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The Badla Financier is Dead. Or is He?

Jun 20, 2019

I belong to the breed of traders who witnessed the transition of our stock markets from the old style of badla (contango) system to the present futures and options system.

In the old order, you bought stocks on margin (part payment, usually 15%) and kept the trade open for a fortnight.

At the end of the fortnight, you informed your broker whether you wanted delivery of your shares, or wanted to carry it over to the next fortnight. If you wanted to carry forward your purchases, your broker would arrange finance for you, for the remaining 85%, in a special fortnightly trading session on Saturday, called the 'badla financing' session.

This session was like any other trading session. The only difference being, what was being traded was money, and at what interest rates it would change hands.

The going rate for funding the buyers could be as high as 2% per fortnight. That's 48% annualised!

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There were financiers who came to the BSE only on badla trading days with chequebooks ready, to lend money at these mouth-watering rates.

What made it safer, was that they received the delivery of the shares against which they were lending. So it was a 100% secured loan. I have met and talked to brokers and HNIs (high networth individuals) and even corporates who invested hundreds of crores in badla finance.

Some brokers specialised in arranging funding at the drop of a hat, but of course, they are extracted their pound of flesh. The dice was always loaded in the favour of the money lenders.

So are these financiers dead and gone? Is this lucrative style of investing money in the markets history forever?

No way!

These guys are in the markets today as option sellers (i.e. the writers of option contracts). Look at it this way...

When you buy insurance from the Life Insurance Corporation of India (LIC), you are buying a put option on your life by paying approximately 6% premium.

You try to safeguard your family's security after your demise. In this case, you are the option buyer who pays the premium and LIC is the option seller (writer) who receives the premium.

As long as you don't die, the LIC will keep pocketing the premium year after year. That's the dynamic of the options game.

The buyer pays perpetually, in the fond hope of receiving payday, someday.

But the seller gets paid at every settlement.

The data bank of The CBOE (Chicago Board of Options Exchange), where option trading started, has extensive digital records of transactions.

The LPA (long period average) shows only 12% of options buyers ever make money. 88% of the time, they lose their premium. Since the markets are a zero sum game, for every buyer, there must be a seller. So the losses of the option buyers must be equal to the profits of the option sellers (writers).

A LPA probability record of 88% is something a statistician would gladly give an arm and a leg for. So when you buy options on any financial asset, thinking you will "lose only a small premium" in a limited loss, and unlimited profit deal, as promised by experts, give a thought to who you are betting against.

The most hardened, fat cats, deep pocketed money lenders, who have a success record of 88%, win most of the time.

Occasionally they lose. That's when you have a chance of taking their money.

So you must be either savvier than the savviest, or you should have the tools to time the asset price movements to near perfection. Then you stand the fighting chance of coming ahead of these guys.

Have all the badla financiers turned option writers? Not necessarily. The lower risk appetite players are option writers, whereas the big sharks are in the futures segment.

There is a major different in the standard operating procedure of both these traders. That story too shall be told, at a later date.

Have a profitable day.

Warm regards,

Vijay L Bhambwani
Editor and Research Analyst, Weekly Cash Alerts

Vijay Bhambwani

Vijay L Bhambwani, is the editor of Weekly Cash Alerts and Fast Income Alerts. He is a professional trader, author, trading mentor, and lifelong student of the markets. He has been an active trader since 1986. Financial markets are his life and passion. Everything else in his life revolves around his main objective - trading. Vijay believes that no matter how much a trader has lost in the market, it is possible with hard work and smart work to get it all back over time. Understanding the method behind the madness of the markets interests him more than the profits. He specialises in predictive style of technical analysis, in the commodity, currency, and equity markets. That is the foundation stone of his style of trading - Neuro Behavioural Technical Analysis. Vijay trains other professional traders. He is empaneled with the BSE & NSE as a visiting faculty for various finance market courses. He created the early course content for the Diploma in Commodity Markets (DICM), certified by the Forward Markets Commission. He was a training mentor at the MCX between 2005-2009. He is the first author to have his book - A Traders Guide to Indian Commodity Markets published by CNBC Publishing 18, in 2009 - approved and sponsored by the NCDEX. Vijay has done over 8,000 TV shows in the last 17 years and has written over 4,000 columns/articles in the print and electronic media. He is one of the first columnists to write a weekly column in the English language print media after the commissioning of the MCX, via his columns in the DNA Money, Business Standard and others. Vijay lives with his family in the posh Breach Candy area in Mumbai.

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