The Index 20-Point Formula
As the name suggests, this is a specific trading strategy or formula. It’s not a magical solution, but rather a calculation that’s based on market observation. The author created it by spending time in the market and noticing a pattern.
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What is it?
The “Index 20-Point Formula” is a calculation based on the movement of an index like Nifty 50 or Bank Nifty. The core idea is that an index, such as Nifty 50, frequently moves up or down by 20 points within a short period. This small movement can result in a significant profit, especially if you understand how it affects an option’s premium.
Let’s break it down using an example:
Suppose Nifty 50 is at 25,550.
It’s not uncommon for it to quickly move to 25,570 (up 20 points) or 25,530 (down 20 points).
While Nifty 50 can give much larger movements, the author’s observation is that a 20-point move is very common and happens quickly. For instance, a 20-point move in Bank Nifty might take just 2 minutes, while in Nifty 50 it might take 3 minutes.
The Role of Delta
To understand the formula, you need to know about delta. Delta measures how much an option’s premium changes for every 1-point move in the underlying asset (the index or stock).
The author assumes a delta of 0.5.
This means if the index moves up or down by 20 points, the option’s premium will change by 10 points (20 points x 0.5 delta).
The Calculation
Let’s use an example to see how the formula works.
You buy a Call option for Nifty 50 at the 25,550 level.
The premium is ₹20.
Based on your analysis, you believe the market will go up.
The market moves from 25,550 to 25,570 (a 20-point gain).
Because of the 0.5 delta, your premium of ₹20 will increase by 10 points (20 x 0.5 = 10), so your new premium is now ₹30.
Now, let’s look at the potential profit:
You bought 2 lots of Nifty 50.
One Nifty 50 lot has 75 shares, so 2 lots have 150 shares.
The premium increased by ₹10 (from ₹20 to ₹30).
Your profit is calculated as: 150 shares x ₹10 profit per share = ₹1,500.
This profit is made from a small, 20-point move in the market, without needing to wait for a large-scale rally.
Important Note
The author emphasizes that this is just a calculation and a formula. It will only work if you combine it with proper market analysis. Without a solid plan and analysis of market sentiment, you could lose money. If you take a trade without a clear direction, the market could just as easily drop by 20 points, resulting in a loss.
The author concludes by saying that this kind of basic knowledge is what many people sell in expensive courses, claiming it’s “advanced knowledge.” By understanding these basic concepts and gaining deep knowledge, you can become a better trader without paying for costly courses.