How to Become a Successful Options Trader - Part 1

New options traders have unrealistic profit expectations, thinking that they can outsmart the markets, doubling funds in a short amount of time. Beginner’s luck makes things even worse, providing hope that a few big wins can help you make a fortune. When markets move fast, things get hectic, you do not have time nor the luxury to sit back and think long about what to do. You need to have a trading plan in place that tells you exactly what to do and when to do it. Experienced options traders understand that modern markets give out very few gifts.

In today's article, we will use my March 2018 trade sheet performance as an example to explain to you how to improve your performance with time and consistency. In this series, we ended with wonderful returns. I always use the words simple and easy to describe my trading strategies: March Series Performance on capital of Rs. 10 lac, someone having 1 Cr, multiply the total profit by 10 & so on.

The net return of this month is 5.16%. With the March 2018 series drawing to an end, we finished the final year 2017-18 by generating a return of 60.098%.

The link for the final year 2017-18 Trade sheet performance could be found here : April May-Jun July August Sept-OCT NOV DEC JANFEB

It is an exceptional return. Most people will say it's quite less than expected, isn't it?? My answer to them is as follow : Keep doing this for 30 to 40 years and the rest is history. The best part with this is consistency of the trades taken and executed. Month on month at Profit Idea we keep doing this. What is most important is that this return is on a portfolio of 10 lacs wherein, we have not taken the performance of equity which is getting multiplied at a rapid pace. Some of my articles on equity performance can be read by clicking these links : Case study on NBI Finance, VHL, DHFL, Dhunseri Investments, Ponni Sugars, Lupin, Jet Airways!

“It is a conscious effort, to be very honest. It is more like ‘eat, sleep, train, repeat’. If you want to be consistent, you need to be boring with your training, your food and your batting habits”.

So it is undeterred practice and hard work, which make one, a legend, not the comfort of a mother’s womb. 

Most people might keep wondering why I keep referring option selling similar to investing. In reality, if option selling is done with adequate capital it is exactly similar to investing, it requires:

a) Right selection - picking the right stock is very important, picking the right option to sell is equally important.

b) Right Timing - picking a good stock is not enough, but picking it at right time is important. Similarly, selling an option is not enough, selling at right time is important.

c) Patience - value investing is all about having patience, so does option selling. You can't become rich overnight. It is consistent effort of finding right options to sell to become rich over time. One has to be consistent while selling and continuous evaluation is important like we monitor stocks.

Let's use simple maths of how option selling can be similar to identifying a multi-bagger :

We aim to earn 3% every month and we are doing it quite consistently as you can see in our trade sheets month on month. Now let's suppose we have Rs. 100 with us today and we continue with what we do. Remember, for most people it might be a boring exercise, but see what it becomes if done for 25 years :

100*(1.03)^(25*12) = Rs. 7,09,851/-

It is like buying a Rs. 100 stock which will be valued at Rs. 7,09,851 after 25 years. The idea is too keep it simple and let it grow. As we are doing it on 10 lacs, the idea is to make it 709.85 Cr.

Even if I don't compound it, still the number would be 100*(1.36)^25 = Rs. 218008/-. On 10 lacs, it is 218 Cr, not bad. Isn't it!!!

There are hugely beneficial reinforcement effects for teachers like me by repeatedly teaching things that really work and also by teaching avoidance of stuff that just doesn’t work as in: All I want to know is where am going to die, so I never go there. — Charlie Munger

If you want to be taken seriously, be consistent.