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The news that’s shaking up the domain of options trading in India is that the vast majority of retail traders in this section are unsuccessful. Statistically, in FY22 alone, 9 out of 10 individual traders in the options market suffered losses — amounting to an average of ₹1.1 lakh! This is no small number.
Options trading can yield high rewards but also poses risks from inadequate tools, overtrading, speculation, and gambling behaviors. The lack of sophisticated tools hinders traders, requiring a deep grasp of market trends and options Greeks. Decisions made without real-time data often lead to poor outcomes.
Overtrading, driven by the pursuit of quick profits, leads traders to execute more trades than advised by their strategies, increasing their exposure to market risks and potentially diluting profits or amplifying losses. Additionally, speculation poses a significant risk, with traders entering positions based on guesses rather than solid strategies, often resulting in substantial losses when markets move unexpectedly.
Lastly, approaching options trading as if it were gambling rather than a disciplined investment practice is highly risky. The allure of large, uncertain bets strays far from the principles of strategic investing and risk management, relying on luck rather than planning, which is unsustainable over time.
The Key Driving Factor Behind Loss-Making Option Traders: A Lack of Hedging Strategies
While the factors outlined above may increase the risk of losses, there’s one major issue that’s plaguing options traders across the country. They lack the tools required to identify, analyse and build a winning options trading strategy for each trade.
Nilesh Sharma, ED and President of Samco Securities, India’s leading technology-driven broking firm, shares his insights on why an options trading strategy is crucial for traders in this market segment.
“An options trading strategy gives options traders a structured approach to making decisions. It allows them to identify when to enter and exit trades and makes it easier to manage risk effectively. With the right strategy, traders can also achieve consistent positive outcomes for most traders.
Without an options trading strategy to guide them, traders often make impulsive decisions based on emotions or market noise — leading to unavoidable losses. A strategy also helps in setting clear goals and sticking to them. This ultimately reduces the chances of overtrading or speculating.”
The lack of winning options trading strategies also means that traders enter naked positions without any hedge. This can be a dangerous proposition because trading in naked options may lead to high profits or unlimited losses.
Samco Securities recently conducted an analysis of the trading outcomes of nearly 30,000 users of the Samco trading app, and the results revealed the importance of hedging every option trade. Of the traders in the sample size, 97.80% engaged in naked options trading, while only 2.20% used options trading strategies to hedge their trades. The result? Those who traded in naked options suffered losses to the tune of over ₹66,000, while those who hedged their positions earned average profits of over ₹1.9 lakh!
Why Don’t Traders Adopt Hedging Strategies?
The insights from Samco Securities’ analysis drive home the importance of protecting every risky trade with an opposite position — either in another options contract or in the underlying asset. That said, building, analysing and selecting an options trading strategy is not easy. It can be incredibly challenging for the average retail trader to find and execute a winning strategy for each trade. Let’s find out why.
- Creating a Strategy
Building an effective options trading strategy is complex, given the multitude of choices. Traders aiming to safeguard against market drops might consider strategies like protective puts or covered calls, but customizing these strategies to fit personal risk preferences and market views is overwhelming. The abundance of options and the need for personalized strategies, without helpful tools, leads to indecision, causing many to avoid hedging strategies altogether. This leaves their investments exposed to market risks.
- Analysing a Strategy
Analyzing an options trading strategy is intricate, adding layers of complexity for retail traders. Take the iron condor strategy, for example - it demands scrutiny of market trends, volatility, and options Greeks, to name a few factors. The absence of intuitive tools to consolidate and distill this information complicates strategy evaluation further. Traders often face analysis paralysis, leading to uninformed choices or a complete bypass of strategic trading. This situation robs them of chances to reduce risks and increase returns via informed hedging strategies.
- Choosing a Strategy
Even when traders manage to develop multiple strategies, selecting the right one is a significant challenge without the right tools. For example, a trader might have developed both a vertical spread and a butterfly spread strategy but may find it difficult to determine which is more suitable based on the current market conditions, their financial goals and risk appetite.
The absence of a tool that can help compare these strategies side by side, considering factors like required margin and risk-reward ratio, often lures traders into a guessing game instead. This lack of support not only makes strategy selection hard but also increases the likelihood of choosing suboptimal hedging strategies.
The One Tool to Solve All These Problems: Samco’s Options BRO
Options BRO from Samco Securities is a state-of-the-art, industry-first options strategy builder that performs three functions in one go. It builds, researches and optimises each option trading strategy, so traders can improve the probability of success in the F&O market.
Nilesh Sharma explains how this one tool can offer three-fold benefits to traders.
“To find the top 3 options trading strategies, Options BRO leverages a straightforward approach using inputs from traders about their preferred security, its expiry and their market outlook. Traders can also rigorously research hundreds of other strategies that align with their requirements by analysing different parameters like profit & loss forecasts, option Greeks and vital strategy statistics such as probability of profit and risk-reward ratios.
This ensures traders have all the information they need to make informed decisions. Finally, Options BRO also allows traders to optimise their strategies through advanced filters — allowing for customisation based on specific needs like risk level, maximum profit/loss, profit potential and margin requirements. This process ensures that traders can build, research, and optimise their options strategies efficiently.”
Samco Securities offers this pioneering tool free of cost to traders in the Samco community. So, anyone with a Samco trading account can log into the Samco trading app and access these features and more for free.
About SAMCO Securities
SAMCO Securities was incorporated by Mr Jimeet Modi, Founder & CEO of SAMCO Group in 2015. As the country’s leading flat-fee brokerage and wealth-tech platform, SAMCO Securities provides retail investors access to sophisticated financial technology and makes their wealth-creation journey simple, informed, and cost-effective. SAMCO Securities' mission is to eliminate the existing challenges faced by traders and investors and democratise access to the wealth management process for every Indian. With customer centricity at SAMCO’s core, we implement a quantitative approach to provide differentiated solutions that empower our customers in acing the capital markets.
SAMCO Securities is pioneering the stock market trading by introducing industry-first features like My Trade Story, Personal Index and Trade Spread Sheet to name a few, under its CRP strategy.
Contact Info:
Name: Nilesh Sharma
Email: Send Email
Organization: SAMCO Securities Limited
Address: 1004 - A, 10th Floor, Naman Midtown - A Wing, Senapati Bapat Marg, Prabhadevi, Mumbai - 400 013, Maharashtra, India.
Phone: +91 91222 27777
Website: https://www.samco.in/
Release ID: 89124407
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