, the option is in the money.

    2.An “at the money” (ATM) option is a contract for an option that has a value of zero. If the market price of the Nifty is the same as the strike price, it will be an ATM for a call option on the Nifty. Since there is no intrinsic value, the time value is the only thing that makes the option worth anything.

    3. Out-of-the-Money (OTM) options are option contracts where the market price is lower than the strike price for a call option or higher than the strike price for a put option. According to our formula, the intrinsic value will be negative, but since the intrinsic value can’t be negative, we’ll treat it as zero. So, only time value will make up the option premium.

    At the beginning of the month, ATM options have the highest time value, followed by ITM options and then OTM options. In the long run, the time value of all three options will tend toward zero as the expiration date gets closer. Even though the OTM and ATM options themselves have no value, the option premium for ITM options will still be positive because they have intrinsic value.

    Why is time value such an important part of trading options?

    An option is a wasting asset because its time value tends to go to zero as its expiration date gets closer. This loss of time is also called “Theta.”

    Time and volatility are two of the most important parts of time value. For both call options and put options, the time value goes up as the time to expiration goes up. Even if the option is still Out of the Money, a rise in volatility can cause the time value to rise. The person who buys the options bets that volatility will make the time value go up, while the person who sells the option hopes that the time value will work in his favour so that the option expires worthless. This is the main idea behind trading with options.

    As a share broking company, we offer our clients a seamless online trading platform and also provide them with the lowest brokerage on intraday trading, to make their journey as a trader as smooth as possible. Contact us to know more.


  • What Is All The Hype About A Trading Edge?

    What Is All The Hype About A Trading Edge?

    In theory, a trading edge is a strategy, observation, or special technique that gives a trader an edge over other traders in the market and helps them make more money. There are a lot of books and papers on different trading techniques, but since many people learn and use the same information, the chances that it will give a trader an edge quickly go down to almost nothing.

    Finding an edge and understanding what that really means can help you decide if it’s worth your time to look for one or if it’s even possible or useful.

    The Common Thought

    Most people think that an edge is something that a trader knows or uses that gives them an advantage over the market or all the other traders. For example, a trader might think that using a certain indicator (like the Relative Strength Index, or RSI), in a certain way (like making short trades when the RSI is above 84), gives them an advantage over traders who don’t use the same indicator in the same way.

    Many new traders spend years trying out different indicators or different settings for indicators (like a length of 10, then a length of 15, etc.). They also try out different chart settings, like time-based charts, tick-based charts, or volume-based charts, to find the combination that gives them an edge.

    Getting Your Way

    Some traders have never heard of the term “edge.” When they do, they might start to wonder if they have an edge or if they need to find one. A few rules can help traders find trading edges, if there are any:

    The edge must be based in reality and can’t be based on assumptions. A trader needs to know that an edge might not work all the time. It is possible to make a lot of money with an edge, but then the edge might stop working for a while.

    If you think you have an edge, you should test it by clearly defining the rules and then applying them to historical market data and “paper trading.”

    A wake-up call

    In reality, there are traders who think they have an advantage and traders who think they need an advantage. Some traders laugh every time someone talks about an edge while they make another trade that makes them money. In other words, you might find and use an advantage or you might not.

    Many traders think that good training and instruction give them an edge. In fact, this could be the edge that people looking for an edge are looking for. To trade well, you don’t have to compete with the market or other traders. In fact, the opposite is true. Good risk management and a healthy dose of patience are more likely to lead to success in trading. Retail traders often do better when they focus on controlling their own decision-making processes instead of making decisions based on things they can’t change.

    This is not what many new traders will say. If you are one of them, think about this: Traders who think they have an edge will never tell other traders what trade they are about to make. These traders think that if they talk about it, they might lose their edge.

    Professional traders, on the other hand, won’t think twice about telling other traders what trade they are about to make. This is because it doesn’t change the potential of the trade if other traders know about it or make the same trade.

    Prices can change over time based on supply, demand, and investor sentiment as a whole, but just because one investor thinks they have an edge won’t change anything.

    If you are a new trader who is just starting to look for your edge or if you are an experienced trader who has been looking for your edge for years, you should stop. Markets change so quickly that an edge you find today is likely to be useless tomorrow. In the short term, looking for a trading edge might help you make quick money, but it’s more likely to waste your time and cause you to miss out on opportunities and money.

  • 5 Skills That Every Trader Should Have

    There are many ways to become a professional trader, and a person needs a lot of skills to do well in a field with a lot of stress and competition. When financial firms hire people for trading jobs, they usually look for people with degrees in math, engineering, and hard sciences instead of just people with backgrounds in finance.

    There are also different kinds of trading jobs, some of which require communication skills with customers as well as knowledge of charts. So, let’s take a look at some of the skills that all traders need.

    Skill at analysing

    Every trader needs to be able to look at data quickly and figure out what it means. Trading involves a lot of math, but charts with indicators and patterns from technical analysis show what the data means. So, traders need to improve their analytical skills so they can see trends in the charts.

    Research

    Traders need to have a healthy thirst for information and a desire to find all the important data that affects the securities they trade. Many traders make schedules of economic reports and news that affects the financial markets in a way that can be measured. By keeping up with these sources of information, traders can act on new information while the market is still processing it.

    Focus

    Focus is a skill, and the more traders use it, the better they get at it. Because there is so much financial information out there, traders need to be able to focus on the important, actionable information that will affect their trades.

    Sector-based traders also focus on one particular industry. This helps them learn more about a certain sector, industry, or currency, which gives them an edge over traders who don’t specialise as much.

    Control

    Control and, more specifically, self-control go hand in hand with being able to focus. A trader needs to be able to keep their feelings in check and stick to a plan and strategy for trading. This is especially important when using stop losses or profits at set points to manage risk.

    Many trading strategies are made so that the trader loses less when things go wrong and makes more money when things go right. Strategy goes out the window when traders start to get emotional about their trades, whether they are good or bad.

    Keeping a record

    Keeping good records is one of the most important parts of trading. If a trader keeps careful records of how his or her trades turn out, all that’s left to do to get better is to try out different strategies and change them until one works. If you don’t keep good records, it’s hard to show real progress.

  • How To Keep Your Emotions In Check While Trading

    How To Keep Your Emotions In Check While Trading

    On their way to becoming market masters, stock traders go through different stages. One of the hardest things to learn is how to trade without letting your emotions get in the way. You can be good at picking stocks and managing risk and still fail as a trader if you can’t keep your emotions in check.

    When you know how to control your emotions, you can be patient with your winners and not at all with your losers. Even though it seems easy to say that you should stick to your trading plan, it is actually much harder to do so. Most of us have strong feelings about money, which makes it hard to stick to our rules.

    To do this, you have to take the money out of the picture. Financial risk can’t be a factor in making decisions. It might be hard to incorporate this ideology while trading but you can remove the emotions from trading only if you are able to get this right.

    Here are some ways to trade without letting your emotions get in the way:

    1. Don’t put yourself in more risk than you can handle.

    Most traders keep their losers too long and sell their winners too soon because they take on too much risk. Taking on too much risk ties down your risk management, making it harder for you to make trades with a positive expected value.

    This is something you can change by taking less risk. Then, many traders find that the upside isn’t enough to make them want to trade at all. If a trader doesn’t have a way to make good profits with the money they have, they may start to take on more risk to try to get better results.

    But you can make your trades more likely to go up without taking on more risk if you scale into your positions. As the trade goes in your favour, add to your winners. You don’t need to put yourself in danger by doing this. You can lower the risk of your other positions by using the money you made from your first positions. Add to the list of winners. Don’t throw money at your losers.

    2. Change how you think about money

    We often tell people that it’s best not to look at the summary of their trades’ profits and losses. When you do this, you get too caught up in the current gain or loss on your positions, which makes your fear or greed about the trade worse. Instead of making decisions based on the chart, think about the money.

    People can’t be expected to trade without checking to see if they are making or losing money. So, if you have to look at your trades, instead of focusing on how much money you are making or losing right now, think about how much money you will make or lose if your trade hits the stop loss levels.

    If you buy 1,000 shares of a stock for Rs 100 and the stop is at Rs 90, you could lose Rs 10,000. That’s how much you could lose when you leave.

    Let’s say that this stock goes up to Rs 120 and you move your stop to Rs 110. Even though your position is up Rs 20,000 right now, if you get out on the stop, you will only make Rs 10,000. You need to pay attention to the number that matches your exit point. Don’t think too much about where you are now.

    If you congratulate yourself on making Rs 20,000 on a trade, you start to feel something about that number. If so, you are less likely to sell the stock if it goes back down to Rs 110, where you would only make Rs 10,000. You thought you would make Rs 20,000 and hoped it would be more. It hurts to leave at a lower price, so many people stay and wait for things to turn around. Count on what you already have, not what you want.

    3. Make a plan on paper and trade it

    Some people can lose their minds because of how they feel about a trade. When you make a trade, your feelings can make you break your trading rules. Having a plan written down will help you stay on track when you get lost.

    The plan doesn’t need to be long or hard to understand. A trading plan shouldn’t be longer than one page, in our opinion. It should include your rules for entry, risk management, scaling, and leaving the business. There should also be a review process so that you can work to make your rules and how they are carried out better.

    When you write down an idea, it gives it more value. Before you make another trade, take the time to write out a plan.

  • Buying Vs Selling Options

    Are there any tips and tricks for trading options that can help you decide when to buy and sell options. What should you do when trading call options? Here’s a guide for people who are just starting out with option trading. It tells you what factors can help you decide when to buy and when to sell an option.

    Price

    How do you decide if an option is priced too low or too high? Like with stocks, you will have to figure out what the option is really worth. Clearly, you can’t figure out the value of an option the same way you figure out the value of a stock. But there is a different model called the Black & Scholes model that has a complicated formula to help you figure out the intrinsic value of any option. If the price of an option is more than what it’s really worth, it’s overpriced and should be sold. If the price is less than what it’s really worth, it’s underpriced and you should buy it.

    Volatility

    This is an important thing to think about when deciding whether to buy options or sell them. Volatility is good for both call and put options because it makes the option more valuable if the price goes up, but it limits your risk if the price goes down. Even if the stock price stays the same, if volatility goes up, the value of the option can go up. When volatility is likely to go up, it is always best to buy options. When volatility is likely to go down, it is best to sell options.

    Events

    Can you imagine what would have happened if you had sold put options before the Lehman Brothers crisis or the Greek crisis? Before big events or important geopolitical risks, it’s always better to buy options instead of selling them. When you buy options, your loss is restricted to the premium you pay. If you sell options before something bad happens, you could lose all your money.

    Trend

    How you feel about the stock or index is a very important part of whether you should buy or sell an option. It would be ideal if you can determine if the stock will either go up decisively or go down decisively. In that case, you can buy either a call option or a put option, depending on what you want to do.

    Time decay

    This is a very important thing to think about when deciding whether to buy or sell an option. Remember that every option contract has a set date when it ends. Time hurts the person who buys the option and helps the person who sells the option. Most of the time, time decay is pretty stable in the first few days of the month. But as the expiration date gets closer, the time decay starts to happen more quickly. That means the value of the option starts to drop quickly. So, it’s not a good idea to buy options close to their expiration date unless you really want to take a risk and bet on volatility.
    A big choice is whether to buy the option or sell it. The more you think about a choice, the better your chances of making the right one.

  • Everything You Need To Know About Diversified Equity Mutual Fund

    A well-diversified equity fund, which is usually just called a “diversified equity fund,” invests in companies of all sizes, no matter how big or small they are.

    Diversified Equity Mutual Fund: What is it?
    A diversified equity fund puts its money into companies of all sizes and in all industries. It spreads investments across the stock market so that investors can make the most money possible while minimising risk. Unit-linked insurance plans (ULIPs), mutual funds, and other investment firms all offer them.

    There are many different types and sizes of companies on the stock exchange.

    1)large caps
    2)mid caps,
    3)small caps.

    How does a fund with a wide range of stocks work?

    A diversified equity fund also invests in companies from different sectors and industries. So, it can take part in the growth of the whole economy and isn’t tied to any one sector or industry.

    They can choose to put their money into businesses from –
    Pharmaceuticals
    Technology
    Engineering
    Automobiles
    Power/Services
    Services for banking and finance
    Gas and oil

    Simply put, a diversified equity fund invests in companies from different sectors, industries, and sizes of the market.

    Diversified equity funds, which include both ULIPs and mutual funds, are created so that investors can profit from the financial growth of companies of all sizes and in all industries and sectors. The rules for investing in ULIPs and mutual funds are different, and investors are told this in product literature and on company websites.

    Who does it work best for?
    Diversified equity funds can be helpful for investors who like stocks and have long-term goals like planning for retirement or saving for a child’s education or wedding. They can be used on their own or as part of a portfolio with other investments.

  • What Exactly Are VAR And SPAN Margins?

    VaR and SPAN margins are related to every position you take in the stock market, especially if you trade in FnOs. But what exactly are they and how can you calculate them?

    Here’s everything you need to know.

    VaR is a way to measure the risk of a loss. Value-at-risk, or VaR, is a way to measure the downside risk or potential loss of a portfolio or investment over a certain amount of time. It helps analyse and estimate how much the minimum loss can be with a certain amount of confidence. Essentially, it is a number that tells you how risky a portfolio is.

    For example, VaR can tell us that an investor can expect to lose at least 2% of the total value of their portfolio on 1 out of every 15 days. So, it helps figure out how much money could be lost, how likely it is to lose that much money, and how long it could take.

    Statistical simulations can be used in a number of ways to figure out VaR. The risk management department of a company keeps a close eye on this parameter and tries to make sure that extremely risky trades are not taken.

    Margin SPAN

    On the equity markets, traders also need to have a certain amount of money set aside as “margin money” to help cover trade losses. But it is hard to guess how much of a margin is needed to cover all the losses if the market shows the worst-case scenario. As a result, the SPAN, which stands for Standardised Portfolio Analysis of Risk, is a standard way for traders to figure out how much margin money they need.

    When figuring out margin amounts for every single position, the SPAN system uses complicated algorithms and machine learning techniques. Each margin amount is equal to the most a single account can reasonably lose in a single trading day. It was made by the CME in 1988, and more than 50 exchanges around the world use SPAN as their official way to figure out how much margin they need. This margin is different for each security because each one comes with a different level of risk. For example, the SPAN margin for a single stock will be higher than that for an Index because single stocks are more risky and volatile.

    Risk management

    Every trader who is successful knows how important it is to manage risk, which is even more important than making money. With the help of VaR and SPAN calculations, a trader can keep a large number of contracts in their portfolio and stay away from serious margin calls.

    More brokers and financial institutions are now focusing on better ways to handle risks. Many of them require that, in addition to SPAN margin, which is collected when trades are started, an additional margin called Exposure margin to be collected to protect against liabilities caused by wild swings, rogue trades, or reactions to extreme stress in the market.