WHY SO FEW OPTION BUYERS ARE SUCCESSFUL AS AGAINST OPTION SELLERS
#threadbytradersushma
#optiontrading
#stockmarkets
#threadbytradersushma
#optiontrading
#stockmarkets
Shyam is a bank nifty trader. He has been trading in cash. Not satisfied with his returns he wants to enter Options. Due to his low capital base, he tries option buying. Like any other option buyer, he too enters this market with the hope of doubling options.
He has a capital of Rs 1.5 lakhs. He buys Bank Nifty call option in the hope of market moving up. He is able to buy 24 lots of BNF with a capital of Rs 1.5 lakh (supposing call option premium is Rs 250 at that time) & he does that.
Market is highly volatile & his MTM fluctuates wildly. Market moves up moving his premium up by 10% & his MTM shows 10% profit on his capital. But he is not satisfied. Greed overtakes his emotion.
10% return is not what he had come for in options market. He wants his premium to double. So he doesn't close his trade.
Market now gets tired & cools off. It starts consolidating. Shyam did not book his 10% profit while in momentum. Now his profit starts declining with time. Though he’s still hopeful of market rebounding. But it takes a while & by then premium erodes 20%.
His MTM shows 20% erosion on his entire capital. Now he’s in lot of fear & closes the trade even before his SL level is reached. After few mnts market rebounds & moves up. So, in spite of being right on market direction, Shyam ended up losing money.
Meanwhile there’s another option trader Ram who is an option seller. He needs more than Rs 20 lakhs in his trading a/c to sell the same quantity as Shyam bought. Do u think Shyam will have a better edge than Ram with just 1/20th of his capital?
Let’s delve deeper with definite example.
Ram is Option Seller; Shyam is Option Buyer.
Both are given Rs 1.5 lakhs each.
Ram sells 1 lot call option trading @ 250 using his full capital.
Shyam buys 24 lot call option trading @ 250 using his entire capital.
Ram is Option Seller; Shyam is Option Buyer.
Both are given Rs 1.5 lakhs each.
Ram sells 1 lot call option trading @ 250 using his full capital.
Shyam buys 24 lot call option trading @ 250 using his entire capital.
🔹If premium moves 10%
loss of Ram is 25*25 = Rs 625
loss of Shyam is 25*25*24 = Rs 15000.
🔹If premium moves 50%,
Ram’s loss is 125*25 = Rs 3K,
Shyam’s loss is 125*25*24 = Rs 75K
loss of Ram is 25*25 = Rs 625
loss of Shyam is 25*25*24 = Rs 15000.
🔹If premium moves 50%,
Ram’s loss is 125*25 = Rs 3K,
Shyam’s loss is 125*25*24 = Rs 75K
So, utilising same capital, Shyam loses 50% of his capital while Ram loses only 2% of his capital.
While buying option Shyam has put his total capital at risk. If option goes 0, he will lose his entire capital.
While buying option Shyam has put his total capital at risk. If option goes 0, he will lose his entire capital.
That’s the reason option buying is more dangerous to trade without proper risk management.
Risk management is inherent in option selling. Whereas in option buying one has to incorporate it & formulate his position sizing accordingly.
Risk management is inherent in option selling. Whereas in option buying one has to incorporate it & formulate his position sizing accordingly.
With a capital of Rs 1.5 lakhs, option seller is forced to trade with one lot only, while option buyer can trade for as much as 24 lots (on a premium of Rs 250). So, he has to control his urge to trade with his entire capital & save his money.
Option Sellers have a natural edge with their high capital. They have the gunpowder i.e., money through which they tend to keep market their way.
Rarely market moves out of their control & when it does option buyers make merry, but only those who have learnt the art with proper money & risk management.
Purpose of this thread is not to discourage u from trading option buying. It is just an eye opener on how risky it can be if it is done without risk management, money mgmt & correct position sizing.
That’s all for this thread!
If u found it useful, hop on the 1st post of this thread & retweet it for sharing this information as much as possible. Meanwhile follow @tradersushma for more such informative posts in upcoming threads.
Thank u!
If u found it useful, hop on the 1st post of this thread & retweet it for sharing this information as much as possible. Meanwhile follow @tradersushma for more such informative posts in upcoming threads.
Thank u!
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